Cut excise duty on large cars, govt told

Passenger Vehicle sector seeks cut in excise duty on large cars too, and to reduce interest on auto loans to boost demand.

Current status

Domestic Passenger vehicle sales fell in seven out of the 12 months of FY 2008-09, with steeper fall in the quarter ended December 2008.  But since then, there the passenger vehicle has been one of the auto segments to quickly bounce back.

From low of 127910 units sold (including exports) in December 2008, the total passenger sales have been consistently going up in the subsequent months and touched 170586 cars in May 2009 thanks to stimulus package of 4 per cent cut in excise duty on all vehicles enforced by the government in December 2008. This measure lifted the passenger vehicle industry from recession.

On flip side, though the passenger car has managed to pull itself out of worst, its domestic sales growth still linger in lower end of single digits i.e. 4 per cent y-o-y growth in April 2009 and a 1 per cent degrowth in May 2009. It is attributed to the fact that the banks are risk averse to offer auto loans and reduce the interest rates despite the RBI cutting the key policy rates such as CRR by 400 bps to 5 per cent and Repo rate by 425 bps to 4.75 per cent since mid Oct 2008 till date.

Another factor that is limiting the passenger vehicle sales is the high excise duty of 20 per cent attached to large cars against the 8 per cent attracted by small cars and hybrid cars. On account of the duty differential hampering utility vehicle demand, the total sales of the utility vehicle are yet to improve on year on year basis.

Its total sales slipped by 15 per cent y-o-y from 45830 utility vehicles in cumulative April-May 2008 period to 38751 utility vehicles in cumulative April- May 2009 period. Though Mahindra & Mahindra is an exception recording 12 per cent y-o-y growth to 22081 vehicles in period April-May 2009 in its utility vehicle sales on back of new launches such as Xylo and revamped Scorpio.

Passenger vehicles: Sales at a glance

Financial Year 2008-09

Source: SIAM

Cumulative April- May 2009

Source: SIAM

Industry expectations

• SIAM has not come out with expectations from Union Budget 2009-10

Analysts/market expectations

• Lowering the excise duty on large cars
• Reduction in interest rates on auto loans by Banks

Companies to watch

• Frontline players such as Maruti Suzuki, Tata motors, would benefit from reduction in interest rates on auto loans.
• If excise duty on large cars is cut, it would help improve the sales of utility vehicles and large cars of players such as Mahindra & Mahindra.

Outlook

The passenger vehicles have managed to restore itself from the shackles of the downtrend in calendar year 2008. However, high excise duty on large cars and high interest rates continue to limit the growth. Reduction in excise duty of large cars and lowering of interest rates could enable level playing and provide passenger car industry a stronger platform of growth.