Cutting taxes on small cars is a quick fix that ignores the elephant in the room
Summary
The vast majority of Indians are unable to afford a car, and tweaking tax rates won't solve this overarching problem for the auto industry.
India’s largest carmaker has a problem. Maruti Suzuki India Limited, the listed India arm of parent Suzuki Motor Corporation, has for several years been bigger than its Japanese parent. But it has found it increasingly difficult to defend its once dominant share of the market in the face of rising competition and changing consumer preferences.
India’s automobile boom is distinctly running out of gas. After clocking a couple of decades of high growth, passenger vehicle sales have started slowing sharply. In FY25, retail sales grew by around 2.5%. Maruti was slightly ahead of the market, but not by much – domestic sales grew by 2.7%, while profits in the March quarter grew just 1%.
Big problems in small packages
For Maruti and its long-standing chairman RC Bhargava (he became chairman and managing director of the company in 1990 and non-executive chairman in 2007, a post he’s held since then), there is a bigger worry – the sharp decline in sales of its once predominant seller, the entry-level sub-compact.
Maruti, which built its reputation and size on the back of its portfolio of cheap, small cars, has seen its once most profitable and biggest-selling segment decline rapidly. In a market dominated by SUVs – which now account for more than half of all new cars sold in India – Maruti’s ‘mini’ segment, comprising the entry level Alto and the S-Presso, saw sales decline by around 12% last year. Overall, small car sales fell by around 15%.
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Automobile sector analysts have long suggested that this marks a shift in consumer preference from small, low-powered cars towards bigger and more powerful SUVs. But Bhargava has a different explanation for the slowdown: entry-level car buyers, mostly first-time buyers upgrading from a two-wheeler, are being simply priced out of the market.
Extreme inequality
Bhargava points to one of the biggest problems with the India growth story – its unevenness. According to him, India’s potential car buyers are almost entirely restricted to those earning ₹12 lakh a year or more, which is just 12% of the population. “How can you get high car sales growth if 88% of the country are below the levels of income where they cannot afford these cars costing ₹10 lakh and above?" he asked at the company’s recent post-results conference.
Bhargava blames rising taxes and higher cost of regulations for the surge in sticker prices. Mandatory safety upgrades, tougher emissions norms including a shift to BSVI fuel directly from BSIV, and rising insurance costs have combined to add nearly ₹1 lakh to the on-road cost of an entry-level car since 2020.
The veteran auto executive says spending more than half a year’s earnings on a small car is simply not possible for most middle-class families, which explains the sharp drop in sales of such vehicles and a corresponding uptick in the sales of pre-owned cars.
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His solution is for the government to adopt Japan’s highly successful ‘kei jidosha’ (light automobile) policy, which gives several tax and other incentives for small, low-power cars that meet strict specifications: a maximum length of 3.4 metres, width of 1.48 metres, height of 2 metres, and a maximum power output of 64 PS.
Carmakers that meet these norms benefit by way of lower tax, including an almost 30% reduction in automobile weight tax, lower road tax and, in rural areas, exemption from providing otherwise mandatory proof of owning parking space before buying a vehicle. Thanks to the slew of incentives, kei cars now account for around 35% of all cars sold in Japan, reducing urban congestion and emissions, and spurring innovation.
India had a similar policy years ago, for cars under 4 metres and with less than 999 cc capacity, which led to Maruti’s runaway growth in its early years. But now the tax structure is complex, ranging from 29% GST on small cars (less than 4 metres and below 1,200 cc engine capacity) to 50% on large SUVs.
Tax breaks are a mere band-aid
So a small-car tax break could solve Maruti’s problem of slowing small car sales and possibly help alleviate urban congestion (Mumbai has 2,300 vehicles per km of road available). But it wouldn’t address the larger problem Bhargava touched on – of income growth not keeping pace with GDP growth or inflation.
According to The Indus Valley Annual Report 2025 by Blume Ventures, India’s true middle class comprises some 40 million households, or around 140 million people. This segment accounts for most of the discretionary consumption in India (cars fall in this category).
The bulk of the population – around a billion people – earns too little to spend on discretionary items. So while the top 10% earn more than ₹13 lakh a year, and the top 1% more than ₹53 lakh, the bottom 90% can only manage essential expenses. According to a World Inequality Database report, in 2022-23, anyone making more than ₹8,750 a month in India was earning more than half the population!
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India’s GDP growth has been largely driven by private consumption, which in turn has been driven by a very thin creamy layer of the population. As the auto industry is finding out, that market is becoming saturated. Fixing this will require a paradigm shift in policies, and not merely a tweak of tax rates.
