The government said on Wednesday that it will intervene to revive growth in the automobile industry after interest rates that are at a five-year high reduced the buying power of customers and slowed sales. The automobiles sector, catering to Asia’s fourth largest market, accounts for around 5% of India’s economic output.
“We are keenly watching the outcome of the second quarter,” said Union minister for heavy industry and public enterprises, Sontosh Mohan Dev. “If need be, we will certainly intervene to sustain growth.”
The second quarter ends this month.
In the first four months of this fiscal year starting April, sales of passenger cars and commercial vehicles grew slower than last year while two-wheeler sales declined. Overall sales of automobiles in this period slipped 5.7% to 2.24 million units compared with 2.4 million a year ago.
“Among various factors, availability of credit for first-time buyers is a major constraint, coupled with the increase in interest rates,” said Dev. “We will also look at incentives for exports.”
In an effort to address inflation rates—they were hovering near two-year highs in January—the central bank has raised its benchmark lending rate six times in the past 18 months. This has led to a 4 percentage point increase in vehicle loan rates. It has also resulted in banks and financing companies becoming more cautious in lending, especially to automobile buyers. Almost 70% of two-wheelers and 90% of four-wheelers sold in India are bought on credit.
A Rs1 lakh vehicle loan taken today costs Rs265 more to repay each month than it did two years ago, because of the successive rate hikes by the central bank. Currently, interest rates on automobile loans can be as high as 16%.
“If the credit situation remains as it is, we have to look at incentives (for automobile companies),” said an official in Dev’s ministry who didn’t wish to be identified. “We will work out something with the ministry of finance when we meet them for pre-budget meetings in mid-October.”
Prospects of growth in the Indian vehicle market have attracted at least six new players in the last two years. Auto firms, including existing ones, have pledged investments of Rs60,000 crore. Companies are hoping to sell everything from entry-level affordable cars to high-end luxury sedans. While France’s Renault SA, is looking at India for making low-cost cars costing a little more than Rs1 lakh, Volkswagen AG has just introduced a car costing about Rs24 lakh, which it is importing into the country.
“In a global context, India’s car industry is still in a nascent stage,” said K.K. Swamy, deputy managing director of Toyota Kirloskar Motor Pvt. Ltd. “It is definitely a good thing if the government can look at some policy issues and intervene to help the industry.”
Around 66 million cars and trucks are sold worldwide, and the US tops with sales of 12 million units. In Asia, the largest market is Japan. India has picked up speed only in the last decade, with its first slew of foreign car makers entering the country in the early 1990s.
Separately, the department of heavy industries is conducting a study to examine a reduction in excise for bigger cars in an attempt to determine whether the fall in prices after the cut will stoke enough demand to make up for lost taxes.
“Excise duty is too high, whether it be for cars or two-wheelers,” said Madhur Bajaj, vice-chairman of Bajaj Auto Ltd, India’s second largest two-wheeler maker. “If there can be a reduction, there is a possibility of an upturn from this downturn.”
There is an 8% excise tax on two-wheelers while small cars—defined as vehicles that are less than 4m in length, and additionally with an engine capacity that doesn’t exceed 1.2 litres in petrol and 1.5 litres in diesel—attract a 16% tax. The duty on all other cars is 24%.
“Excise is an issue on which the finance ministry has the final say,” said another heavy industry ministry official. “We can go to the ministry with the data (car sales) and projections and negotiate. But at the same time, the industry also has to take some steps to boost rural sales and exports.”
The 2006-07 Budget had lowered excise for small cars by 8 percentage points to 16%.