Centre’s Flip-Flop On Diesel Has Auto Industry In A Tizzy

Murali Gopalan
13 Sep 2023
08:17 PM
4 Min Read

Nitin Gadkari’s announcement on a pollution tax for diesel at the SIAM convention had industry leaders perplexed till a clarification followed much to their relief.

Nitin Gadkari

Nitin Gadkari literally set the cat among the pigeons when he announced his intent to impose a 10% pollution tax on all diesel vehicles. 

Industry representatives present at the 63rd annual convention of the Society of Indian Automobile Manufacturers (SIAM), where this dramatic announcement was made, would have quite predictably gasped in disbelief. Auto stocks of prominent brands took a nosedive and this became the talking point for a while during the day.

The Minister for Road Transport & Highways later clarified on Twitter that his statement had been misinterpreted and taken out of context while reiterating that no such proposal to levy this tax was under consideration. This was akin to the calm setting in after the storm but it was perhaps a little too late since the original news had spread like wildfire and caused enough consternation in the process.

While auto industry officials would have been relieved reading the quickly issued clarification, many would recall that was not the first time that they were thrown off balance. Rewind to SIAM’s convention of 2017 when Gadkari’s ‘bulldoze’ comment caused a great deal of anxiety all around.

“We should move towards alternative fuel... I am going to do this, whether you like it or not. And I am not going to ask you. I will bulldoze it. For pollution, for imports, my ideas are crystal clear... The government has a crystal-clear policy to reduce imports and curb pollution,” he had told the stunned audience six years ago.

Perhaps some of them were truly shocked while others may have been quite amused too but this proclamation in 2017, like the more recent one of Tuesday, created quite an impact. Way back then, the industry was in the midst of its most difficult transition from Bharat Stage IV to VI emission norms which had to be completed in barely 36 months.

Giant Leap

There was a lot of money involved then in terms of investments in new technology since this was a giant leap to a new emissions era in record time. Not only were manufacturers across vehicle segments subject to this pressure cooker exercise but so were their suppliers, the oil companies and dealers who had to liquidate older BS IV stocks carefully before the April 1 2020 deadline set in.

To everyone’s credit, the marathon switchover was achieved successfully  except that it was swamped under the burden of the draconian lowdown imposed during the pandemic. This was the time the COVID threat was looming large in India and the Centre thought it best to completely shut down the economy for three weeks initially and continue doing this for a while. 

The industry reported zilch sales in April and it is only over the last year or so that the momentum has returned though it is a moot point if the overall recovery has been uniform across the country. This detailed context is relevant from the viewpoint of the auto industry’s efforts to keep pace with regulations that keep cropping up from time to time.

The Centre, in its turn, is also justified in pushing for stiffer norms in emissions, safety etc given that India is now perceived as an important manufacturing hub for vehicles and is the third largest producer of cars after China and the US. To that extent, policymakers like Gadkari need to do their job in giving stakeholders a push from time to time.

However, the issue here is that a gentle nudge or reminder is quite different from a more belligerent tone which has the tendency to throw the recipient off guard. Auto stocks took a beating soon after Tuesday’s diktat simply because investors thought companies like Mahindra & Mahindra and Tata Motors would now have their backs to the wall. Unlisted companies with a reasonably sizable diesel engine portfolio like Hyundai and Toyota would have been quite worried too.

Policy Continuity 

This is precisely why investors across the world constantly seek continuity in policies without any ad hoc announcements that can derail their plans. This is especially true for an industry like automotive where product developments are made well in advance which means substantial investments have also been committed as a result. 

For instance, the transition to BS VI involved massive spends where some automakers like Maruti Suzuki decided to drop diesel in their portfolio of the new emissions regime simply because it did not make good business sense. Hyundai, on the contrary, kept its faith in diesel intact as did Toyota and M&M with their MPV/SUV range. Customers preferred this fuel for their more powerful SUVs and in the BS VI era, the particulates were also kept in check.

Diesel, of course, had become a dirty word following the Volkswagen mileage fudging scam of 2015 which had the entire global auto industry gobsmacked. Here was the world’s largest producer of cars (either ahead or just behind Toyota) which actually indulged in a needless hoodwinking game and was caught like a burglar in the process. 

When VW had its back to the wall, diesel turned out to be the villain of the piece even while the world decided that the time had come to look for cleaner fuel alternatives. Policymakers and activists got onto the scene aggressively especially in Europe where big councillors and mayors in prominent capitals decided to create new templates for greener mobility.

Extreme Reactions 

Nobody thought they were doing anything wrong — on the other hand, most people welcomed the move towards sustainability except that the reactions seemed to be bordering on the extreme. India did its bit too by pushing its auto industry to make a giant leap from BS IV to BS VI but when think-tanks also got into the act, it only led to more confusion and some justifiable anger among industry leaders.

For instance, in 2019, Niti Aayog decreed that all two-wheelers under 150cc should be scrapped by 2025 as part of a cleanup exercise where only cleaner options would prevail. Companies like Bajaj Auto and TVS Motor were aghast at this proposal which fortunately did not see the light of day but served as a grim reminder that anything could happen in terms of mindless directives coming in from all directions.

Constant Levies

Some two-wheeler manufacturers have in fact argued that the entry-level segment has suffered because of constant levies in the form of technology and safety fitments which have increased the selling price of vehicles. This segment is sought because it is easy on customers’ pockets especially in small towns where disposable incomes are not so high. 

Any price increase can lead to resistance in buying and this is precisely what is happening right now with basic commuter motorcycles which still face headwinds compared to their premium siblings which are finding more willing customers in bigger cities.

Right now, diesel has been making the headlines but there was a time when it was hugely sought after in the era of price control and generous subsidies. During 2011-12, diesel was actually more affordable than petrol which caused customers to queue up for diesel cars and give petrol versions the cold shoulder. Once prices were deregulated and the subsidy component knocked off, diesel was not such a cheap bargain and this was enough to deter buyers.

Today, diesel’s use has come down to less than 20% in the Indian automobile arena but there will be a gradual phaseout as cleaner options are offered. Manufacturers cannot wave a magic wand and hope to make it disappear instantly to comply with the whims of policymakers or politicians. Unfortunately, the dynamics of business work quite differently.

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