The 3% excise duty hike on SUVs in India, announced during the union budget on Thursday, may spell the end of the purple patch the segment has been going through, while spelling hope for the beleaguered sedan segment.
Automakers such as Honda, which have new sedans lined up for launch this year, are hoping to gain at the expense of SUVs.
Led by a flurry of modestly priced compact sports utility vehicles such as Renault's Duster, Mahindra's Quanto and Maruti's Ertiga, and spurred by the rising differential between the prices of diesel and petrol, the sales of SUVs have gone through the roof in the last two years, outpacing passenger cars.
On an average, sales of SUVs and multi purpose vehicles (MPVs) have grown by over 35% while passenger cars have remained stagnant. The demand for sedans suffered the most in this newfound SUV craze.
"We would not have grown by 50% in 2013-14 anyway, and were in line for a more moderate 20% growth. But with the excise duty hike it may be even less," said Pawan Goenka, president (automotive sector), Mahindra and Mahindra, India's largest utility vehicle maker.
"A customer eyeing a Rs. 12 lakh SUV will not buy a Rs. 5 lakh small car. He would opt for Rs. 12 lakh sedan, as the SUV becomes Rs. 35,000-40,000 dearer. Passenger cars may end up growing faster," he said.
India's craving for SUVs had seen consumers clearly move away from sedans, and this may see a correction in 2013-14. Some manufacturers such as Honda, which have lined up new launches in this segment, may end up as direct beneficiaries.
"This year while the market has remained flat, sedans have seen a decline," said Jnaneswar Sen, vice president, sales and marketing, Honda Cars India Ltd. "I think that will see a correction and there would be a revival in demand for sedans."