Passenger vehicle sales slump in June on GST fears
New Delhi: Sales of passenger vehicles in June declined the sharpest since March 2013 as dealers stayed away from buying stock due to ambiguity over the goods and services tax (GST).
Passenger vehicle sales declined 11.21% to 198,000 units. In March 2013, passenger vehicle sales had declined 13%. Car sales declined 11.24% to 136,000 units—the sharpest since May 2013 when they declined 11.7%.
The Society of Indian Automobile Manufacturers (Siam), however, ruled out any long-term impact and said other macroeconomic factors were good enough for the industry to record 7-9% growth during the current fiscal year.
“It is a one-off instance,” said Siam deputy director general Sugato Sen. “Things should be normal from July.”
Siam reports wholesale numbers and not the ones billed by companies to customers.
To automakers’ delight, raw material prices, which were on the rise, have started to soften in the last few months. Prices of some key commodities such as natural rubber, hot-rolled steel, cold-rolled steel and lead have declined 13%, 2.41%, 2.16% and 6.5%, respectively. Coupled with declining vehicle prices and lower inflation, this is expected to boost sales.
But Siam warned that the cost of ownership is expected to rise by 1-2% in 2017-18, as a result of increasing fuel costs and insurance expenses. Oil prices are expected to remain higher ($44-48 per barrel in 2017, up from $42 in 2016), which would contribute to the increasing cost of ownership, it said.
“The growth rate in the PV market is likely to accelerate going forward. We expect an overall sales growth in low teens during FY18, owing to reduced vehicle prices as a result of GST, expectations of a good monsoon season, new model launches and low fuel prices as well as financing costs,” said Rakesh Batra, a partner at consulting firm EY.
Under GST, most vehicles fall in the highest tax bracket of 28%, with an additional cess ranging from 1% to 15% based on the segment the vehicle falls under, its engine size and type (petrol or diesel) and its size.
Broadly, effective GST rates indicate the highest tax savings for sport utility vehicles (SUVs), for which the tax rate is down to 43% from the earlier 55.3%.
With the GST regime kicking in, luxury cars and SUVs are expected to witness an impetus, due to a considerable reduction in taxes, Batra said. “A key risk would be increased levy of registration taxes by state governments, which is outside the scope of GST,” he added.
Siam said that it expects sales of medium and heavy commercial vehicles, a key indicator of economic activity, to drop further.
“With the recent shift from BS-III (Bharat Stage III emissions norms) to BS-IV, transporters are expected to delay purchases due to price increase and to wait for SCR (selective catalytic reduction) and EGR (exhaust gas re-circulation) performance reviews,” said Sen. EGR and SCR are tools used to reduce vehicle emissions.
However, Siam expects motorcycle sales to grow after months of tepid growth.
“Improved economic indicators, 7th Pay Commission payouts, better rural incomes with good monsoon coupled with new launches will support this growth. Motorcycle segment has bounced back from the impact of demonetization and reported strong numbers in April and May,” Sen said.
But scooters will continue to outpace motorcycles—good news for Honda Motorcycle and Scooters India, which is the country’s largest maker of scooters but still lags behind market leader Hero MotoCorp Ltd when it comes to overall two-wheeler sales.
“Rural demand is slowly coming back on track, which is helping the two-wheeler segment. Hopefully, the demand will bounce back in the coming months,” said Abdul Majeed, partner and auto practice leader at PwC.
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