Budget provides impetus to small cars

Finance minister PC Chidambaram has finally acceded to the auto industry's demand and slashed excise duty on small cars to 16 per cent from 24 per cent earlier. Clearly auto makers expected the duty cut to be restricted to small cars as the FM had hinted as much in November last year.

Of the 800,000 cars sold in the country in 2005, 600,000 are small cars of engine capacity up to 1,300. The sector seems happy with the provisions of the Budget of 2006-007 after the finance minister additionally proposed duty cuts on key raw materials including steel and plastic in the budget.

Excise duty for passenger cars has been brought down from 24 per cent to 16 per cent for cars up to 4,000mm length, with an engine of up to 1,200cc for petrol engines and up to 1,500cc for diesel engines.

The companies that stand to gain the most from the excise cut are Maruti Udyog, Hyundai Motors and Tata Motors all of whom have small cars in the Indian market. MUL is likely to be the biggest gainer as it has five models (Alto, Zen, Swift, WagonR and M800) in the small car category. The newly launched Swift also fits the category of small car as it has a length of 3,695mm with an engine displacement of 1,298cc.

Shares of Maruti Udyog, India's biggest small carmaker, responded to the FM's announcements by rising more than 6 per cent per cent to a record Rs834 to end the day at Rs822, a 4 per cent rise. Tata Motors, India's largest commercial vehicles maker, rose 2 per cent and closed the day 3 per cent higher at Rs814.4.

Shares of India's second largest truck and bus maker Ashok Leyland gained nearly 1 per cent to Rs38.40 and TVS Motor Ltd, the number three motorcycle maker, gained more than 1 per cent to Rs119.40.

Maruti Udyog promptly announced price cuts (See: Maruti passes execise reduction to customers) post the budget session as did Hyundai Motors. Maruti Udyog, majority owned by Suzuki Motor of Japan said it would cut prices on its five models by Rs13,000 to Rs22,000 ($293-495) starting March 1, 2006 while Hyundai announced a cut of Rs23,000 on the Santro model. "We will pass on the entire benefit to our consumers," managing director Jagdish Khattar told a television news channel and added that, "This will bring a change in the auto industry ... penetration will increase," he said.

For companies importing cars into the country the peak customs duty has been cut from 15 per cent to 12.5 per cent. General Motors India has announced a reduction in the prices of its D segment Chevrolet Optra by 20 per cent.

The Indian automobile industry that began booming in 2003-04 managed to carry forward the momentum in 2005. The industry has benefited from another year of strong GDP growth (resulting in higher per-capita income), low interest rates regime and varied financing options.

With the government placing renewed emphasis on roads and budgetary support to NHDP enhanced from Rs93 billion to Rs99 billion in 2006-07 the automobile industry has the potential to register steady growth in the medium term. However, the exponential growth experienced in 2004 and 2005 may not be repeated as most of the pent-up demand has already been met in FY04 and FY05. Further, rising fuel prices and hike in interest rates might also prove a dampner.

Making India a hub for small cars
While announcing the Budget proposals the FM said such measures would soon turn India into a global auto manufacturing hub for small cars. The government's focus on small cars is clearly aimed at encouraging fuel conservation and giving incentives to global carmakers to set up manufacturing facilities in the country.
In January Maruti Udyog managing director Jagdish Khattar announced at the Delhi Auto Expo that his company planned to invest Rs2,718 crore by 2007-08 to develop new cars. This was in addition to the Rs3,200 crore the company is investing in a new car plant and a diesel engine facility in Haryana. Of the five cars that Maruti plans to launch in the next five years, three are likely to be small.

Hyundai Motor India, which almost tipped MUL's monopoly for five years with the launch of the Santro in the late 1990s, has already made the country a manufacturing hub for the Santro. India is the only country in which Hyundai's Santro is manufactured and Hyundai is the biggest exporter of cars from India.

Toyota is also working on a small car project, reportedly in collaboration with its subsidiary, Daihatsu, which is known for its small car capability. According to analysts, this car could be based on Toyota's own Yaris, a hot-selling model in Europe.
US-based General Motors India, which is aggressively launching new models in India after witnessing falling sales at home, has recently announced the launch of its hatchback, the Aveo. The Aveo will be available in 1,400cc and 1,600cc variants.

Mahindra & Mahindra has tied-up with Renault of France to manufacture hatchbacks in India and Volkswagen is planning to make small cars in India while Fiat is planning to introduce its small car Grande Punto in India. Volkswagen, Renault and Fiat are big players in the small car market in Europe.

India has world class capabilities in small car manufacture as the domestic market comprises of about 80 per cent of small cars. Cars in India are driven mostly in narrow and congested city areas. The poor condition of India's highways has been a big deterrent for car drivers, though the state of affairs has changed with the development of the Golden Quadrilateral and north-south corridor, it will be a while before long distance road travel gains popularity in the country.

The factors that place India at an advantage over other small car locations like Europe, Brazil and Japan makers are the low cost of labour and a well developed auto component industry that has achieved global standards. Several automobile multinationals admit that they can produce cars in India at a third of the cost in the US because of the high cost of labour there.

Escalating prices of oil globally are working to the detriment of companies like General Motors Corp and Ford Motor Co in the US, which are known for their SUVs and large fuel guzzlers. The demand for small cars is at present rising all over the world and even in the US that has resisted small cars. China has lost out in the small car race and - driven by institutional buying — has become predominantly a big sedan market. Only recently, the Chinese government has started pushing for small affordable cars for individuals and easy finance schemes.

P Chidambaram addressing the addressing the annual meeting of the Society of Indian Automobile Manufacturers (Siam) in January said the government is fully aware that companies intending to make small cars are looking at India as a base.

Key pre-budget memorandum for 2006-07 from Society of Indian Automobile Manufacturers (SIAM):

1. Exise duty: Reduction in excise duty on passenger vehicles from the current level of 24 pert cent to 16 per cent for cars with an overall length of 4,000mm and engine sizes of 1,200cc for petrol and 1,500cc for diesel engines.

2. Customs duty: Increase in duty for new as well as second-hand imported CVs to 40 per cent from the current 20 per cent. However, status quo needs to be maintained on import duties with regards to passenger cars / MUVs. Customs duty on certain specific grades of raw materials should be brought down from the existing 10 per cent and 15 per cent to 5 per cent in order to improve the competitiveness of domestic automobile players.

3. Income tax: Reduction of surcharge of 10 per cent under Income tax Act to Nil, reduction of distribution tax to 7.5 per cent from the current level of 12. per cent and wealth tax to Nil. Scrapping of fringe benefit tax. R&D benefit (of 150 per cent deduction) under Income tax Act should be extended for further 10 years (it is expiring in March 2007). Increase in the depreciation rate from 15 per cent to 25 per cent for plant and machinery.

4. Sales tax: Introduction of uniform VAT system of taxation as it will reduce market distortions and enhance industry competitiveness. With the introduction of VAT, CST should be phased out since it enhances transaction costs and causes market distortions. Reducing the rate of VAT from 12.5 per cent to 9 per cent.