Shares in auto manufacturing companies jumped between 7% and 10% on Monday morning, responding to the fiscal and monetary measures announced by the government and the central bank over the weekend to boost consumption. Better sense prevailed later in the day’s trading session and most of the these shares ended flat or fell by up to 4%. The only exceptions were shares of two-wheeler companies, which seem to be better placed at gaining from the cuts in excise duty and interest rates.
Both car and commercial vehicle manufacturers have decided to pass on the 4 percentage points cut in excise duty to consumers and banks have responded to the Reserve Bank of India’s monetary moves by cutting deposit and lending rates. Despite this double benefit, consumers aren’t expected to rush to buy cars and commercial vehicles. Employees in the private sector face the prospect of job losses and salary cuts and, as a result, the list of prospective car buyers has dwindled. The lower excise duty and drop in interest rate on car loans will result only in a reduction of a few hundreds in the monthly instalments for small cars. This would cause only a marginal increase in demand, at best.
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As far as commercial vehicles go, truck operators have slowed purchases more because of a drop in payload, rather than because of high interest rates and lower availability of finance. Unless economic activity picks up, there is unlikely to be high demand for trucks and goods carriers. Marginally lower instalments will hardly cause truck operators to change their business plans. True, the cut in prices of diesel will also result in savings, but lower fuel prices could also cause a drop in freight charges, leaving little on the table for operators.
In fact, commercial vehicle and car manufacturers are expected to take a hit on account of revaluation of the high inventory in the market based on the lower excise rates. Vehicles that have already left the manufacturers’ gates would have attracted excise at the previous higher rate. These vehicles, lying with dealers, will now have to be sold at approximately a 4% lower price to be comparable with the prices of vehicles that are leaving factory gates after the duty cut. Since the excise duty on these vehicles has already been paid, the differential amount or the loss would have to borne by companies.
In the case of two-wheeler firms, inventory pile-up has been much lower and hence the impact of revaluation will be less. Besides, demand for two-wheelers has been slightly better of late thanks to the farm loan waiver, the Sixth Pay Commission and reduction in income tax. That’s not to say that the slowdown will not impact two-wheeler demand. But since the purchase value is much lower, more customers are likely to take advantage of the lower prices.
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Graphics by Paras Jain/ Mint