Auto firms need to think innovatively to attract buyers back to small cars

The emerging structure of the passenger-vehicle market offers a potent example of India’s K-shaped post-Covid economic recovery. The share in sales of more expensive and heavily taxed sports utility vehicles (SUVs) crossed 50 per cent in FY25 and appears on track to accelerate. Meanwhile, sales of small cars in FY25 crawled up just 2 per cent. Sales of Maruti Suzuki, India’s largest carmaker, are indicative. Against a modest growth rate in domestic sales of 2.6 per cent in FY25, sales of small cars (defined as cars up to 4 metres in length and with 1,200-1,500 cc engines) dropped 9 per cent. For Tata Motors and Hyundai, the drop was 3 per cent. This realignment of the market has real consequences for the economy. The automotive industry accounts for almost half of India’s manufacturing gross domestic product (GDP) and 7 per cent of overall GDP, and small cars typically drive this market. 

Car-market executives attribute the drop in small-car sales to stagnating incomes across the board, with only 12 per cent of Indian households earning over ₹12 lakh annually; in effect, as Maruti Chairman R C Bhargava points out, 88 per cent of households are locked out of the market. They also point to the rising regulatory cost — such as the mandate to include six airbags in cars — and high taxes as a reason for small cars being priced out of the market. Indeed, today, there is no small car priced below ₹3 lakh, with on-road starting prices touching ₹4 lakh. However, several factors point to untapped latent demand, which could breach price and income barriers. First, SUVs account for a growing proportion of first-time buyers, once traditionally the monopoly of the small-car market, suggesting that small cars are losing their traditional value proposition. Second, growth in the two-wheeler market was 7 per cent in FY25, indicating that the appetite for value-conscious mobility remains. Third, the used-car market has been growing at a rapid clip, with small cars and sedans accounting for the bulk of the sales. 

These three factors suggest that carmakers, long used to selling in an underserved market, may have to acquire the habit of innovative thinking to attract buyers to the small-car market. Indeed, there has been no innovation at this end of the market since Hyundai’s tall-boy concept and Tata Motors’ short-lived Nano. There are examples from other industries to draw on. The airline industry, which operates on wafer-thin margins, mastered the art of low-cost fares and dynamic pricing to expand a market that was traditionally considered premium. Makers of consumer goods learnt that smaller packs (such as shampoo sachets) or additional value (iodised salt) could bring in lower-income consumers, who would otherwise avoid such products. Per-second billing and bundled handsets changed the dynamics of mobile telephony. 

These tactics may not be exactly replicable for carmakers but they indicate the sort of nimble responses to market exigencies, which could address concerns over demand stagnation. That said, there is some merit to grumbles about taxes. For an industry that is considered a leading economic indicator, there is little logic in treating small cars on a par with “sin goods” or luxury goods and tax them at 29-31 per cent (including surcharge). Lower taxes could nudge this stagnant market, but carmakers need to look within their strategic toolboxes as well.