Automakers today said the government decision to allow "small" hikes in diesel prices was a step in the right direction although it could have some impact on sales.

While car market leader Maruti Suzuki India (MSI) said the move will not have any impact on its Rs 1,700 crore investments for a diesel engine plant at Gurgaon, Mahindra & Mahindra (M&M) was of the view that demand for petrol passenger cars in the small and mid-range could increase following the development.

The government today allowed oil companies to make small hikes in the price of diesel from time to time.

"This is a step in the right direction for the country overall, as we cannot afford such a high subsidy burden... This will, however, not in any way affect Maruti Suzuki's plans for diesel engine plant. We don't have a problem with the proposed diesel price hike," MSI Chairman R C Bhargava told PTI.

The company's new diesel plant is slated to start operations by June with an initial capacity of 1.5 lakh units per annum, and will be doubled by 2014.

Welcoming the government's move, M&M President Automotive & Farm Equipment Sectors, Pawan Goenka said: "Mahindra has always been supportive of narrowing the gap between diesel and petrol fuel prices by another Rs 5 per litre. In our opinion such an increase in diesel price will have very little impact on UV and CV demand but may slightly shift demand to petrol in the passenger car segment in the small and mid-range."

He, however, said an increase in diesel price beyond Rs 5 may start impacting overall industry volume.

Despite the possibility of a temporary hit on sales due to the proposed diesel price hike, Toyota Kirloskar Motor (TKM) Vice Chairman and Whole Time Director Shekar Viswanathan said: "It is always better to have a realistic and market related pricing, and the earlier it is the better."

He further said instead of sudden increase of prices, it should be done in a gradual manner.

When asked if sales of TKM, whose major contribution comes from diesel driven vehicles, will be impacted, he said: "We want the consumers to have the choice. If there is more demand for petrol vehicles, then we will be producing more petrol vehicles."

Society of Indian Automobile Manufacturers has already stated that it would welcome any move to reduce the gap between petrol and diesel prices and also to deregulate diesel pricing.