V-o-A interim budget 2014-15 proposal impact on Automobile Sector: ICRA analysis

India Interim Budget 2014-15 proposals entail reduction in excise duty from 12% to 8% on small cars, two wheelers and commercial vehicles, and
reduction in excise duty on mid & large segment cars from 24% to 20% and 27% to 24%, respectively, and on SUVs from 30% to 24%.

Passenger vehicles sales during April-January 2014 registered 6.13% decline over the same period last year. Passenger Cars, Utility Vehicles and Vans sales decline is registered at 5.22%, 4.59%, and 16.81% respectively during April-January 2014 compared to the same period last year.

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Overall Commercial Vehicles segment 18.63% sales decline in April-January 2014 when compared to the same period last year. Medium & Heavy Commercial Vehicles (M&HCVs) registered 26.08% sales decline, and Light Commercial Vehicles 14.79% sales decrease.

Three Wheelers registered 11.07% sales decline in April-January 2014 over the same period last year. Passenger Carriers and Goods Carriers sales decline was registered by 12.64% and 3.74% respectively in April-January 2014 over April-January 2013.

Two Wheelers sales growth of 5.76% was registered during April-January 2014 over April-January 2013. Scooters and Motorcycles grew at 20.75% and 2.65% respectively, while Mopeds reported 9.52% sales decline in April-January 2014 over April-January 2013.

During April-January 2014, overall automobile exports grew by 6.29%. Passenger Vehicles, Three Wheelers and Two Wheelers registered growth at 7.11%, 15.99%, and 5.27% respectively, while Commercial Vehicles registered 10.87% sales decline during April-January 2014 compared to the same period last year.

India Interim Budget 2014-15 proposals will have a positive impact on a number of fronts. Reduction in excise duty on automobiles is a positive as it reduces vehicle price across all segments, thereby supporting demand. Reduction in excise duty could bring down cost of passenger vehicles by Rs. 15,000-46,000 and that of commercial vehicles by Rs. 19,000-42,000 per vehicle (assuming OEMs pass on the benefit completely).

For passenger car, and two-wheeler segments, price reduction should help demand in the near term through ‘positive’ sentiment effect. For commercial vehicle segment, reduction may provide relief to the industry currently reeling under high discounts.

In the longer run, a sustainable demand recovery in the automobile industry would be contingent on improvement in the overall economic environment.