Excise duty cut to jump-start auto sales

The Government of India reduced the excise duty applicable to the automotive sector by four percent on December 7. This was part of its economic stimulus package for the slowing Indian economy.

Following this reduction, most automakers have cut retail prices of their models in a bid to stimulate sales. High interest rates, difficulty in obtaining finance and weaker buying sentiment have depressed sales in recent months.

Tata Motors immediately cut prices across its model range with the Indica and Indigo models reducing by between Rs 12,000 to Rs 23,000 and UVs like the Safari and Sumo by between Rs 16,000 to Rs 36,000. As for its light commercial vehicles, they have come down by between Rs 17,000 and Rs 23,000. And, its medium and heavy commercial vehicles which have seen the biggest sales declines have come down by Rs 30,000 to Rs 60,000.

According to Dr Pawan Goenka, president - Auto Sector, Mahindra & Mahindra, “The excise duty cut should help but there is an urgent need to supplement this with availability of retail financing. Also, the government needs to look at the excise duty differential in various classes of vehicles. While a Maruti 800 attracts an excise of about Rs 12,000, the Scorpio attracts about Rs 1,46,000. Such a large difference is, in our opinion, not justified.” M&M has passed on the entire cut to customers and is confident that overall vehicle sales in 2009 would get a boost from this reduction in excise duty. Commenting on this change, Michael Boneham, president and managing director, Ford India said, “We have reduced the prices of our models. However, it is essential that the government address issues like the availability of credit and current interest rates."

Meanwhile, Yamaha India said the cut in excise is encouraging in the current economic scenario and would benefit auto companies. However, it feels that a reduction in sales tax would have benefited the industry more. Yamaha clarified that it has not reduced prices; however, it has deferred a price increase which it was about to make around the time excise rates were cut. It also urged financial institutes like ICICI Bank to re-start two-wheeler financing activities.

According to L Ganesh, chairman, Rane Group, “The reduction of Cenvat is the right initiative. However, vehicle sales may take a little while to bounce back."

Discussing recent development, Sumit Bali, CEO, Kotak Prime said, “There have been some positive developments for the auto sector recently like the recent cut in prices of petrol and diesel fuel. Also our interest rates are declining by 0.50 to 0.75 percent and price reduction by manufacturers. All this will help the auto industry." He added that “lower rates will improve finance penetration, which should help arrest the decline in sales. Even with all these measures, the credit flow is still not back to normal. Vehicle prices are expected to rise again in January 2009.