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Wednesday, June 13, 2012

Auto shares plunge on excise hike threat

As suggested by the Oil ministry, government is mulling over hiking the excise duty on diesel cars.
As the difference between diesel and petrol prices is around Rs. 30, more and more people are rushing for the diesel variants.  The stocks of M&M, Tata motors and Maruti Suzuki were down by 1.84%, 2.31% and 3.31 % respectively.

For small cars proposed excise duty could be as high as Rs. 1.7 lakh while for big cars it might be Rs. 2.5 lakh. Small cars fall under Rs. 6 lakh and if excise hike is implemented then the rates will be around 25-28 %.

In India, around 15 % of diesel is consumed by the privately owned diesel cars. As raising diesel prices will result in higher headline inflation, going for the excise hike seems suitable for the government.
S&P, one of the top global rating agencies, has already threatened to downgrade India’s investment rating for failing to implement the policy reforms.
Diesel Under-recoveries have been piled-up around Rs. 1 lakh crore ($ 18 billion).

Is excise hike will be viable ?

This step could be detrimental when IIP manufacturing growth is hovering around zero-level and Indian industries are on the back foot owing to the higher inflation regime.
This shall only discourage the new sales but old diesel cars shall continue to avail the subsidized diesel. Auto companies which have subscribed heavy loans for raising diesel car-manufacturing setup shall be affected on the profitability front and thus affecting their loan repayment ability.
Banking sector which has funded the auto industries for the above-mentioned setup shall face the higher risk of CDR (corporate debt restructuring).

What is the right solution?

Raising the price of diesel by Rs. 1 only could fetch the government around Rs. 7800 crore per year while this excise hike shall fetch at the most Rs.6000 crore (considering possible sales decline after the hike) that too endangering the economy.

You may also like : Diesel Subsidy & Inflation


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