Tax cut on small cars raises hopes

Small cars already make up three out of every four cars sold in India and the latest cut will fuel more sales.

india Updated: Mar 05, 2006 04:30 IST

A tax cut on small cars in India will boost sales, but may slow growth in the more lucrative mid-size segment and make it even tougher for most foreign car makers to make inroads in the market, analysts said.

The finance minister on Tuesday proposed cutting excise duty on small cars to 16 per cent from 24 per cent, prompting the top three car makers, Maruti Udyog, Hyundai Motor Co and Tata Motors Ltd., to lower prices.

Small cars already make up three out of every four cars sold in India and the latest cut -- after a reduction from 32 percent in 2003 -- will fuel more sales, but perhaps at the cost of the fast-growing mid-size segment, analysts said.

"Some of the momentum we've seen in mid-size, particularly in the B+ category, may now shift to compacts," said Kalpesh Parekh at ASK-RJ Securities, referring to the popularity of newly launched premium hatchbacks Maruti Swift and Hyundai Getz.

"On the manufacturers' end, too, they may be tempted to trim the length or engine capacity on some models to come within the purview of the excise cut," he said.

The duty reduction applies to cars under 4 metres' length and with up to a 1.5-litre engine capacity for diesels and 1.2-litre engine capacity for petrol variants.

"The Indian car buyer is extremely price-sensitive, so with cheaper cars, you will see new consumers coming to the market," said Mohit Arora, director for India at JD Power Asia Pacific.

"You won't have the entire 6-million motorcycle market shift to small cars, but even if only 5 per cent of that market makes a jump, that's one-third the car market now," he said.

That is bad news for foreign car makers like Ford Motor Co, General Motors Corp. and Toyota Motor Corp.

Toyota, which wants 10 percent of India's car market by 2010, has admitted that rapid growth in emerging markets like India and China is tough because it lacks ultra-cheap, no-frills cars.

It is considering making low-cost cars to take on the likes of Renault's Logan sedan, which will launch in India in 2007 in a joint venture with Mahindra & Mahindra.

Companies like Ford, which has seen growing sales of its mid-size Ikon, expect a short-term setback as the higher price differential will discourage sales of bigger cars.

"The market will be distorted in the short-term," said Arvind Mathew, president and managing director of Ford India.

"Luxury cars will not be affected, but Ikon and others that are at the periphery could see a bit of a short-term hit."

But Ford plans to bide its time before considering changing its India strategy.

"There will no doubt be growth in small cars, but for how long can it be sustained," Mathew said.

"If we see a sustainable 20 per cent growth in small cars, then there will clearly be a shift in our priorities, but I'm not going to chop up my bumpers to meet the requirements," he said.

Small car skew

At top car maker Maruti, in which Japan's Suzuki Motor Corp owns 54.2 per cent, compacts make up more than 70 per cent of revenues.

Its new diesel car, slated for launch by end-2006, will have a 1.3-litre engine, also eligible for the cut.

Only eight in 1,000 people own a car in India, compared to 16 in China and nearly 500 in developed markets. But cheap finance and new models have recently encouraged more purchases and shorter replacement cycles.

Passenger vehicle sales topped 1 million units in 2005, and are forecast to double by 2010. But analysts believe the target could be hit early with cheaper small cars and plans by local car makers like Tata Motors to sell cars for less than Rs 100,000.

An entry level Maruti mini costs more than twice that.

First Published: Mar 05, 2006 00:24 IST