The auto industry is today in the dumps after the sales tax increases in most states have driven down sales during the first 3 months of this year despite the record domestic car sales that had soared 60% from the previous year to a record of 615,544 units in 1999-2000. The industry has a production capacity of over a million and most automakers believe that this is what a country like India would normally consume if India's taxes were similar to those of other developing countries.

The combined impact of 35% duty on imported components plus 10% surcharge plus VAT on bought out components plus 40% excise duty plus 4% CST plus 12% Local sales tax raises the cost of Indian cars by 80 to 150% depending on the level of local content. The combined taxes in countries like Australia, Indonesia, Thailand, Korea, Japan, New Zealand, Philippines, South Africa and Thailand ranges from 8 to 42%. If India had even the highest level, the showroom prices of a Maruti 800 would probably be about Rs. 1,30,000, a Zen Rs. 220,000, an Esteem Rs. 330,000 and a Honda City about Rs. 490,000. At such prices, the demand for Indian cars can be well imagined.

The previous year, however, saw some interesting trends. The launch of larger hatchbacks like the Santro, Indica and Matiz at the end of 1998, joining the Zen and Uno saw this segment accelerating from 26 to 43% of India's car sales. The Wagon R also joined this segment this year. In April-June 2000, these hatch's accounted for 50% of India's sales.

Under it's impact, the mini segment was hit hardest and the Maruti 800 and Omni dropped from 57% of the domestic market in 1999-2000 to 44% the following year and then to just 31% during the first three months of the current year.

In mid 1999, these bigger hatch's had filled all the price slabs between Rs. 2 to 4 Lakhs. There was, however, no car except the Esteem in the range between Rs. 4 and 7 Lakhs where there were more expensive sedans like the Cielo, Astra, Escort, City and Lancer. This gap was soon filled by the Siena followed by the Accent, Ikon and Corsa launched after mid 1999.

The sedans, excluding the ubiquitous Ambassador, had accounted for just 10 % of car sales in 1999-2000. The new launches increased their presence to an encouraging 15% during the first three months of the current year.

Today Indian buyers can choose from 21 main models powered by 42 petrol and diesel engines between 800 and 2000 cc offered in over 110 price options between Rs. 2 and 10 Lakhs excluding 5 models of the Mercedes-Benz. Next year, under WTO pressures, imports of new cars may be permitted but with customs duty. If it comes down from the present 105% many more big sedans, sports cars and utility vehicles may be offered by the carmakers.

With second hand cars freely available at very affordable prices, the automobilisation of the Indian market is advancing rapidly. Unfortunately the same cannot be said about the Government's response to the changing reality. While the Government had been forced to move to control pollution under Supreme Court orders, it also needs to revise the Motor Vehicles Act and other rules to ensure stricter control on licences, vehicle condition, overloading and traffic management.

As the auto industry is the world's largest industry and recognised as a major engine of economic, export and employment growth, it should be encouraged. Every job in a car factory supports about 20 in their ancillaries, service, delivery and other networks. It is estimated that 19% of all employment in America are directly or indirectly linked to automobiles. If the Government does not take steps to bring taxes in line with India's neighbours on it's own it may soon be obliged to under WTO pressures.

The Government needs to also understand that the car is no longer a luxury of the elite but now a necessity for large segments of the population. It should amend tax rates to help the growth of the industry instead of only looking for revenue to feed a bloated bureaucracy.