Thursday, August 30, 2012

Oil price deregulation and the auto sector!

Deregulation of petrol and diesel prices has given rise to a lot of hue and cry in the domestic auto industry. B&E reaches out to various experts for a commentary on how the dynamics of the auto industry may change. by Sanchit Verma

“Why should the government pay `5,000 crore per quarter for the petrol being used in anyone’s car?” Replying to opposition’s demand to roll-back fuel recent price hike, when Union Petroleum Minister Murali Deora asked the above mentioned counter question, it was absolutely clear that the government was determined to go in for the kill and save as much as $25.6 billion per year spent on subsidizing prices of petrol, diesel, gasoline et al. Anticipation of a budget deficit of 5.5% might have made the Congress-led UPA government opt for deregulation, but this certainly was one of the landmark decisions since opening up of the country’s economy around two decades ago. The question remains, how is freeing up oil prices going to affect the auto industry, an industry which is directly associated with fuel prices?

While the auto industry is divided on the impact of the fuel price rise, it’s quite obvious that in the near future price deregulation is bound to hit the sales of vehicles in the country. A research report from CARE Ratings suggests that the automobile industry would be one of those industries, which would face a higher degree of negative impact. According to the research, while growth of the two-wheeler segment would fall by 200 basis points, sales of passenger vehicles would be marginally affected and the same for domestic commercial vehicle would have a very insignificant impact. Comments Revati Kasture, Head – Industry Research, CARE Ratings, “The 5 -6% increase in petrol prices by the said move of EGoM would bring in difficulty for many households, which are already reeling under the pressure of high inflation.” This, certainly, is something to be worried about for the industry, as it’s only this year that the industry has managed to revive its performance after last year’s poor show due to the sluggish economic conditions.

P Balendran, VP, GM India also opines that high fuel price would have a negative impact on the demand scenario in the short term. Going by his words the industry may witness a drop of around 5 to 10% in sales over the next month or so. But then, as per industry reports, Indian car makers, be it market leader Maruti Suzuki, Hyundai, Tata Motors, Ford or General Motors, have posted record sales in July (prices of petrol and diesel were hiked in the last week of June). While Maruti’s sales have surged 29.18% to record the auto maker’s second monthly sales of over 1 lakh units during the year, passenger vehicles sales of Tata Motors has jumped by a whopping 62%. Similarly, domestic sales of Hyundai Motors India Ltd have jumped over 24% up during the last month. However, for pessimists considering just one month sales figures may be myopic to reach to any conclusion, but then considering the fact that fuel prices were deregulated in June, this should have been the month with the maximum of the impact.


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