More mileage for small cars

Updated: Mar 1 2006, 05:30am hrs
The finance minster gave a shot in the arm to India Inc's quest to become a small car hub by cutting excise duty on small cars from 24% to 16% as he had promised last year. The reduction would be applicable only on cars under 4 metres in length with diesel engine capacity less than 1500 cc and petrol engine capacity under 1200 cc.

However, the bigger size cars have been affected due to the reduction in the peak rate of customs duty and the imposition of countervailing duty. General Motors has slashed the price of the Optra by Rs 20,000. Honda Siel has also slashed the price of all of its sedans by Rs 2,000-Rs 15,000, while hiking the price of CRV by Rs 33,000.

Effectively, only compact car models - which amount to 85% of domestic volumes - will benefit from the reduced tax rate. The country's three largest carmakers reduced the prices of their compact car vehicles effective Wednesday. The Maruti Swift and Hyundai Getz fall outside this definition.

"The duty cut will bring double benefit for the consumer, who will also get a reduction in Vat. So, one can see the reduction in the prices of cars made by Maruti beginning from Rs 12,000 on Maruti 800, and going till Rs 21,000 to Rs 22,000 for hi-end cars models. This will also lead to long-term benefit to the sector as other nations will start sourcing small fuel-efficient cars from India," says Jagdish Khattar, managing director of Maruti Udyog Ltd (MUL).

Shares of MUL rose 4.3% to Rs 822.6 while Tata Motors, whose Indica model stands to benefit, saw its stock rising 3.6% to Rs 814.35 on the Bombay Stock Exchange (BSE) Ltd.

Only compact car models stand to benefit
Maruti Swift and Hyundai Getz outside the ambit
Manufacturers of bigger-sized models not too happy
Wonder why only big cars left in the 24% excise bracket
Higher car sales expected next fiscal
Import duty cut on non-ferrous alloys means gain for auto component sector, too
Predictably, manufacturers of bigger sized models aren't too thrilled about this development. "While it should boost the growth of small cars, I am surprised why only big cars are left in the 24% excise bracket. Many manufacturers have invested heavily in Indian operations. The equilibrium of the market would get distorted, as growth will now be skewed in favour of small cars. It is a disadvantage for us," said KK Swamy, deputy managing director of Toyota Kirloskar Motors.

Overall, analysts expect the measure to significantly boost the sales of cars by as much as 20% next fiscal. After growing at 15% plus for the past three years, car sales have decelerated this financial year, rising only 6.3% to 9.19 lakh units during the 10 months till January. The last excise cut happened in February 2003, following which production volumes jumped 38% to 8.42 lakh in 2003-04.

The auto component sector also stood to gain as the import duty on non-ferrous alloys like copper and aluminum was cut 2.5% to 7.5%.

"There will be economies of scale for parts makers and this will see a lot of FDI flowing into ancillary makers," said Surinder Kapur, CMD of Sona Koyo Steering Systems.