Maruti slashes price, others to follow suit

STIMULUS PACKAGE

Govt announces cut in Central Value-Added Tax.

Auto companies led by Maruti Suzuki are all set to cut prices of passenger cars by 3 per cent to over 4 per cent as the government today announced a reduction in the Central Value Added Tax (Cenvat) rate. However, auto makers are also unanimous that the move will not lead to a major spurt in demand leading to an earlier projected double-digit growth in sales this financial year.

Maruti Suzuki took the lead by announcing a reduction of Rs 8,000 in its largest-selling model the Alto. The company will announce the exact cuts on other models on Monday. R C Bhargava, the chairman of the country’s largest car maker, said the reduction in price across all its models would range from 3 per cent to 3.25 per cent. Bhargava also added: “The reduction in prices will come over and above the discounts which car makers are giving on their models already to push sales.”

Mumbai-based Mahindra & Mahindra, makers of utility vehicles, also announced that it will pass on the benefit to Scorpio and Bolero. The company will even consider a more than 4 per cent cut on the premium variant of its models. Pawan Goenka, president (automotive sector), M&M, said, “The move by the government will certainly help boost demand.”

Korean car maker, Hyundai and US car major General Motors will also evaluate the exact nature of the cut and its final impact on car prices before passing on the benefit to the customer. Said P Balendran, the vice-president of GM India: “Surely, we will pass on the benefit as we are already offering discounts. However, the key problem in the industry is availability of loans, which have dried up and interest rates on them without which demand might not go up”.

Tata Motors will also cut prices across all categories including cars and commercial vehicles. A spokesperson for the company said, “Tata Motors will pass on the benefit that will come through the cut in Cenvat in passenger and commercial vehicles”. However, he gave no details.

Chennai-based Ashok Leyland has also indicated that it will take a decision on price cut on Monday. A senior executive of the company said that a 4 per cent reduction in duty translates into a reduction of Rs 32,000-35,000 on their trucks. However, the exact cut in price will be evaluated in a day, added the executive. Two-wheeler companies like Hero Honda also said they will pass on the benefit to customers and are working on the details.

Car companies at the moment pay Cenvat of 12 per cent on small cars (with less than 4,000 mm in length and engine capacity of not more than 1.2 litres for petrol and 1.5 litres for diesel) and 24 per cent for other cars. With the government reducing the Cenvat by 4 per cent today this will come down to 8 per cent and 20 per cent respectively.

During the Budget this year, the government had in fact reduced the duty on small cars from 16 per cent to 12 per cent. However, in June as a measure to contain inflation, the government had imposed an additional excise of Rs 15,000 on cars with engines of over 1,500cc and Rs 20,000 on cars with engines of over 2,000cc, forcing car companies to hike prices of large and premium cars. However, most auto makers caution that the cut in price may not lead to a major push in demand and there is no way that the industry will see a double-digit growth in sales as was earlier anticipated.

Said Bhargava: “We are already getting in negative zone. A 3 per cent cut will not lead to double digit growth in sales until key issues on liquidity and availability of car loans are taken care of.” Bhargava said the key issue was that banks were reluctant to give car loans as the new rules makes it impossible to repossess cars in case of a default.