Consumers planning to buy a new vehicle, as well as OEMs and dealerships looking to increase their volumes, were taken by surprise when PM Modi announced that the government is reviewing the Goods and Services Tax (GST) structure, and that relief can be expected by Diwali this year.
However, a lack of clarity on the new GST structure and its rollout date is likely to hit car and bike sales during the early festival season in late August and September. This is because Indian consumers often delay big purchases when they anticipate prices might drop.
A couple of dealers who spoke to Autocar Professional indicated that customers in Tier 1 and Tier 2 cities are starting to get cautious. Customers inquiring about new cars and two-wheelers are now asking if prices will drop in the coming months. A slowdown in sales, at a time when OEMs increase production in anticipation of strong festival demand, could lead to a significant inventory pileup.
While Onam and Ganesh Chaturthi in the South and West may not drive sales on the same scale as Navratri and Diwali in the North and Central regions, they still offer a significant opportunity for dealers to boost demand. Dealers said potential buyers, although making inquiries now, seem hesitant to make a purchase, concerned that they might spend more now on a vehicle expected to become cheaper in the near future.
“The recent announcement on the GST structure review gives us hope of a long-awaited reduction in the tax burden. While the anticipated rate rationalization is expected to boost long-term vehicle demand, there will likely be a short-term sales challenge over the next few weeks as consumers await clarity on the new tax structure,” a prominent vehicle dealer in the South Indian market said.
Though Modi did not mention the automobile sector while announcing the review of the GST structure, various media reports say that there could be a sharp cut in the GST rates for vehicles as the government has reportedly proposed moving the GST system to a two-tier rate structure of 5% and 18%, and a 40% slab for a few items. Currently, vehicles fall under the 28% GST slab, and the proposal is reportedly to move small cars and entry-level two-wheelers to the 18% slab in the new structure.
Dealers and brokerages tracking the sector underlined that there could be some short-term hiccups in sales, impacting the Onam and Ganesh Chaturthi demand, if clarity on GST rationalization takes time.
“Given the Indian consumer’s strong value orientation and deal-seeking behavior, many are likely to postpone purchases in anticipation of more favorable pricing. Until there is a definitive announcement, buyers may prefer to wait rather than commit – impacting near-term sales momentum,” said Gaurav Vangaal, Associate Director for Light Vehicle Production Forecast at S&P Global Mobility.
Motilal Oswal highlighted that while the GST rate rationalization is expected to boost long-term demand in applicable sectors, it will likely face some initial ‘teething issues’ during the transition.
“For instance, if these rates are not implemented soon, customers are unlikely to buy vehicles before this move in anticipation of the rate cut. At a time when OEMs were looking to push dealer stock in anticipation of a demand revival in the festive season, this move is likely to put OEMs in a spot in the interim,” Motilal Oswal said.
A Delhi NCR-based passenger vehicle dealer said that every customer who inquired this week has asked about a potential price drop during Diwali. The dealer noted a specific instance where a customer, who had been planning to take delivery of a new vehicle this week, expressed reluctance to buy now, stating it would not be sensible to purchase a vehicle now if the tax rate were to drop significantly from 28% to 18%.
This challenge comes at a time when the passenger vehicle and two-wheeler industry is banking on demand during the festival season to record growth in volume for the year. Passenger vehicle domestic wholesales during the April-July period represent a decline of 0.7% on a year-on-year basis, while two-wheeler dispatches fell 2.9%.
This year’s festival season starts next week with Ganesh Chaturthi and Onam and lasts until Bhai Dooj in November. The busiest sales period is expected to be from the end of the Shradh period to Diwali. This year, the 16-day Shradh period, when new purchases are typically avoided, falls between September 7 and September 21. The Navratri period will follow, from September 22 to October 2.
This festive period is of much significance to automakers owing to high consumer spending due to cultural significance. Volumes generated in this period account for a bulk of automakers’ annual sales. Rural areas, in particular, see a notable increase in vehicle sales during this time, as farmers often have more disposable income after the harvest season.
Clarity on the new GST structure is unlikely before mid-September. The government’s proposal is being presented to the Group of Ministers this week. Following this, the GST Council – a body consisting of finance ministers from both the central and state governments – is expected to convene in September or October to review and approve the final GST rate structure, aiming for implementation before Diwali.
Brokerages are raising concerns about the potential for inventory issues. BNP Paribas noted that because many OEMs have already begun stocking up for the festive season, the current uncertainty could pose a significant problem. Echoing this, Nomura highlighted two specific risks: a temporary dip in sales for high-value items such as automobiles, and the possibility of dealers incurring inventory losses.