First, as past evidence tells us, every time the government snipped the excise levy, there has been an increase in sales. Both in 1999-2000 and in 2003-04, when duties were cut from 40 to 32% and from 32% to 24%, sales rose above 30%. Coming as it is at a time when sales are flagging, the present round of duty reduction is estimated to boost volumes by 15%. Second, the expansion of sales, needless to say, will lead to a concomitant increase in investment in production capacity of not only compact carmakers, but also result in bringing forward investment from other players scrambling to increase their market share. General Motors, Toyota and Honda have already announced their intention to make small cars in India. Any carmaker wanting to make an impact on the small car segment—which boils down to price—would have to invest heavily in large capacity creation. Thus, the size of capital inflows would be more, as compared to the relatively small amounts that have come in so far.

Third, as the domestic market expands, auto parts makers too would scale up their capacities to meet increased demand. The resulting economies of scale would not only lead to still cheaper cars, but also give vendors the confidence to cater to huge foreign orders. Many auto parts makers have had to refuse foreign orders at times because of insufficient capacity. A vibrant supplier base will, in the final analysis, benefit all carmakers irrespective of the size of their makes. Fourth, we believe it is entirely appropriate that the cut has been restricted to small cars, since it would lead to lesser stress on road and parking infrastructure. With fuel prices skyrocketing and congestion in the cities increasing by the day, small cars should be encouraged by means of such sops. Japan, Brazil and Korea have already taken the lead in doing so. In sum, this move of the FM is a shot in the arm for India Inc’s twin objectives of becoming a small-car hub and becoming a preferred supplier of auto parts to the world at large.