A surprise hike in tax on SUVs in India risked hurting one of the only bright spots in the country's automotive market, sending industry shares falling on Thursday after a federal budget that offered little help for the struggling industry.
Car sales growth in India is set to be its poorest in almost a decade during the financial year that ends in March, but strong demand for sports utility vehicles has provided some cheer for the country's automakers.
The budget for the coming financial year proposed a hike in the duty paid by the manufacturers of the vehicles to 30 per cent from 27 per cent, and did not include a reduction in excise on small cars, as the industry had hoped.
"Given the growth in that sector, that's going to hit very hard," Lowell Paddock, the managing director of General Motors' Indian operations. "It's going to affect a lot of different manufacturers here ... I was surprised by that."
"What I guess I find frustrating is that there was not a recognition that the industry is currently in the doldrums," Paddock told Reuters, adding that the specific details of the SUV duty hike would be important in determining its impact.
Shares in Mahindra and Mahindra, India's biggest SUV manufacturer, fell as much as 2.5 per cent on Thursday, and shares in Tata Motors Ltd fell as much as 2 per cent.
Maruti Suzuki India, India's biggest carmaker, saw its shares fall as much as 3.4 per cent, and the industry index shed as much as 1.3 per cent after the announcement.
High interest rates and rising fuel costs combined with sluggish economic growth in Asia's third-largest economy have slammed the brakes on India's car industry, once one of the world's most promising growth markets.
Sales of utility vehicles in India rose 57 per cent in the nine months to December, against a 2 per cent fall in car sales.
"SUVs occupy greater road and parking space and ought to bear a higher tax," the Indian finance minister P Chidambaram told parliament in a budget speech that increased spending and raised taxes on the rich.
Mr Chidambaram also proposed an increase in import tax on luxury vehicles to 100 per cent from 75 per cent, and on motorcycles with engine capacity above 800cc to 75 per cent from 60 per cent.