MUMBAI, INDIA: Shares in Indian vehicle makers rose on Friday after the government proposed to cut excise duties in the fiscal year 2008/09, which analysts say will encourage demand, particularly for small cars.
The finance minister proposed to cut excise duties on buses and chassis, as well as small cars, to 12 percent from 16 percent in his annual budget.
He also cut duty on hybrid cars to 14 percent from 24 percent and on two- and three-wheelers to 16 percent from 24 percent.
"This is welcome news and will definitely boost the two-wheeler industry," said Mohit Arora, managing director for India at research firm J.D. Power Asia-Pacific.
"It will also provide more momentum to the small car sector, which was beginning to lose steam," he said.
Shares in top car maker Maruti Suzuki India Ltd, which has about half the market with its mostly small cars, rose as much as 3.8 percent to 867 rupees.
A spokesman for the company said it would announce price cuts on some models to pass on the tax benefit to consumers.
Passenger car sales have grown at an annual rate of about 15 percent in the last five years, but more than two-thirds of the market is for small cars, defined as up to 4 metres in length and with an engine displacement of 1.2 litres for gasoline and 1.5 litres for diesel.
Top motorbike maker Hero Honda Motors Ltd rose as much as 1.7 percent to 760 rupees, while No. 2 bike maker and top three-wheeler maker Bajaj Auto jumped as much as 4.5 percent to 2,319 rupees.
Shares in Ashok Leyland Ltd, the No. 2 bus and truck maker, climbed as much as 4 percent to 37.40 rupees, also helped by a 10 percent increase in defence sector spending.
The sector index rose as much as 1.9 percent to 4,920.39 before falling in a Mumbai market that was down 2 percent to 17,466.72 points at 0848 GMT.
Some auto makers were disappointed: "The industry expected a reduction in excise duties for all cars," said a spokesman for General Motors in India.
"It did not fully meet expectations."
Sales of motorbikes and commercial vehicles had taken a hit in recent months on higher interest rates and tighter credit.
While sales of motorbikes and three-wheelers would still remain sluggish, overall demand would improve, an analyst said.
"There are macro benefits like the waiver of loans to small farmers and change in income tax that will stimulate demand," said Ramnath S. at SSKI Securities.