Are safety costs and rising state taxes hindering car sales in India?

Buyers appear more concerned about higher upfront payments and seem reluctant to bear higher cost of safety norms

Automobiles sales have crashed in India, and there has been no bigger business news than this in the past few months. There has also been no end to an exploration into the causes of this phenomenon, which is said to have put brakes on economic growth, taking it to slowest in six years. 

While commercial vehicles are needed purely for business activity, car sales are an indicator of individual consumer demand. From the proliferation of cab aggregators such as Ola and Uber, to lack of parking spaces in metros, observers of the economy have attributed several reasons to decline in car sales.

But an interesting comment came from R C Bhargava, the chairman of Maruti Suzuki, India’s biggest carmaker. He said in an interview last week, that the increase in the cost of safety norms and state taxes has pushed the consumer away from the car dealer. 

But how much has the cost gone up for the most sold cars on the road today? We take the examples of two cars made by Maruti Suzuki -- the Alto 800 and Swift Dzire. Data has been obtained from the manufacturer. 

Three key inferences can be drawn from the data. One, the customer has to pay higher down payment or upfront payment than before. Two, higher taxes might not have led to fall in sales as the latter have declined more in states where tax hike has been lower, shows data for Dzire. And thirdly, driver- and consumer-friendly safety norms occupy a higher share in car price hike, both the examples show. 

Car makers say that they are trying their level best to improve the customer sentiment by providing “never-heard before” discounts.

“This is the best time to buy a car. This discounts will not last long,” said Shashank Srivastava, executive director, sales and marketing at Maruti Suzuki.

Higher upfront cost at dealership

Dealers told Business Standard that the increase in the first down payment of a vehicle has pushed the marginal buyer away from buying a car who otherwise would have upgraded from a two wheeler to a four wheeler. 

“We are seeing it every day. Customers see the advertisements of discounts being offered in media. They come for enquiry and when they find out that the on-road price has increased manifold they opt out,” said Nikunj Sanghi, MD of JS 4Wheel Motor Private Limited and director of Federation of Automobile Dealers Association (FADA).

Sanghi said that the impact has been harsher in the entry-level segment, as the customers of those cars are very value-conscious. “We try to explain to the customer that this is also an impact of making the car safer by adding seat belt alarm or the anti-lock braking system but for that price conscious customer when the upfront down payment is getting doubled he steps back and thinks twice and most of the time the enquiries are not translating into sales,” Sanghi said.

Higher the tax, lower the sales decline 

In beginning of financial year 2019-20, many states started raising road tax on cars and other vehicles, primarily to set off the resultant revenue loss from slower collection of goods and services tax (GST) and income tax. In addition, drop in consumption of petrol and diesel has put a cap on state revenue from sales tax on these fuels, too. 

Road tax is mostly applied ad valorem (as percentage of final ex-showroom price) of the car: ergo, a higher tax hike for a costlier car. While the top-end Alto 800 comes in at Rs 500,000 in Delhi on road, a corresponding variant of Swift Dzire costs Rs 800,000. 

Bihar raised the road tax the most. The road tax on Alto 800 went up by Rs 16,000 per car, and that on Swift Dzire by Rs 27,300. But the sales of the latter have declined 13 per cent there, one of the least among the seven states where tax hikes have been the highest. 

On the contrary, while tax on Dzire has increased by Rs 9,600 in Kerala, sales have declined by a massive 50 per cent in April-August 2019 (see table). The state faced its worst floods in 2018. 

This correlation, however, fails when we analyse Alto 800 trends, as the drop in sales has been uniformly between 22-28 per cent among the seven states under consideration. 

Rise in car costs: Alto 800

State

Decline in sales Rise in cost due to tax Rise in cost due to other resaons

Rajasthan

24% 10,000 47,000

Jharkhand

26% 6,300 37,700

Uttarakhand

28% 9,500 43,500

Bihar

27% 16,000 40,000

Punjab

28% 5,000 44,000

Madhya Pradesh

22% 5,900 41,100

Kerala

22% 5,600 34,400

Rise in car costs: Swift Dzire
State	Decline in sales	Rise in cost due to tax	Rise in cost due to other reasons
Rajasthan	6%	17,600	36,800
Jharkhand	15%

11,500 35,600 Uttarakhand

34%

21,800 33,100 Bihar

13%

27,300 35,500 Punjab

27%

6,700 33,900 Madhya Pradesh

28%

8,800 33,200 Kerala

50%

9,600 38,700

*other reasons refer to upgradation to BS-VI, insurance costs, costs of mandatory safety norms such as antilock braking system and airbag, product upgradation.   

Other costs pinch more than taxes, and more on smaller cars

For both the cars, data shows that mandatory safety norms have caused a bigger jump in car prices than the addition due to the tax hike. The set of safety norms here includes BS VI pollution norms, mandatory anti-lock braking system (ABS) and air-bag system, upfront payment of three years of third party insurance (and in some cases, three year payment of own damage premium too), and smaller additions such as mandatory seat-belt indicator. 

About 70-90 per cent of the price jump for Alto 800 is due to these norms, while for Swift Dzire, the share 50-70 per cent. 

Despite being a low cost entry level car, safety norms added more than Rs 40,000 to its on-road price in most of the seven states (barring Kerala). In comparison, they added Rs 35,000 to the higher on road price of Dzire, the data show. These mandatory safety norms thus added more to the price of an entry level car than a mid-segment sedan.

Dealers said this was due to the fact that entry level cars did not have any of these features before, while sedans like Dzire came with some of these provisions installed. 

Carmakers are trying to compensate this with commensurate discounts. 

On an Alto 800, for instance, you could get a discount of Rs 40,000. If you offer your old car in exchange, you get a further Rs 20,000 off. There is also a corporate discount of another Rs 5,000. All of this adds up to a hefty discount of Rs 65,000.

On a Vitara Brezza, a compact SUV, a discount of Rs 50,000 is available at present. In addition, there is an exchange bonus of Rs 20,000, a corporate discount of Rs 10,000, and a five-year warranty. On the Honda Amaze sedan, a discount of Rs 42,000 is available.

Festive season beckons 

Added to all this, is the increased scrutiny by non banking financial company lenders, which has made it difficult for a customer without any CIBIL record to get a loan. 

A dealer in western Maharashtra said that the agents of the financing firms were desperately trying to get business during Ganesh Chaturthi but due to stringent directions from the management, he was not able to offer financing to at least 3 buyers. 

“Earlier, it used to be fair even if CIBIL score was around 500, the customer would get a loan… but now if it’s below 750, the agent is very hesitant,” the dealer said. He added that business has never been this bad during Ganesh Chaturthi. 

“There is very little chance of a revival this year. Around 50 percent of my sales come during this season but this time it has been dull.”

Cars more affordable in India than elsewhere in Asian 

Years to own an entry level car

Country

Years to own Car name City

India

3.8 Maruti Suzuki WagonR Delhi

Bangladesh

9.4 Toyota Aqua Dhaka

Sri Lanka

4.0 Suzuki Spacia Colombo

Vietnam

6.7 Vinfast Fadil Ho Chi Minh City

Indonesia

2.3 Daihatsu Ayla Jakarta Source: Respective countries' news reports, World Bank