Indian Government Policies May Check Diesel’s Growth

MUMBAI – It might be easy to envision diesel-powered light vehicles capturing an ever-larger share of the Indian market as they become increasingly cleaner and more fuel-efficient.

But auto makers here are putting their investments in diesel-engine production on hold and growing numbers of consumers are delaying their car-buying plans while the government decides whether to maintain its increasingly burdensome subsidies on diesel fuel.

Sales of diesel cars, multipurpose vehicles and SUVs surged from 310,000 units, or 20% of the Indian market, in 2009 to 1.6 million, or 50% of the total, at the end of 2012.

However, overall LV deliveries in December showed only a 0.2% year-on-year uptick and January sales dipped 1.1% from like-2012, according to WardsAuto data. The Society of Indian Automobile Manufacturers again has lowered its forecast for the fiscal year ending in March 2013 to no more than 1% growth.

At the center of the uncertainty is the fate of diesel-fuel subsidies as specified in the 2013-2014 federal budget.

The government has not indicated whether it will levy a tax on diesel vehicles, stop subsidizing diesel fuel (having relinquished control over gasoline prices in 2010) or raise the price of diesel for personal car use. The government does wish to maintain lower prices for diesel used by trucks that carry goods and by State Transport passenger buses.

Current diesel prices are stable as a result of subsidies that likely will total Rs1.2 trillion ($21.8 billion) for the fiscal year ending next month. But higher vehicle taxes and removal of the subsidies would erase any immediate advantage of owning a diesel car.

The popularity of diesel vehicles in India is due not only to less-expensive fuel but also to better fuel economy and greater power, offset partly by higher sticker prices, lower resale value and increased maintenance costs.

Diesel’s biggest disadvantage had been high levels of noise, vibration and harshness, but that changed when Fiat India introduced its 1.3L common-rail direct-injection (CRDI) turbodiesel engine in 2009. The efficient, economical and clean powerplant for small cars and small MPVs and SUVs revolutionized the car market.

During 2012, when the difference in pump prices between diesel fuel and gasoline increased threefold, from Rs11 ($0.20) to Rs33 ($0.61) per liter, Fiat India supplied 100,000 CRDI engines to Indian auto makers.

Fiat also provided the technology and licensing to Suzuki Powertrains India for the production of 300,000 units, while Maruti Suzuki (whose takeover of Suzuki Powertrains India is pending) manufactured another 100,000.

Maruti Suzuki is investing Rs17 billion ($309 million) in a plant in Gujarat that eventually will give India’s largest auto maker annual capacity of 900,000 diesel engines and 1.15 million gasoline mills.

Honda India had never sourced or built a diesel engine, but after seeing its market share dwindle from 3% in 2009 to 1.2% in 2011, it began manufacturing its own small CRDI diesel engines for its new Amaze entry-level sedan and Brio premium compact and Jazz (Fit) hatchback.

Hyundai India, which now offers diesels only in the i20 hatchback and Santa Fe cross/utility vehicle, is spending Rs.6.5 billion ($300 million) to develop CRDI 1.2L and 1.1L engines for the i10 and Santro minicars, respectively.

Other diesel powerplants are built here or imported into India by Tata and Ashok Leyland for light trucks, Mahindra & Mahindra for utility vehicles, Toyota Kirloskar for its Etios sedan and Innova MPV and by General Motors India and Ford India.

Diesels also are common in Mercedes-Benz, BMW and other premium European imports.

But many of these pending and planned programs face uncertainty in the near term while auto makers wait for the government to decide on its diesel strategy. The technological advantages of CRDI may lose their significance if its policy curtails customer demand.