India’s New Budget May Hamper Local and Foreign Automakers

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Written by Ammar Master, manager, LMC Automotive and a contributor to the ASEAN Automotive Monthly—Market Trends for J.D. Power Asia Pacific

Much to the chagrin of the auto industry in India, the country’s Finance Minister P. Chidambaram in his 2013 Budget raised duties for utility vehicles (SUVs and MPVs) and fully-imported luxury cars.

The changes mean that excise duties for SUVs and MPVs were increased from 27% to 30%, excluding vehicles that are registered as taxis. In addition, India’s government now defines utility vehicles to be over four meters in length (slightly more than 13 feet or 157.5 inches); with 2.5L engine capacity and a ground clearance of at least 170 mm (6.7 inches).

This definition, especially the new criteria for ground clearance, also will subject certain passenger cars, including the Honda Civic and Maruti Suzuki SX4 to the higher duty, while at the same time allowing utility vehicles like Mahindra’s Quanto or Renault’s Duster to be taxed a lower rate.

In preliminary analysis of this change in the taxes, the SUV sales forecast for 2013 may be cut by up to 5%, although the long‐term outlook for the segment remains positive. The only silver lining is that upcoming compact SUVs (of less than four meters) may help offset some of the impact of this new higher excise duty on larger vehicles.

India’s National Automakers Are Concerned about Excise Duty

What’s worrying for the industry is that the excise duty hike can hurt the sales of mass-market SUVs such as Mahindra’s Bolero and Scorpio as well as Tata’s Safari. The increase in prices of these models coupled with already negative sentiments may cause many buyers to defer purchases.

Furthermore, it is possible that some OEMs may delay future launches in order to meet the new definition for SUVs, particularly with attempts to lower the ground clearance. Yet, this lowering of ground clearance may not be the best plan for buyers with India’s less-forgiving road infrastructure— many pot‐holed roads where a higher ground clearance is a useful attribute.

Luxury Vehicles Also Feel the Weight of New Tax Hike

Meanwhile, the customs duty for luxury vehicles with prices over $40,000 and an engine capacity exceeding 3.0L for petrol and 2.5L for diesel have been hiked from 75% to 100%.

Notably, this is the second time the government has increased taxes for luxury vehicles in as many years – in Budget 2012‐13, taxes were raised from 60% to 75% to promote more local manufacturing. Our group does not expect the increase on luxury vehicles to have a major negative impact on the industry, as import models make up a small proportion of overall sales.

Another element to be aware of for the automotive industry in this year’s Budget is the extension of existing benefits on specified parts of hybrid and electric vehicles by two years to March 2015.

India Gives Hybrids and EVs a Break

India’s government has attempted to promote the manufacture of hybrids and electric vehicles (EVs) in the country. Hence, it had reduced the excise duty on specified components of hybrid vehicles from 10% to 6% in the 2012-2013 Budget. The excise duty on lithium ion batteries was similarly brought down from 10% to 6% in the last Budget.

Furthermore, this extension includes full exemption on the basic customs duty and special countervailing duty (CVD) with concessional excise duty, or CVD of 6% on specific items and lithium ion batteries.

These extensions are a step in the right direction, but we are not certain if India is completely ready for hybrid and EVs. This is why we don’t think

they will make any impact in the immediate future. For now, major global players do not appear to have any big plans to start manufacture manufacturing these alternative vehicles in India.

A major obstacle to consumer acceptance of hybrids and EVs in India will be the high price tag. To be certain, this year’s Budget has put more pressure

on the industry at a time when it is finding extremely difficult to push up vehicle sales in a challenging environment. OEMs are clearly not happy with the Finance Minister.