High taxes creating affordability issue for aspiring car owners: Maruti Suzuki

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Taxes on cars in India, which are higher than in any other vehicle manufacturing country in the world, have created affordability issue for many aspiring car owners, according to Maruti Suzuki India (MSI) Chairman RC Bhargava. If the contribution of manufacturing sector to the country's GDP is to reach 25 per cent by 2025, then car sales need to grow faster, he said while addressing shareholders in the company's annual report for 2019-20.

Commenting on high taxes, Bhargava said, "Even before 2019-20, the tax on cars in India was far higher than in any other car manufacturing country in the world. In the European Union (EU), the VAT is 19 per cent and no other taxes. In Japan, taxes are around 10 per cent.

"Given the much lower per capita incomes in India, this created an affordability issue for many aspiring car owners."

He further said that in 2019-20, the increase in cost of acquisition of a car, coupled with other hurdles to be crossed to obtain a loan, led to a fall in sales. It was proven that the price elasticity of demand is a real concept.

"It is quite apparent that if the manufacturing sector is to grow at a rate that would take its contribution to 25 per cent of the GDP even by 2025, car sales must increase at a much higher rate than in the past. The car industry constitutes about 50 per cent of the auto sector which contributes around 40 per cent of the manufacturing sector's share of the GDP," he added.

Passenger vehicles currently attract top GST rate of 28 per cent with cess ranging from 1 per cent on those less than four metres in length with petrol engine to 22 per cent on big SUVs longer than four metres.

Commenting on the impact of coronavirus pandemic, Bhargava said, "The woes of the auto sector were compounded by the COVID-19 pandemic even before the financial year ended."

The lockdown from March 25, 2020 led to disruption of sales plans of all companies as the last week of March is always important, he said adding, "there could be no production in April and in May 2020 production was very limited extent because of the need to comply with all regulations and to ensure the safety of employees and customers and June production was better."

Bhargava said MSI expects to "gradually increase production and sales as the situation improves and workers return from their villages".

On the outlook, he said the economy in the rural areas is quite robust, thanks to a good rabi harvest and the expected normal monsoons.

Tractor sales are already higher than last year.

"Our sales in the rural areas are growing faster than in the urban areas. We are hoping that in the second half of 2020-21, sales may near the performance of last year and 2021-22 should be better, especially if the central and state governments recognise the importance of supporting faster growth of the car industry as a means of reviving the economy and creating larger employment opportunities," he added.

On the current situation Bhargava said, "The market, at present, seems to favour smaller hatchbacks and petrol and CNG cars. Fortunately, we are well placed for such products."

He said the plan to shift the Gurugram facility had to be delayed because of the COVID-19 pandemic.

The auto major said it may make a comeback in diesel segment if demand remains strong for such vehicles going ahead.

The company, which exited diesel segment with implementation of BS-VI emission norms, is also adopting a mix of powertrain technologies based on electrification and CNG in order to further meet the future CO2 emission targets, MSI Managing Director and CEO Kenichi Ayukawa said.

"We also note that prices of both diesel and petrol fuel have now come much closer.
However, if for some reason, the demand of diesel vehicles continues, the company may have the flexibility to bring back diesel technology (1.
5 litre) in its products," Ayukawa said.

He added that the company is making efforts to electrify its powertrain, ranging from smart hybrids to strong hybrids to electric vehicles.

The partnership between Suzuki Motor Corporation (SMC) and Toyota Motor Corporation will help MSI gain access to hybrid technology, Ayukawa said.

"SMC is not only providing its support for requisite technology, but also partnering to putting up India's first Lithium-ion cell and battery manufacturing facility," he noted.

With government's increased focus on increasing CNG distribution infrastructure across the country, he said demand for CNG vehicles could see an upsurge in the near future, and MSI is best placed to leverage this opportunity.

On COVID-19 situation, Ayukawa said sudden halt of business with the start of the lockdown put significant pressure on cash flows of some of its business partners like suppliers and dealers.

The company provided them with cash flow support to ensure they are able to pay salaries to their employees and meet other obligations, he noted.

"After lifting of the lockdown, fortunately, we recognise that some demand is starting to recover.

"However, the biggest challenge is to ramp up production of vehicles, amidst the shortage of manpower and the local lockdowns being observed in different states or cities affecting the supply of components and delivery of vehicles at dealerships," Ayukawa said.

It is too early to judge whether demand is only pent up or really starting to recover, he noted.

Ayukawa noted that India's long-term economic prospects are promising, which augur well for the automobile business.

"Experience from the global financial crisis suggests that the Indian economy is quite resilient, and it may not be too far to think that the Indian economy may recover relatively faster this time as well.

"The company is making all-round efforts to both participate and drive this recovery," he added.