Passenger vehicle: Retain excise duty on small cars

Current status

2010 has been one impressive ride for the automobile industry in general as well as passenger vehicle in particular. Increased personal disposable income, healthy economic growth and pent up demand led to milestone sales in financial year 2011 so far - from 2.4 lakh vehicles in Aug 2010 and 2.5 lakh vehicles in Sep 2010 to 2.7 lakh vehicles in Oct 2010 and 2.66 lakh vehicles in January 2011.

Its worth noting also that these milestones were achieved in midst of vehicle price hikes, increase by 175 bps in key policy rates by Reserve Bank of India (RBI), deregulation of petrol prices and  petrol price increase of Rs 11 per litre in past one year.

It reported the highest domestic monthly sales of 233994 vehicles in January 2011 despite 0.5-2% vehicle price hike. The passenger vehicle industry recorded sales of 2399151 vehicles in period April- Jan 2011, up by 25% y-o-y.

The international players also took advantage of burgeoning auto demand in India with launch of small cars such as Micra from Nissan; Polo from Volkswagen, Figo from Ford India etc. This provided the international players a solid foothold where there was none in previous year.

But not everything is rosy for the passenger vehicle industry. Though the robust demand is visible in sales of passenger car companies, the same is not reflected as profits thanks to increasing raw material prices especially steel and rubber.

Passenger vehicles: Sales at a glance

Cumulative Financial year 2010-11

 Source: SIAM

Industry expectations

Retain the excise duty of small cars at 10%.

Reduce the excise duty from 22% to 10% on big cars i.e. cars which are longer than 4 metres and have engine capacity over 1200 cc in case of petrol and 1500 cc in case of diesel. Remove additional tax of Rs 15000 on big cars with engine capacity exceeding 1500cc.

Retain the import duty on imported cars.

Removal of 1% national calamity contingent duty on cars and multi utility vehicles.

Analysts/market expectations

The Government of India is expected to roll back the balance stimulus cut of 2% excise duty on vehicles in order to curtail the growing inflation. Though the demand may not be impacted right away, growing concern over rising interest rates, vehicle prices, fuel costs and general inflation would dampen the demand over the medium term.

With growing concern over the environmental issues, we expect the GOI to increase the excise duty on utility vehicles (UV). This would negatively impact UV players such as Mahindra & Mahindra, Tata Motors, Toyota Kirloskar etc

There are also fears that GOI may impose a differential/additional excise duty on diesel vehicles. Kirit Parikh committee had recommended increase duty on diesel cars by Rs 80,000 in order to neutralize difference in fuel price. In case, unfavourable differential tax rate is implemented, the manufacturers such as Ford India who have invested in setting diesel engine plants would be impacted.

Companies to watch

Mahindra & Mahindra, Maruti Suzuki, Tata motors

Outlook

Considering the spike in prices, there are expectations of cut / removal in import duty on non-ferrous metals.  But as regards steel, there are two opinions. India is amidst massive rise in its steel capacity, which can transform us into a net exporter of steel from currently being a net importer of steel.  This will require increase in customs duty on HR coils from 5% to 10%.

On the other hand, steel finds application in wider range of products from construction, capital goods, consumer durables to automobiles.  So, in the context of rising prices, the customs duty can be slashed to benefit user industries.  Any cut in customs duty on metals will benefit auto sector, and hike will add to their costs.

Amidst high crude oil prices, any amount of tinkering with duties are not going to prevent further hike in petrol and diesel prices, so long as civil unrest in many oil producing countries are not contained.

The auto players are already combating issue of rising raw material prices especially steel and tyre prices. Though so far, the companies have been able to pass on, to some extent, rising raw material prices to end consumers through vehicle price hikes, concerns are brewing up on the impact of rising interest rates and fuel prices over period of time.

With possible hike in the excise duty of small cars and utility vehicles, the companies are likely to pass on it fully to end consumer, as there is limited room for absorption by the car companies.

This would only add on to existing woes of the consumers who are battling with rising interest rates, fuel prices and general inflation thus impacting the demand unless some step is taken to combat the inflation by GOI.

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