Indian car makers have received a big boost following the government’s decision not to hike taxes on diesel cars – a particular relief to domestic diesel-focused manufacturers such as Mahindra and Mahindra, and Tata.

Carmakers had feared a tax on diesel vehicles or a reduction in generous subsidies for the fuel, which has boosted sales as overall demand slows on high interest rates and rising petrol prices.

The news also boosted shares in car companies in India on Friday (16 March) with Tata rising 2.6% to its highest ever prices while market leader Maruti Suzuki's stock reached its highest level for a year, up 4.6%. M&M rose 6.1%.

The government also announced a rise in import duty to 75% from 60% for assembled SUVs and multi-utility cars costing more than US$40,000.

Diesel car sales have grown to account for about 40% of new purchases in India, compared with less than 20% a few years ago. Maruti Suzuki's popular new Swift diesel has a waiting list longer than six months.

Cutting the subsidy, which makes diesel about 50% cheaper than petrol, is a political hot potato due to the fuel's extensive use in India's vast agricultural industry.

Analysts said that clarity in the government's stance on the fuel should kick-start investment plans by India's car makers.