FM P. Chidambaram's decision to slash excise duty on cars and SUVs in Interim Budget 2014 may not lead to a spike in sales, while the impact of the same on the capital goods sector would be neutral, a research report says.
The excise duty cut across major auto segments/ sub-segments, though would help reduce cost of ownership marginally, will not boost volume growth. Upside would continue to be constrained amid better affordability on account of the overall high cost of ownership and shrinking discretionary spending power, India Ratings said in a report.
Finance Minister P. Chidambaram in the interim budget yesterday proposed cutting excise duty on automobiles, mobile phones, electronic items, capital goods and soaps till June 30.
Excise duty was proposed to be cut on small cars and two-wheelers to 8 per cent from 12 per cent, on small SUVs to 24 per cent from 30 per cent and on mid-size cars to 20 per cent from 24 per cent.
Excise duty on commercial vehicles would be cut to 8 per cent from 12 per cent and for large and mid-segment cars to 20 per cent from 24 per cent.
On the impact of duty cuts on capital goods sector, the report said the 2 percentage point duty cut to 10 per cent on capital goods falling under chapter 84 and 85 of the Central Excise Act will not materially affect the industry at least in the first half of the next fiscal.
For the entry-level price-conscious auto models, the decision will continue to be largely influenced by the cost of ownership which remains high due to high finance cost. Also, diesel price deregulation has resulted in deferment of car purchases, the report said.
Although the duty cut is significant especially for small trucks, demand for trucks is influenced to a greater extent by the level of industrial activity, which remains weak leading to tepid freight rates. Therefore, a significant uptick in demand is unlikely in the near term, it said.
On the neutral impact of the duty cut on the capital goods sector, the report said this is due to depressed capex rates and project execution and given the tight margins in the sector, this nominal cut, even if its passed onto customers, is unlikely to boost demand for industrial goods.
Thus, arguably capital goods producers may decide not to pass on the full benefit so as to