New Delhi: After a run of record sales growth, powered in part by the government fiscal stimulus, auto sales will likely slow in the coming quarters on higher prices, a shift to new emission norms and possibly higher loan rates, analysts say.

Loading video...

Finance minister Pranab Mukherjee, in his Budget for fiscal 2011, proposed the rollback of a 2% reduction in excise duty on large cars and sports and multi-utility vehicles. The cut was part of an earlier stimulus package aimed at bolstering economic growth in the face of a global downturn.

While small cars, with engine capacity of below 1200cc and smaller than 4m in length, will be taxed at 10%, the excise duty for larger cars is 22%.

All car makers have raised prices since Friday, when the Budget was presented. Maruti Suzuki India Ltd, India’s largest car maker, has increased prices by Rs3,000-13,000, and Hyundai Motor India Ltd by Rs6,500-25,000.

Graphics: Ahmed Raza Khan / Mint

Deepesh Rathore, lead automobile analyst at IHS Global Insight, a research firm, said demand for large cars was more vulnerable as prices have been raised by up to Rs25,000.

“People are initially surprised by higher prices and it does take a quarter for them to get used to it," he said.

Fuelled by cheap loans, new model launches and improving economic sentiment, auto sales have grown at a healthy clip since September. In the period from April to January, sales rose 23% from the year-ago period to 1.2 million units.

The growth momentum was kept up last month. Maruti sold 84,765 units in February, a 20% jump from a year earlier and its highest sales in its 26 years, according to figures released on Tuesday. Tata Motors Ltd sold 17,441 heavy trucks, a rise of 98% from the year before. Hyundai, General Motors India Pvt. Ltd and Toyota Kirloskar Motors Ltd reported record sales in February, though from a much lower base than that of Maruti’s.

While the excise duty hike had been factored in—the auto index ended nearly 5% higher on Friday as the market had expected a steeper increase—the mandated switch to Euro 4 emission norms by April could be another sales dampener, analysts say. Auto makers say the new norms could push up prices further by 2-5%.

On Tuesday, the Bombay Stock Exchange’s auto index rose 4.2% on the February numbers released by individual companies. The benchmark Sensex gained 372.05, or 2.3%.

Mukherjee’s proposal to raise excise duty on petrol and diesel by Re1 per litre could also hurt sales, together with a potential hike in interest rates to curb inflation. The rates had been lowered during the downturn to boost liquidity in the market and consumer spending.

Three out of every four cars and nine out of 10 trucks sold in the country are financed by loans. “A rise in interest rates could be a game changer," said Rajive Saharia, executive director, marketing, Ashok Leyland Ltd.