New vehicle buyers need to be incentivised with low taxes, benign fuel prices to keep the sales going

Petrol prices in India and its impact on economy
Owning a vehicle has become expensive with rising fuel prices, high taxes, production cost. Unless, potential buyers see value in having one, auto companies will continue to have tough times.
 

In casual conversations with some friends and people from generation younger to me, many have said that they were not inclined to own a vehicle. With the likes of Ola and Uber along with a host of other transportation options in metros and other tier 1 cities, not owning a vehicles was no more a problem. This is also reflected in the lacklustre automobile sales for many years on the trot, before the Coronavirus pandemic hit and the view changed on its head.

Over the past few months there has been a shift in mobility preferences with many choosing to have their own vehicles if they could afford it. This has been driving the sales, despite higher cost of owning and maintaining a vehicle now.

But are there real incentives to own a vehicle now is the question that one needs to ask?

Spiralling Commodity Prices

The cost of a vehicle has increased over the years with spiralling commodity prices. Despite lacklustre sales during the past year, many automakers have passed-on this cost to the customers since the beginning of 2021. The sector is expected to face a further commodity cost inflation. India’s largest passenger car maker Maruti Suzuki was the first to announce the hike in December 2020. Rest followed.

Every raw material including metals, plastic, rubber and polymers is seeing a price uptick. A media report has quoted rating agency ICRA saying that automobile companies and ancillary companies will continue to feel the heat with prices of steel, aluminium, copper, lead, and rubber going north. The global prices remained benign during the first half of FY21with lockdown in place, but that has changed now.

BSVI transition

The vehicle cost saw a significant uptick because of the recent transition to stricter BSVI norms which came in to effect fromApril 2020. Industry body Society of Indian Automobile Manufacturers (SIAM) had estimated an average increase in cost of the vehicles at around 10 per cent with 8-10 per cent price rise for commercial vehicles, as per a media report.  

Fuel Price Impact

The biggest pain point has been the fuel price increases happening almost on a daily basis. While, the prices have really never come down despite crude oil plummeting to record lows at the peak of the pandemic and with lockdown restrictions in place, there have been news that the price cut for petrol and diesel could just be around the corner.

Petrol prices crossed the Rs 100 mark in Rajasthan and Madhya Pradesh. Diesel is catching it up with levels around Rs 80 in the four metros. This is unprecedented. The government is attributing this to rising crude oil prices. It is true that the crude oil prices have been increasing for many months now and are hovering around USD 65 from the lows of USD 20 last year. But, the truth is also that the taxes on petrol and diesel are burning a hole in the pockets of a common man.

With struggling economy and tighter finances, the states and Centre are unwilling to put brakes, let alone cut taxes. The per month outgo on EMI, maintenance and fuel is only going up.

We also hear the demand for bringing Petrol and Diesel under the ambit of the Good and Services Tax (GST) and even the Centre passing the buck on States for not letting it happen. A study quoted by one media report suggested that bringing petrol and diesel prices under the ambit of GST would bring down the prices by as much as Rs 25-30.

Petrol and diesel have traditionally been a cash cow for states and the Central Government and every government has milked it to its advantage. It is unlikely that it would come under the one nation one tax regime anytime soon.

However, cutting tax is certainly doable and the governments need to show a large heart.

This will not only bring down the fuel cost for common man, it will also keep in check, the rising consumer inflation (CPI Inflation).

The daily price increase has also got the Reserve Bank of India (RBI) worrying, with the banking regulator exhorting the government/s to cut taxes. It fears inflationary pressures if the prices don’t come down. As per the RBI’s Monetary Policy Framework, the target inflation is to be maintained at 4 (+/-2) per cent.  

GST on Automobiles 

The automobile industry’s longstanding demand to the Government has been to cut GST on vehicles from the existing 28 per cent to 18 per cent for all categories. The government in its wisdom has been unrelenting.

The current 28 per cent GST on vehicles is a high tax levy and every time the cost of factory finished product goes up, the tax paid as GST on the same vehicle goes up. So, it is not just the cost of vehicle that is going up, the tax outgo for same type/brand of vehicle also goes up every time.

There is also a GST of 28 per cent on the automobile components, which does make repairing and maintenance dearer.

Other Expenses

Apart from routine expenses that one incurs in maintenance and upkeep, there are recurring expenses in the form vehicle insurances which have to be renewed after a certain time period.

There is a onetime road tax which one needs to pay while purchasing a vehicle. This road tax is a state subject and varies from one state to another. It also depends upon the cost of the vehicle. For instance, according to a website indianauto.com, road tax on petrol cars is at 4 per cent of the value of the car up to Rs 6 lakhs in Delhi. For Diesel cars it is 5 per cent. For petrol cars above Rs 10 lakh, the road tax is at 10 per cent of the value while at 12.5 per cent of the value for Diesel cars.

In Kerala, the highest slab is Rs 20 lakh and above where the road tax is 20 per cent of the value of the car. In Andhra Pradesh, there is an additional tax of 2 per cent when buying a second vehicle under the same name.

In certain state like West Bengal, road tax is levied on the basis of the engine capacity.

Some Green shoots

The sales of passenger cars, and two wheelers have seen a growth over the past 3-4 months. As per SIAM’s figures, the auto industry registered a 5.97 per cent sales growth in Indiaat 17.32 lakh units in February as against 16.5 lakh units in January 2020. Four-wheeler sales increased from 2.48 lakh units in January 2020 to 2.76 units in February, registering over an 11 per cent growth.

Meanwhile, two-wheelers sales went up by 6.6 per cent, from 13.41 units in January 2020 to 14.29 units last month.

But the growth has been on a lower base. The 10-year CAGR over the decade FY2000 to FY2010 for passenger vehicle market was 10.3 per cent which dropped to 3.6 per cent in the decade between FY2010 and FY2020 according to a Business Today report quoting SIAM. In the period between FY2015 and FY2020, it further dipped to just 1.3 per cent CAGR, the same report said.

As far as Two-Wheelers, at 14.30 lakh units sold in January 2021, a degrowth of 5.32 per cent CAGR was seen from the highest sales in January 2018 with 16.85 lakh units sold.

Impact

The above data is indicative of the current crisis and which is how expensive it has become to own a vehicle! Higher commodity prices, rising fuel cost and exorbitant taxes could potentially be counterproductive to the current sales growth in the affordable two-wheeler and four wheeler segments.

While the auto industry has been cheering for the green shoots that have emerged over the last 3-4 months, it is also mindful of the situation that exists.

Many economists and automobile sector experts have said the existing scenario is a result of high pent-up demand. This could soon fade away, if the prices continue to shoot up.

The need of the hour is to incentivise the new vehicle buyers. Unless, they see value in owning a vehicle, they would not buy a vehicle. This does not augur well for the automobile companies and the economy as a whole if this sector continues to suffer. It is also one of the biggest employment generators.

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