Excise duty cribs do not make any sense

The auto industry was hoping for a happier beginning to the New Year.

The Centre has decided not to continue with the excise duty concessions first announced by the UPA regime in its Interim Budget last February. These would have been in force till June 30, 2014 but the BJP government extended the deadline to end-December.

Automakers were hoping that the concessions would continue even further till the Budget this February given that sales had only begun picking up. However, the Centre was in no mood to oblige especially when it needs to mop up revenue over the next two months and ensure that the fiscal deficit is pegged at the targeted 4.1 per cent of gross domestic product.

It may be recalled that duties were slashed from 12 to eight per cent for small cars and two-wheelers while mid-size cars saw them lowered to 20 from 24 per cent. In the case of large cars, they were down from 27 to 24 per cent while SUVs saw the biggest slash to 24 from 30 per cent.

Sales impact Carmakers are now worried that with the original duty levels back in place, sales will be impacted as customers will end up paying more. According to them, this is very likely considering that the market is just about crawling out of a slump and any kind of negative sentiment means that it will be back to square one all over again.

The argument just does not add up given the sales trends seen since last February when the duty cuts were first announced. Those expecting to see huge crowds queue up at dealerships overnight were sorely disappointed. Manufacturers were puzzled why customers refused to bite the bait of lower prices little realising that the economy not in the best of shape.

The reason for this poor response was attributed to poor sentiment associated with the UPA regime which meant that buying would gain momentum with a change of guard at the Centre. The BJP duly obliged and took charge in May but this did not result in any mad stampede at dealerships. On the contrary, the mood was still subdued across most parts of the country.

Yet, two things were happening at this time which translated into positive tailwinds for the industry. Crude oil prices began falling from levels of $115 per barrel to the present $57/bbl, a near 50 per cent crash in six months. As a result, petrol and diesel also became more affordable with the Centre knocking off the subsidy in diesel.

Buyers’ focus It was also getting increasingly clear that new models like the Celerio, Alto, Grand i10, Elite i20, Ciaz and Mobilio had connected strongly with potential buyers and their waiting list grew consequently. Manufacturers with a limited product range and tepid retail efforts saw numbers fall. By the end of the day, Maruti, Hyundai and Honda stood tall and this was not because of lower excise duties.

The truth is that the economy is still not out of the woods even as the whole global community is upbeat on Prime Minister, Narendra Modi. While this has resulted in a buoyant stock market, this has still not percolated down to the job market. Despite this, if some car models are still doing brisk business, it is thanks to the complete package on offer which goes beyond the price tag.

Hence, even as cars and SUVs become dearer from this month, customers will continue buying what they like. Brands will do well irrespective of discounts or lower excise duties. The list would typically include the Honda Activa, Bajaj Pulsar, Royal Enfield Classic, Maruti Celerio and Alto, Hyundai i20, BMW, Mercedes, Audi and so on. These are brands which are coveted and price is, therefore, no deterrent.

From the Centre’s viewpoint, it is important to signal a roadmap for duty levies especially with the Goods and Service Tax scheduled to be in place from April 2016. Automakers are better placed to plan their pricing structure and should, therefore, welcome the end in excise duty concessions. The show can still go on so long as they know what the customer is looking for.

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