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Interim Budget: Excise duty cut unlikely to turn fortunes of commercial vehicle industry

Will the Interim Budget announcement help in turning around the sentiment and kick in demand for new trucks? This is unlikely, considering the sector has excess capacity to the tune of more than 40 per cent.

N. Madhavan        Last Updated: February 17, 2014  | 17:08 IST
Interim Budget: Excise duty cut unlikely to lift the fortunes of the commercial vehicle industry
Finance Minister P Chidambaram.

N Madhavan
It was a parting gift that the commercial vehicle sector did not expect from Finance Minister P. Chidambaram. An excise duty reduction, that too only up to June this year, came as a surprise. But will the Interim Budget announcement help in turning around the sentiment and kick in demand for new trucks? This is unlikely, considering the sector has excess capacity to the tune of more than 40 per cent.

A four percentage point cut in excise duty will mean a reduction in prices of anywhere between Rs 20,000 and Rs 40,000. This is far less than the discounts of 20 to 25 per cent that the industry is already offering. If fleet operators and small truck owners have not taken the bait of such steep discounts, they are unlikely to fall for a four per cent fall in prices.

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The industry has seen an unprecedented fall in sales volumes. Sales of medium and heavy commercial trucks dropped 26 per cent in 2012/13 and have fallen 29 per cent so far this fiscal year. Light commercial vehicle sales have declined 13 per cent this year. The slump in demand is due to poor economic growth and accentuated by factors such as a ban in mining in various parts of the country. This has thwarted any rise in freight rates at a time when operating costs have sharply risen. Diesel prices, for instance, have increased 12 per cent.

The announcement may bring in a few numbers, especially from those who have already made up their mind to buy a new truck or replace their old ones, but the situation in the industry is too bleak for the tax cut to turn things around.

FULL COVERAGE:The Great Indian Budget

The sentiment will only improve if the economy begins to chug along and results in a lot more goods to move on the road. Rather than sops, volumes will improve only when there is more freight to move and, consequently, freight rates increase.

The industry, in fact, was hoping for a 'truck modernisation programme' to come out of the abyss. That would have cost the government many thousands of crores of rupees. What it got instead was a sop that is too little for its comfort. For now, the industry seems happy with what it has got. Something is better than nothing, seems to be its view.

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