Why auto makers aren't cheering Jaitley's extension of excise duty cut just yet

The Finance Ministry’s decision this afternoon to continue with the lower excise duty regime for automobiles is a welcome one. It saves car and two wheeler buyers from any immediate price increase, which would have become imperative as manufacturers would have passed on any increase in duties to buyers.

It also provides a sentiment boost to the automobile sector, which has not seen the best of days this year as sales continue to languish across most automobile categories.

But will it really provide a big boost to the sale of automobiles?

In the Interim Budget presented in February, excise duty on small cars, scooters, motorcycles and commercial vehicles was reduced to 8 per cent from 12 per cent; 24 per cent from 30 per cent for SUVs; 20 per cent for mid-sized car from 24 per cent and 24 per cent for large cars from 27 per cent. The reduced duties were applicable till 30 June. Now, this regime has been extended till December 2014.

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It is possible that while the 30 June deadline prompted the FM to announce his decision to continue with the lower excise duty regime just ahead of the Union Budget, he may consider acceding to other demands of the automobile industry too. The Society of Indian Automobile Manufacturers has sought a further lowering of duty for all vehicle categories and also wants the number of duty slabs for the industry to be reduced.

Jaitley dismissed the potential negative impact of lower excise on the exchequer, saying such steps were necessary for reviving growth in the sector. Experts point out that the lower excise duty regime would mean an impact of about Rs 2,000 crore in revenues to the government, a gap which can be easily made up through a regular hike in diesel prices - something which is already happening.

But how much will this step will help to revive auto sales.

“With motorcycles, this excise reduction represents a relatively small component of the total cost of ownership. Hence it works more to motivate the industry’s spirit than its sales,” Bajaj Auto’s Managing Director Rajiv Bajaj told Firstbiz.

A Tata Motors’ spokesperson echoed the same sentiment when she said that excise reduction is a positive step for the auto industry “and we are glad to see it (excise) extended as it will help the industry while we await other significant policy decisions to revive the economy”.

In a report to clients, ICICI Direct noted recently that despite a favourable duty regime, passenger cars posted flat growth in May - the big stars were scooters and utility vehicles. Overall the industry grew at 8 per cent to about 2 million vehicles - better than some previous months but clearly a lot of scope for growth remains.

So will lower excise not help at all? It will, with the largest impact perhaps on the varimatic scooter market and on UVs. But more than benevolence on excise duty, the government needs to keep fuel prices, general inflation in check and ensure that all round economic activity picks up. This will spur growth, not just in car and two wheeler buying but also in purchase of medium and heavy trucks and buses.

Besides, the fate of this year’s monsoon is also inextricably linked to that of automoble sales, especially in rural areas.