Carmakers announce price hike in hope of recovering demonetisation sales drop

Just a week after Toyota announced that it will be increasing prices of its passenger vehicles by 3%, Tata Motors on Monday said that it follow suit beginning January 1, 2017 by raising prices by Rs 5,000 upto Rs 25,000. Renault too will be increasing the prices of its cars by 3% from the same date. 

Although carmakers are known to hike prices beginning January 1 on the back of price and duty adjustments, this time is a bit different. 

Prime Minister Narendra Modi's demonetisation drive has reduced industry growth to under 2% in November and sales are not looking any better in December. Therefore, carmakers are hoping that an early announcement of a price hike in January might push some sales in the month of December. 

Last year itself several car companies had announced in December that they will increased the prices of their vehicles with effect from January 1 in the range of 1-5% as the government had decided to roll back the excise duty cuts.

This resulted in car sales in December 2015 seeing a large spurt in growth of 12.87%, according to the Society of Indian Automobile Manufacturers (SIAM). Total passenger vehicle sales too was up 10.46% as it grew to 2,30,960 units.

“It is normal practice for car companies to increase the prices of their vehicles in January,” an automobile analyst told Zeebiz. He explains, “They do this as car sales in December are usually low as many prefer to differ their purchases to the new year. This is as if they buy during December it is registered in that year and that is not good in terms of resale value.”

Even in December 2013 car companies such as Maruti Suzuki, Hyundai, Mercedes Benz, BMW, Audi, Honda Cars announced that they will hike prices in January 2014. Similarly, a year earlier in January 2013 all major automobile companies increased their prices of across their models.

However, the price rise in January did not result in as great as rise in the December sales like it 2015. For instance, in December 2014 the sales grew by just 2.46%. However, this growth in sales came at a time when the automobile industry was struggling with sales declines and needed an increase in excise duty cuts to propel growth. A year earlier in December 2013 passenger car sales had declined by 9.6%.

This shows that hiking prices in January not necessarily leads to a growth in sales in December. A point which auto analysts were saying could be the case this year as demonetisation has resulted in people postponing their purchases and reduced demand significantly.

“If intrinsic demand is not there then increase in prices will not push buying of cars higher,” says another automobile analyst we spoke with. “Demonetisation has had an immense impact on demand this year and people are postponing their buying of cars. While car companies increasing their prices is one thing that goes against this trend, demonetisation has resulted in a demand disruption. Anything that automobile companies do won't do much because demand has been disrupted. Sales are not normal and even in January the sales will not return to normalcy. Buying will be postponed for a longer time till cash problem gets sorted,” he said.

The other analyst mentioned earlier said that the increase in the prices in January will not make a difference to sales in December this year due to the demonetisation impact.