Small is in while big gets the boot

The news wasn’t completely unexpected. It was over a month ago when the Goods and Services Tax (GST) council had mooted a revision upwards in the cess on SUVs and large cars from 15 to 25 per cent.

When this officially got Cabinet nod on Wednesday, it effectively dashed the hopes of automakers in expecting a reprieve of sorts. The Centre has now made up its mind and it only remains to be seen how soon the revised cess will come into play. Automakers will also keep their fingers crossed that it will not be a flat 25 per cent but at a more benign level of 20 per cent.

Given that a whole lot of States are under financial stress, the hike is expected to happen sooner than later, which could then be a dampener for the festive season sentiment. While it is clear that the entire calculation process was badly done and even hurried, the Centre has also made clear its focus on small cars, a process that kicked off over a decade ago.

At that point in time, the prevailing excise duty structure gave small cars the largest breathing space and defined what they meant in terms of length and engine capacity. They were seen as India’s competitive strengths in a newly emerging global arena and carmakers were quick to jump on to the bandwagon with a host of offerings.

Many years have passed on since and the country is now on the way to becoming the third largest car producer worldwide by 2020. Affluence levels have grown but this is still home to the highest number of two-wheelers and small cars across the world.

The GST was perceived as a silver lining in the cloud for luxury carmakers, which rightfully believed that they deserved better. The lower cess meant that customers would be enticed to buying a Mercedes, BMW or Audi. But with that decision revoked and a higher levy now imminent, these manufacturers do feel shortchanged.

They have every right to be upset with this sudden volte-face but are things going to be as dire going forward? Not everyone thinks so. “A person buying a luxury brand will not be deterred by any duty hikes,” says an auto executive. “And in any case, premium brands do not need discounting in order to sell.”

What cannot be disputed, however, is that a price reduction could have prompted a Corolla owner to considering a BMW. That may have to wait for a while. Likewise, SUVs and MPVs like the popular Innova Crysta will get dearer but will not be short of customers since they are well established brands.

The Centre has made clear that small cars will continue to get the breaks even while things could change in the coming years as income levels increase and people move on to larger offerings. “It is also evident that India has emerged a competitive global hub for small cars where products made here are shipped out to other emerging markets such as Latin America and South Africa,” argues the executive.

Despite this, SUVs and luxury carmakers will have every reason to feel aggrieved since they have been at the receiving end for years. Their products were perceived to be gas guzzlers and the domain of the high and mighty, which did not need subsidised diesel like the rest of India. These were the times of administered pricing for auto fuels and successive Budgets ensured that SUVs and large cars were slapped with higher excise duties while small cars had a field day in contrast.

In this backdrop, the GST was seen as a leveller of sorts even while small cars were levied a lower cess (1 per cent for petrol and 3 per cent for diesel) in addition to the 28 per cent GST. All other categories invited a cess of 15 per cent, which was still welcome considering that large cars/SUVS would now be more affordable than the pre-GST era. For the likes of Mercedes-Benz, Audi and BMW, this meant that they could now look forward to expanding their buyer base and increasing domestic business from India. After all, the luxury segment takes up barely 2 per cent of overall automobile sales in this part of the world and a lower price tag would have been a huge help in drawing people to showrooms.

Likewise, SUV and sedan makers rejoiced since their offerings would be more affordable in the new GST regime. Be it Toyota, Honda or Mahindra & Mahindra, there was good reason to uncork the champagne and work towards a far more promising future.

From automakers’ point of view, it cannot be refuted that the GST was the perfect balm for their wounds. Many of them had suffered during the demonetisation in November . Then came the Supreme Court verdict on BS III stocks, which had to be cleared from dealerships in just three days before the BS IV regime came into effect from April 1. For Toyota and Mercedes, they also had to endure the eight month diesel ban in Delhi some months earlier.

Given these huge upheavals, GST was the proverbial manna from heaven and companies were now far more optimistic about the road ahead. Even while they were gearing up for the next big task in the form of BS VI emissions norms in 2020, buoyant sales could at least be assured in the days leading to this transition. Now, with the cess revised upwards, it is hardly surprising that many of them are unhappy.

While the show will eventually go on, the industry will be bogged down with the larger challenge of transiting to BS VI norms within the next 1,000 days. With economic growth still sluggish and no fresh investments happening in creating capacities, the bigger worry is the challenge of job creation. For the moment, this seems unlikely as automakers get ready to take on a new set of challenges in the coming months.