Meaningful Minutes

Excise duty:

The government often doles out incentives to certain sectors to boost growth. The auto sector saw sales fall for multiple quarters due to high interest rates and a slow economy. To help the sector, it announced a temporary cut in excise duty - the tax companies pay for production of goods and services. This duty cut helps reduce the prices of vehicles. This cut was originally announced in the interim budget by the outgoing UPA-II government. It was extended until December in the Modi government’s first finance budget. In January, the excise duty went back to normal levels for auto companies. This pushed up the price of cars and two-wheelers.

Fuel rate cuts:

A key reason for the rise in sales is the fall in petrol and diesel prices. The near 50% fall in global crude oil prices helped reduce the price of fuel in India. Petrol price has been cut 10 times since August 2014. The price of diesel too has been cut six times since October last year. As a result, petrol today costs nearly as much as it did in September 2010, while diesel costs the lowest since March 2013. Costly fuel was one of the major detriment to consumer car purchases earlier.

Falling interest rates:

Most consumers depend on a bank loan to buy a vehicle. As a result, auto sales are closely tied to the interest rates in the country. For a long time, the RBI had to keep interest rates high to curb double-digit inflation - the rise in prices over time. In mid-January 2015, the central bank announced a surprise rate cut. This was on the back of a positive inflation data, which showed prices barely grew in December. This makes auto loans cheaper.

Demand for petrol cars:

Earlier, petrol cost nearly three times diesel in 2012. As a result, consumers preferred cars, whose engines ran on diesel. These cars, however, cost more than petrol-based cars. Today, though, there is a difference of Rs 10-11 between petrol and diesel. This has resulted in an increase in appetite for the cheaper, petrol-based cars. Consumers prefer to pay the additional Rs 10/litre for fuel than shell out thousands of rupees for diesel engine cars. As a result, the sale of petrol-based cars amounted to 62% of the total car sales in the quarter ended December 2014. This is the highest in five years, according to an Economic Times report.

Commercial vehicles:

Auto sales can reflect the state of the economy. Commercial vehicle sales usually rise when companies do well financially. Not surprisingly, sales of commercial vehicles remain muted for many months during the economic slowdown as companies cut costs. Auto companies saw strong growth in the commercial vehicles segment in January. This was especially so for medium and heavy commercial vehicles, which predominantly cater to the manufacturing and infrastructure sectors. Two of the leaders in the segment - Tata Motors and Ashok Leyland - posted strong yearly growth of 38% and 45% respectively in January.

This reflects a recovery in the manufacturing space. With the economy slated to grow at a faster rate this year, sales in the segment could improve further.