Shocked auto sector accuses Re, plans to turn diesel

In the wake of the over Rs 7 increase in petrol prices by the government, CNBC-TV18 spoke to executives from leading auto companies for their reaction on the hike in petrol prices, its impact on the rupee and the economy as a whole.

The government still treats petrol as a rich man's fuel while diesel is considered a politically more sensitive product because of its use in the farm and public transport sectors.
As a result, successive increases in the prices of petrol have made it over Rs 25 per litre more expensive than diesel. This has led to a diesel-dependent economy with the sales of diesel-run cars and SUVs outstripping the petrol variants.
While the cost of producing diesel and petrol is roughly the same, it is higher taxes on petrol and the subsidy on diesel that accounts for the huge price difference.
Maruti Suzuki, chairman, RC Bhargava says that  the price hike was not a shocker given the speed with which the rupee has depreciated. He also added that the hike will increase the difference between the demand for diesel and petrol cars.
Forecasting that close to 75%-80% of the auto market could turn diesel, he adds that the government had to decide To what extent it wanted the auto industry to become diesel- oriented.
Sunil Munjal,chairman, Hero Corp opines that the price increase was expected but the quantum came unseen and the hike was to include diesel also. He adds that it is only a matter of time before the price if diesel is increased too.
Pravin Shah, head - automotive, M&M reacts that the current increas in petrol prices was a further blow to consumers and the auto industry. He adds that M&M is not expected to be impacted right now as M&M has a diesel-driven market.
However, he explains that any increase will have an impact on overall cost of ownership to customers. He says that could not comment on the timing of petrol price hike and opines that irrespective of the level of affordability, the price hike is a dampener. Below is an edited transcript of the reactions to CNBC-TV18. Also watch the accompanying videos. Q:Your first thoughts on the quantum of the hike that has been administered, clearly a shocker? Bhargava: Certainly it's a hike, but it’s not a shocker in the sense that the way the rupee has been depreciating. It’s just in line with the way the rupee has depreciated. So, one could expect this.
But what is little bit of a shocker is that nothing has been announced about diesel prices. As it is, the market between petrol and diesel cars was terribly distorted last year and this will further accelerate that distortion. The Indian market will almost entirely run on diesel. Q: The shift towards diesel consumption has also driven the SUV category and the extent of this hike without parallel adjustment in diesel would put a lot of sectoral economics out of place. What would you recommend to the government as far as diesel prices are concerned in the immediate term? If you in favour of a hike, what would be the  quantum? Bhargava: The government has to decide the extent it wants the car industry to run on diesel. That is the fundamental policy decision which I think government has to take - does it want a 50% or 80% subsidy on diesel and depending on that find a way of making diesel cars more competitive either with excise duties or by increasing diesel prices in some form for cars.
I don't know exactly how the government will do it, but something needs to be done otherwise about 75-80% of the auto market will become becoming dependent on diesel. Q: Given that only petrol has been touched, is this is a clear positive for you apart from worries on further initiatives on diesel automobiles? Pravin Shah: The current increase in the petrol prices post increase, is the duties and the different other taxes levied by various state-government, that will be yet an another blow to the auto consumer. The auto industry already witnessed slow growth during April. This increase of petrol price will surely have some impact.
So far as Mahindra is concerned, we have diesel-driven products and so we are not going to get impacted currently. However, this is going to increase the cost of ownership and likely to impact growth. Q: From an overall sectoral perspective, what kind of diesel price hike could be absorbed in the normal course? Pravin Shah: I will not like to comment at this stage on what decision the government has taken, but surely any increase in petroleum prices does have an impact on the overall cost of ownership to the auto customer and surely, irrespective of the level of the customers affordability, surely this becomes a dampener. Different strata of people will look at the increases differently. However, it has an impact overall on the growth. Q: You have seen what has happened and clearly your reactions are that only a part of the subsidy burden seems to have been addressed and even what has been addressed is at best nominal? Vikram Mehta: That's right. If you have raised the price of the petrol by Rs 7, you have address a vey small part of the burden, the total burden is really accounted for by diesel, kerosene and LPG.
So the oil companies are going to continue to face a major cash crisis, a major balance sheet issue and the government is going to continue to have problem with their fiscal deficit because the subsidy burden has not been materially reduced.
So we can say that we should be thankful for small mercies at least the oil companies will not have to suffer the losses from petrol any further.
But in the overall scheme of things, given the pressures that the government is facing both on the external front as well as on the domestic front, this decision is not going to inspire too much confidence amongst the oil companies nor the investors who are looking for a much bold step towards deregulation. Q: Do you expect realistically some movement on diesel? Vikram Mehta: The fact remains that it is upto the government to take a decision on either allowing oil companies to run a commercially sensible operation or shut tjhem down. If they do not do something about deregulation of diesel, LPG or kerosene, the oil companies will not be in a position to pay their bills and at the end of the day there would be shortages on the retail outlets.
So from a political point of view, it's a question of either suffering the political backlash today or in the near future with long queues outside petrol pumps. There is no other way out of this. There is no such thing as a free lunch.