Updated: Jun 27, 2021
Cars having length of 4m or less has completely cemented their position in Indian passenger vehicle market, with close to 75% of cars sold in last three years are small (4m or less in length). Driver of the change is the tax structure introduced by the Government way back in 2006, to make India a manufacturing hub for small and fuel-efficient cars.
In reality, small vehicle doesn’t solve road congestion problem but an efficient public transport system may. On small cars, James May (earlier with Top Gear-BBC) once said “Length is not an issue, as roads are infinitely long but finitely wide, it is just easy to park.” If you look at the larger picture, cap on engine size (1.2L for Petrol & 1.5L for Diesel) ingrained in tax structure, has promoted vehicles which are emitting relatively less pollutant and consuming less fuel per unit.
Hatchbacks are not the real beneficiary of the tax structure out here. Rather it’s the sedan and SUV body shape which has shown remarkable growth. Reason – it is culmination of buyer’s aspiration to own a Sedan or an SUV, with limited budget and manufacturer’s ability to package the same in such small footprint and passing on the lower tax incidence as benefit to customer.
What made this happen?
Roots of sub 4m length car segment or small car can be traced back in 2006 Budget speech of the then Finance Minister Mr. P. Chidambaram. Government’s idea was “To make India a hub for the manufacture of small and fuel-efficient cars that will drive economic growth and employment.”
Tax is compulsory contribution. It is one of the major source of revenue for Government. At the same time Government can use tax system to alter the market forces of demand and supply, as in the case of small cars. Lower taxes will reduce price and spurt demand. Also it can be used as a tool for redistribution of wealth, for fostering economic equality, thus the idea of higher taxes on luxury items.
“On cars, I propose to reduce the excise duty to 16 per cent from 24 per cent, but only for small cars. A small car, for this purpose, will mean a car of length not exceeding 4,000 mm and with an engine capacity not exceeding 1,500 cc for diesel cars and not exceeding 1,200 cc for petrol cars. I am confident that industry will seize the opportunity to make India a hub for the manufacture of small and fuel-efficient cars.”- Budget speech – Mr. P. Chidambaram (Minister of Finance-Government of India)
“I have looked at specific sectors where growth is flagging. These sectors are important because they are growth and employment drivers. Some of them also have large externalities. Therefore, I propose to reduce the excise duty on small cars from 16 per cent to 12 per cent and on hybrid cars from 24 per cent to the general revised rate of 14 per cent.”- Budget speech – Mr. P. Chidambaram (Minister of Finance-Government of India)
With GST coming into effect from July 2017 and subsequent revision in September 2017, very idea of 2006 tax structure is cemented now, till another new policy framework comes into effect.
As per 2017 data, small cars are predominantly petrol and as body size increases, buyers opt for diesel engine. Most of the buyers want to keep their SUVs on strict diesel diet, would 2020 BS VI emission norms be able to change that?
Below table shows that over the years SUV growth rate actually outpaced the growth rate of other segments by leaps and bounds.
If you consider perfect 4m length, across all the body shape, with every new product launch, you will see that there is lot of jostling for top spot. With more number of 4m SUV lined up by manufacturers (Datsun, Hyundai and Mahindra), SUV will soon be undisputed leader.
Hatchback sold in India has always been less than 4m in length. Only exception was Chevrolet SRV launched in 2006, which was 4.3m long and found very few takers. Overall hatchback growth rate is pretty low in comparison to overall industry growth rate, thus decline in overall market share. So it is difficult to establish direct impact of tax structure in promoting hatchback which were inherently small in first place. Essentially government is incentivizing small cars over larger cars. In below table you can see that smaller hatchbacks are losing market share and buyers are migrating to larger hatchback. A clear sign of rising aspiration level backed by purchasing power.
Tata Indigo CS (2008) was the first sedan to take advantage of the tax structure for its diesel version. What Tata essentially did, was to chop-off the boot of Indigo, to make it fit into 4m length and passed on reduced tax incidence as benefit to customer. Major boost came in 2012, when Maruti Suzuki decided to latch smaller boot on Swift to make 4m-Dzire, and despite its odd proportions it was much bigger success than Swift. Now every leading car maker is having at least one product and some did really good work in designing a sedan with such small footprint and carving out generous interior and boot space.
First sub 4m SUV was launched by Premier Auto, called Rio, in 2009. It is the same company which used to manufacture one of the most popular sedan before 90s, called Padmini, but popularly known as Phiat (that’s how it sounds). Ford Ecosport has actually brought the segment into limelight and Maruti Suzuki Brezza later turbocharged the segment. Segment is poised to expand further with upcoming Hyundai 4m SUV.
Tax structure hasn’t had any significant impact on MUV segments. MUV are meant to carry large number of passengers or large amount of luggage or both together. Carving out usable 3 rows of seat in such small footprint is not that easy, unless they make it a boxy-van, which again is not very aspirational from buyer’s perspective.
Utility Vehicle (UV) Chassis
With the advent of new breed of urban, pseudo, compact UV, whatever name you prefer to call them by, monocoque construction is the most preferred chassis.
Maruti Suzuki is champion of small cars indeed. Pick up any segment under 4m, and you will find a Maruti Suzuki product standing at top of podium. On the other side of spectrum it is Toyota with its deeply entrenched and high margin products, namely Innova and Fortuner. For others it is just a pipe dream.