The increased affordability following the simplification in the GST rates will allow auto buyers to move up the value chain and opt for more premium products.
According to market experts, buyers will tend to choose premium options as the resultant benefits reduce the price difference between variants of a same model, and even between two segments of cars.
Price cuts to fuel a premium-seeking market
The reduction in GST rate to 18% from 28% will lead to a price correction of around 8.5% in small cars, and between 3.5% and 6.7% for large sedans, mid-size and large SUVs, according to Crisil Intelligence.
Diesel cars and SUVs having engines smaller than 1,500cc and measuring less than 4 metre will see the steepest reduction in prices since they used to carry a cess of 3%, in addition to 28% GST. Depending on models and variants, this could translate to a reduction of Rs 35,000 to Rs 1.5 lakh in prices, pushing customers to premium options.
For instance, the middle variant of automatic Tata Nexon diesel could see a price reduction of Rs 1.3 lakh, bringing it on par with the base variant of the model with the same technology.
The price of the middle variant of mini SUV Tata Punch at Rs 7.52 lakh will be closer to premium compact SUV Skoda Kylaq, priced at Rs 8.25 lakh.
Experts said since most vehicles are purchased on finance, the upshift in preference will result in minimal or no change in equated monthly instalment.
Saket Mehta, partner and EV & auto industry leader, Grant Thornton Bharat, said: “Since the GST rate cut on small cars reduces the on-road price by up to Rs 1 lakh, the monthly EMI for a typical car loan may not change significantly. This creates an opportunity for buyers to consider higher variants or even upgrade to a better model within the same budget.”
Carmakers typically see 50% of sales volumes coming from the middle variant, followed by 35% from the top variant. Just 10-15% of sales come from the lowest-priced base variant.
Multiplier effect on rural and urban demand
Although prices of entry-level cars have seen a significant rise over the past few years, widening their gap with two-wheelers, the rate cut would infuse a positive sentiment among two-wheeler owners, say experts. With the availability of cheaper loans, they may also consider buying four-wheelers.
Brijesh Kothary, partner at Khaitan & Co, said: “The proposed GST rate cuts in the automotive sector are expected to influence the consumer behaviour. It is expected to stimulate demand through higher spending, which aligns with the very objective of the GST Council in recommending the rate rationalisation.”
As the compensation cess gets abolished, the luxury car segment, too, will see a reduction in prices. Mercedes-Benz India may cut prices by 5-8%. This would translate into a saving of around Rs 5-6 lakh for the buyer.
A 125cc scooter, 150cc motorcycle and a base-variant electric scooter is priced at around Rs 1 lakh. The price of an entry-level car is Rs 4.23 lakh. Thought the gap is significant, the GST rate cut will reduce the EMI on the car to well under Rs 10,000 a month.
Venkatram Mamillapalle, MD, Renault India, said, “With reduced taxes on tractors, agri inputs and farm equipment, the GST reform will boost rural demand, strengthen agri-linked enterprises, and create new growth avenues in semi-urban and rural India. This will unlock fresh demand in Tier II and III cities and rural markets where improving farm income is driving aspirations for car ownership.”