Will you buy a car in 2012?

If you’ve been regularly tracking the car industry, you won’t be shocked to learn that annual car sales in India are likely to drop for the first time since 2002 in the financial year ending March.

Car sales have been lacklustre over the past several months as high borrowing costs and high fuel (petrol costs) kept buyers away from the showrooms. In January, car sales grew by a tepid 7.2 percent.

“Unless sales grow in February-March at 10 to 12 percent, which is unlikely, the industry will miss the sales projection,” Vishnu Mathur, director general of the Society of Indian Automobile Manufacturers (SIAM) said. The industry body had earlier forecast that car sales would increase by a piddly 0-2 percent in the current financial year.

However, SIAM expects vehicle sales to increase by 11 to 13 percent in the financial year starting 1 April if the Reserve Bank of India begins to ease interest rates soon. Given the industry’s current state of affairs, that seems like an ambitious target.

There are five key factors that are likely to influence car sales in 2012, and at least for now, none of them is likely to turbocharge the market. Here’s what we think will happen.

Interest rates: Of course, the chief influencing factor in the car market will be interest rates. Car buyers are extremely sensitive to interest rates as almost 80 percent of buyers take bank loans to finance a car purchase. High interest rates-the result of 13 interest rate hikes by the central bank since March 2010 to tame inflation- have made loans expensive for buyers, who decided to postpone their purchases in 2011.

The hope is that this year, the RBI could start cutting rates by March/April. However, given that inflation refuses to be tamed (manufactured products inflation remains high, food and fuel inflation are expected to surge again after February/March, and the government’s precarious fiscal position could stoke inflation as well) there’s little room for the RBI to enforce extravagant rate cuts.

Limited rate cuts might not be enough to send sales into overdrive, although even a 25 basis point cut to start off with could easily give a strong boost to sentiment. However, the bottomline is that loans will remain expensive for a while yet.

Fuel prices: This has been another big headache for car buyers in 2011. Petrol prices have been raised more than a dozen times since they were freed from government control in June 2010. In contrast, diesel prices remain firmly under government control.

In 2011, the difference between petrol and diesel prices widened to as much as Rs 27 per litre. No wonder petrol-engine car sales, which account for the lion’s share of car sales dropped last year, even as diesel-engine car sales soared to claim about 23 percent of the market.

Sadly, petrol prices don’t look like they’re coming down any time soon. Indeed, political compulsions (elections in key states) have forced oil companies to postpone fuel price hikes for now. But come March/April, prices are most likely to be hiked again and that will give reason for car buyers to pause before they opt for a petrol-engine car in 2012.

Car prices: Of late, several car makers have been mulling price hikes to compensate for rising input prices and a depreciating rupee, which makes imports expensive in local currency terms. Maruti Suzuki, General Motors and Nissan have already hiked prices of a few car models by up to Rs 17,000.

If car prices continue on an upward trend, interest rates don’t come down by much and petrol prices remain high, car buyers might continue to hold the brakes on the decision to buy a vehicle.

Tax on diesel cars: There is a strong possibility that diesel cars could be slapped by Rs 81,000-Rs 1,62,000 ’tax’ to ensure that rich car buyers are not subsidised at the cost of poor.

While diesel-engine cars are more expensive than petrol-engine cars, buyers have increasingly opted for diesel cars because of the widening difference in the prices of petrol and diesel. An additonal tax will make diesel cars even more expensive, sales of which now account for all new car sales.

Still, as long as diesel prices are not hiked substantially, buyers might decide that the additional tax might, at most, postpone recouping their entire investment by a year or so and still go ahead with a purchase. Either way, a tax will not lift the spirits of either the car industry (for which diesel car sales were the one bright spot) or the car buyer.

Jobs growth: Finally, car sales depend on the overall health of the economy. If the economy does not pick up strongly or if companies don’t hire robustly, there will be fewer buyers in the car market. No one wants to buy a car on borrowed money, especially when they’re not certain about their job prospects.

Unfortunately, almost no one expects the economy to put in a spectacular showing in the financial year starting 1 April. Current estimates by different experts suggest growth will not top 8 percent.

All things considered, don’t expect the car industry -or buyers- to come roaring back to life next year.