Excise Duty Slashed: Auto Industry Cheerful

Finance Minister P Chidambaram announced the interim Union Budget on February 17, 2014. Keeping in mind the sluggish growth of automobile industry, the finance minister proposed to reduce the excise duty. 

Automobile sector which has been facing crisis since a long time was surprised when Finance Minister P Chidambaram reduced excise duty. The excise duty on small cars and motorcycles has been reduced from 12% to 8%, whereas on the Sport Utility Vehicle (SUV) it has been reduced from 30% to 24%. The excise duty on large cars has also been reduced to 24% from 27%. The rate will be applicable for one month in Q4FY14 and Q1FY15.

Due to rising fuel prices, high inflation and high interest rate resulted in poor consumer sentiment leading to a sluggish demand for both passenger and commercial vehicles. The total passenger vehicle sales in the year 2013 stood at 25,53,979 units (as per SIAM) registering a decline of 7.23% as compared to the previous year while the total consumer vehicle sales stood at 6,87,230 units in the year 2013 reduction of 15.56% as compared to the previous year. Car sales an indicator of consumer demand and the country's macroeconomic conditions has remained sluggish. The total car sales in the year 2013 was 18,07,011 units as compared to the previous year of 19,98,703 units.

The reduction in excise duty is a positive announcement for the auto sector. The cut in excise duty will pass the benefit to the consumers. In a statement released on this, Tata Motors and General Motors India announced to reduce the prices on their products. This reduction in excise duty would lower the prices, which would improve consumer sentiment and hopefully revive the demand of the vehicles. The dealers will also get some relief. The dealers sits on an average inventory of 40-60 days, in value terms of around Rs 10-12 crore where each car dealer sells cars worth on an average of 4-5 crore per month. This reduction in excise will lead to reduce inventory.

The similar type of excise reduction was announced in the union budget 2009. The recovery was visible in a short span of 6-8 months.

But today's condition is different. This rate will be applicable till June 2014, too short to pace the volume growth. Tax push alone is not enough to propel the growth. There are some other factors like interest rate, depreciation allowance, ability to pay-back on which the decision to purchase depends.

The fiscal deficit in this fiscal year is expected to be at 4.6% of the GDP. The finance minister said that due to reduction in excise duty the incoming revenue flow would be cut down by Rs 300-400 crore in the month of March FY14 and additional Rs 700-800 crore in April and May FY15. If the sales volumes increase then the given concession will reduce. To increase the sales volume companies are going to reduce the prices but it will be for short term because if new government comes they may change the excise rate. 

The excise duty cut will benefit Maruti Suzuki, the market leader of small car sector. The small car sector constitutes around 65% of the total volume. Other companies who would be benefiting are Hero Motocorp, the market leader of two-wheeler’s, Hyundai and Nissan, manufacturer of medium cars.