Soaring fuel prices, deteriorating air quality and expectations of concessions in Budget 2008-09 are encouraging auto majors in India to come up with "green" vehicles.

Manufacturers with green prototypes include Mahindra and Mahindra, Tata Motors [Get Quote], Ashok Leyland [Get Quote], two-wheeler makers Bajaj Auto [Get Quote] and TVS [Get Quote] Motors and international majors like Toyota and Honda.

There are broadly two types of green vehicles. One runs on batteries and requires regular recharging. The other is a hybrid that can run on both electric power and petrol or diesel. Vehicles of the latter type are typically powered by petrol/diesel when they start and switch to electric power when they cruise.

Being new technology, hybrid vehicles tend to be 20 to 50 per cent more expensive than non-hybrid ones. The higher cost, however, could be partly offset by a 15 to 20 per cent reduction in running costs owing to lower fuel consumption. Battery-charged cars, for instance, incur a cost of only 40 paise a km.

Ownership costs might fall even more if the finance minister accepts a demand by the Society of Indian Automobile Manufacturers for excise of 8 per cent on such vehicles, against 16 per cent for small cars and commercial vehicles and 24 per cent for big cars.

Meanwhile, the companies are also looking at other ways to reduce cost. M&M, for instance, has decided that all its future vehicles will have a hybrid option and is engineering its models accordingly. A hybrid Bolero is expected in three or four months.

"A hybrid need not be expensive. We can alter the architecture of the engine to suit buyers' financial needs," said Arun Jaura, the company's senior VP, R&D and global product development.

Japanese auto major Honda, which has been developing hybrid cars as part of its international stable, plans to begin by launching the Honda Civic hybrid car by the middle of this year.

"It is part of our brand strategy to showcase our cutting-edge technology, said Janeshwar Sen, senior general manager, Honda Siel Car India.

Industry experts expect the car to be priced at Rs 15 lakh (Rs 1.5 million) to Rs 16 lakh (Rs 1.6 million) against Rs 11 lakh (Rs 1.1 million) for the normal Civic.

Few analysts, however, are ready to hazard a guess on market size. AC Nielsen's report on electric vehicles estimates 4,00,000 electric two-wheelers in the next financial year with four or five brands in the fray. The Indian two-wheeler market is currently roughly 10 million.

But companies that already have such vehicles on the launch pad say tax concessions could change the size of the market.

"Being a new category the 10 per cent customs duty on the battery pack, 16 per cent countervailing duty on components, 3 per cent central 12 per cent local sales tax add up to a huge cost," said Deba Ghoshal, marketing director of Ultra Motors, a joint venture between Ultra of UK and the Munjals of the Hero group.

He suggested that this could be halved, as was done for vehicles running on CNG. "Also if the entire category is exempt from registration tax, the overall cost comes down and the market will grow," Ghoshal added. His company expects to sell 20,000 battery- operated two-wheelers this year.

Some analysts, however, are cautious about being too optimistic about market size. "The state of hybrid development is very nascent in India and the penetration of such vehicles may be limited because the technology will only be available in vehicles above Rs 10 lakh," said Dilip Chenoy, director general, SIAM.

He predicts that demand could be just 10 per cent of cars in this price range when the market matures.