Car makers heaved a sigh of relief and saw their shares soar after the federal budget did not hike taxes on diesel cars, in a boost for diesel-focused manufacturers such as Mahindra and Mahindra and Tata Motors.
Carmakers in India had feared a tax on diesel vehicles or a reduction in the fuel's generous subsidy , which has boosted sales as overall demand slows on high interest rates and rising petrol prices in Asia's third-largest economy.
"This budget was very, very good for the auto industry," said Vineet Hetamasaria, auto analyst at PINC Research in Mumbai. "Everyone was expecting taxes, and they didn't come."
Shares in Tata Motors jumped as much as 2.6% to their highest-ever price after Finance Minister Pranab Mukherjee's budget speech in parliament on Friday.
Market leader Maruti Suzuki's stock rose as much as 4.6% to its highest level since January 2011.
Mukherjee also announced a hike in import duty to 75% from 60% for assembled SUVs and multi-utility cars costing more than $40,000. An announced increase in excise tax for cars made in India to 27% would only have a small impact on car costs, analysts said.
Shares in Mahindra & Mahindra, India's leading SUV manufacturer, whose entire model range runs on diesel, rose as much as 6.1%.
Diesel car sales have accelerated to account for about 40% of new purchases in India, compared with less than 20% a few years ago. The diesel model of Maruti Suzuki's popular new Swift hatchback has a waiting list longer than six months.
A rush to buy vehicles before the budget drove car sales in February to their highest-ever total.
Cutting the subsidy, which makes the fuel about 50% cheaper than petrol, is a political hot potato due to diesel's extensive use in India's vast agricultural industry.
Fuel retailers and environmental groups had instead called for an extra excise duty of Rs 81,000 on diesel cars, asserting that they account for 15% of the fuel's consumption. Industry groups say the amount is less than 5%.
Clarity in the government's stance on the fuel should kickstart investment plans by India's car makers, who were unwilling to splurge on new plants to meet the surging demand until the ambiguity over diesel was resolved.
Overall car sales in India will likely only post marginal growth in the fiscal year that ends this month, but are expected to grow by more than 10% in the coming fiscal year, driven by increased salaries and a rapidly growing middle class.