By Ruma Dubey

So, cars have become cheaper – more so the SUVs than the small cars; will you be buying your new car soon despite rising fuel prices? Now who cares about that! And the young in your home might be unemployed or the house help might be working harder to merely put food on her table; but who cares as long as you can buy a new ‘cheaper’ air conditioner or a new handset .  Isn’t that what the budget indicated?

The message sent across is - it does not matter if you are today paying more for your electricity. Or if your phone might have got cheaper but your mobile bill give rise as operators will be left with no option but to hike rates following the price they will be shelling out for additional spectrum.

Thus the car prices coming down or the 2% token cut in capital goods is all just symbolical. Or one should say that it comes too late. The Govt wants to spike up car demand, help increase production and spread this feeling of goodness all around. But will mere tinkering with the excise duty at this stage really help?

The car companies have been very quick in passing on this cut in excise duty to the consumers. Over and above the existing discounts, prices have been cut. Maruti Suzuki has slashed prices by Rs.8,502 to Rs.30,984, and Hyundai Motor India by Rs.10,000 to Rs.1.35 lakh across all models. Maruti also cut the price of its recently launched compact car Celerio by Rs.13,615.  Hyundai’s Eon got cheaper by Rs.22,000, Volkswagen cut the price on its Polo by Rs.18,000 to Rs.31,000, on its Vento by Rs.14,500 to Rs.27,000 and Jetta by Rs.38,000 to 51,000. M&M, Hero Moto, Honda Motorcycle, Honda Cars, Audi India, Mercedes – all have very quickly responded with sharp price cuts.

This should be good for the car companies, right? At least that is what the Finance Minister had expected, as it will help boost demand and thus production. But then how come the markets, which have a better ear to the ground have responded otherwise – post the announcement of the price cut, all the listed auto stocks are in the red today. If demand is going to get a boost then why has the market perceived this news to be negative? Incidentally, Bajaj Auto is to yet announce any price cut and its stock price remains in the green.

There could be two reasons to explain this disenchantment of the market. Firstly, the big question – will customers buy? People have the cash but the mere inflation of living the day-to-day life is so high that not many will exactly rush to buy the cars. Yes, there will be a slight betterment of sales but it there will not be an overwhelming rush to book the car. Seasonally, Q4 is a pretty good quarter for the car companies as people rush in to buy cars before the end of the fiscal and thus get some tax advantages. So yes, despite rising fuel prices and rising cost of living, we could see an uptick in demand. There is a little over a month to go for the fiscal to end and this discount period ends on 30^th June 2014.

Thus there is no denying the fact that demand could get a boost but the market does not expect it to be a game changer. Why? And that brings us to the second reasoning  - there is just too much inventory which the auto sector is sitting on to get any true advantage of this duty cut.

Its like this – the ideal inventory holding period is 2 weeks to 10 days but currently, car companies are dealing with 6 to even 10 weeks inventory. All these are at a higher duty structure and priced accordingly. So now with the duty cut, the car companies, in a rush to clear the inventory, might actually be selling cars at a loss at the new discounted prices. In fact the Federation of Automobile Dealers Associations (FADA), the apex national body has written to the Society of Indian Automobile Manufacturers (Siam), urging it to ask OEMs to issue credit notes to dealers for the inventory they are carrying.

The market thus expects car companies to clear their inventories on account of this duty cut and see’s a long term demand revival only if the new Govt too continues with this cut in duties.

Car companies have been hankering around the Govt for months now for this excise duty reduction. It has come just before the elections. So does this mean that car companies will now contribute more to the Congress election funds? Also trucks are the wheels of our economy; so why nothing was done to first boost demand for trucks if the concern was truly about falling demand?