Tata Motors will give bigger discounts to counter plummeting sales

India''s biggest maker of commercial vehicles Tata Motors plans to offer more discounts to reverse a four-month sales slump, as interest rates have soared to a five-year high in India. Higher loan rates have curbed sales of cars, trucks and buses this year

Tata Motors joined Bajaj Auto and Hero Honda in cutting production, as sales started to slow down in June. Hero Honda and the TVS Motor Co have delayed opening new factories as sales have declined.

The Reserve Bank of India (RBI) has raised interest rates by 2.25 per cent over the past three years to curb inflation. Discounts are bound to put pressure on profit margins, but competition is intense, and it is forcing companies to offer price breaks and freebies.

Tata Motors is India''s third-largest carmaker, and will join companies like Maruti, Suzuki, the country''s largest carmaker, in offering discounts. Maruti dealers are offering discounts of up to Rs45,000 ($1,100) on its WagonR model in New Delhi. Now Tata Motors is offering savings of Rs61,000 ($1,540) on its Indigo Marina sedan, according to advertisements in newspapers.

Tata''s total sales in India and overseas declined by 0.4 per cent last month to 45,144. It was led by passenger vehicles like the Indica car and the Sumo sport-utility vehicle. The company''s sales fell 6.6 per cent in July and 2 per cent in June.

Lower interest rates are key to increasing sales in India, where almost three-quarters of new cars sold are bought on credit. Car sales in India gained in eight of the past 10 years, as interest rates halved.

The government has announced on 5 September that it will take steps to boost auto sales. Loans to consumers and companies grew at the slowest pace in three years last month, government data shows.

But apart from higher interest rates, Tata Motors also faces more competition. Maruti, which has 50 per cent of the passenger car market, has introduced five new models or upgrades in the past year, while Renault and Volkswagen have started selling their cars in India for the first time this year.

Also, MAN and Navistar have formed local ventures to sell commercial vehicles competing with Tata Motors. Last month, Nissan announced a proposal to make trucks with Tata Motors''s closest competitor Ashok Leyland.

Higher interest rates have come around the same time when companies have planned large capital expenditures. Tata Motors plans to set up three new factories in the next 18 months.

It had plans to spend Rs12,000 crore ($3 billion) in four years starting 2006, on building new factories and designing new models. It is also building a plant jointly with Fiat. Higher prices for steel, aluminium and other raw materials are also squeezing profit margins.