Wondering why the Indian automobile market was suddenly being bombarded by small cars with small engines? The reason is simple। The Finance Minister P Chidambaram in India’s last budget plan of 2006-2007 reduced the excise duty on small cars from the then 24% to the now 16%. However, he had decided to retain the excise duty on large cars at 24%. Furthermore, excise duty on raw materials such as aluminum and plastic, which are used in manufacturing cars, also reduced.
Small cars were classified as those that are less than 4 metres in length and which consist of an engine under 1400 cc for petrol and 1500 cc for diesel। The immediate beneficiaries of this policy were
Hyundai Santro, Tata Indica,
Maruti 800,
Maruti Alto, Maruti Swift, Maruti Wagon R, and Maruti Zen.
Suddenly the market was swarming with competitors scraping to launch a model of a small car with a small engine। The Hyundai Getz with its 1400 cc engine was revamped and released as the
Getz Prime that sported a 1.1 litre or a 1.3 litre engine that fell under the small car duty excise helping the manufacturers cut the base variant car cost by 10,000, which was then transferred to the consumers. The Fiat Palio was redesigned and released with a 1.1 litre engine under the classification of Fiat Palio Stile, again so that the manufacturers could benefit from the excise duty. Maruti started slashing 12 to 25 thousand rupees for a range of its small cars. Hyundai and Tata did the same.
However, not all car manufacturers were happy with this new budget। Manufacturers of medium sized and luxury cars felt that they had been given a raw deal. Their reasoning was that most people who moved from using small cars to using medium sized cars did so because of their gradual increase in income and also because they could cope with the price difference. However, if small car prices decrease even further while medium sized car prices stay the same, then the margin of price difference is large enough to deter a consumer to shift from small cars to medium cars. Another reason that these manufacturers put forth was that a differential duty structure will lead to an uneven growth.
This year, the automobile sector wanted to ask the Indian government to further reduce excise duties for small cars from 16% to 12% and additionally reduce duties on large cars from 24% to 16%. However, their dreams were smashed to the ground in March 2007. The Finance Minister decided not to make any changes to the excise duty of cars and instead increased the prices for aluminum and plastic. This over the year 2007-2008 will force all car manufacturers to raise the prices of all their products regardless of size. Thus, this will reduce the currently booming purchase of small cars to a trickle unless car manufacturers and dealers can provide lucrative discounts or EMI plans to prospective buyers.
