Maruti and Toyota, the winners of UP's road tax waiver for hybrids

Hybrid best-sellers such as Maruti's Grand Vitara and Invicto, and Toyota's Hyryder and Hycross, are now cheaper by up to ₹3 lakh in the northern state, receiving a tax break that only electric vehicles in the state have enjoyed so far. Shares of Maruti Suzki India Ltd closed 6.6% higher on the BSE on Tuesday, while the BSE Auto index rose 2.17%.

The UP government on 5 July said it will now fully implement its 2022 policy which waives road tax for EVs and strong and plug-in hybrids. Though EVs have received a road tax waiver in UP from 2022, technical snags and mismatches had prevented its extension to hybrids so far.

Good news for hybrid makers

For hybrid makers whose requests for lower goods and services tax and compensation cess have gone unheard, the Yogi Adityanath-led government's move spells good news; however, it may raise concerns for EV makers who say tax sops must be limited to battery EVs such as Tata Nexon EV and the Mahindra XUV400 EV. Cheaper hybrids may also take a toll on the sales of petrol and diesel-powered vehicles in the state. Noida and Ghaziabad in UP are part of the National Capital Region (NCR), which also includes Delhi.

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“The consequence of this move will be that IC engine sales, specifically that of diesel, will be reduced, with the government effort focussed on converting them to clean hybrid or EV technologies as much as possible. We see this move impacting IC engine sales, not EVs. More attractive pricing for hybrids as a result of the tax waiver is only necessary to offset the cost disadvantage which hybrids currently face. It remains uncertain whether other state governments will follow", a senior executive at a leading passenger vehicle maker said on the condition of anonymity.

More price cuts follow

Separately, Tata Motors and Mahindra & Mahindra on Tuesday cut prices of their premium SUVs by up to ₹1.4 lakh and ₹2.2 lakh respectively. While Tata Motors termed it a 'celebratory offer' marking sales of 2 million SUVs, Mahindra said its recent capacity addition now enables it to cater to a broader set of customers, and making the XUV700 brand more accessible will attract a new set of buyers to the brand.

Maruti Suzuki and Toyota Kirloskar dealers are advertising hybrid price benefits, the latter offering up to ₹4.4 lakh less on the Camry.

Struggle with inventory

Interestingly, the price cuts also come at a time dealers are struggling with unsold cars, as retail sales lag wholesale dispatches.

“Car manufacturers’ price cuts indicate they are struggling with demand issues. Higher inventory levels suggest deeper discounts this year compared to the past four years. We’ll need to monitor the upcoming budget for potential tax cuts to boost consumption. However, increased discounts and marketing spend may negatively impact carmakers’ margins, which is not a positive sign", Gaurav Vangaal, associate director at S&P Global Mobility said.

Mint had reported in April that hybrid cars in India may remain pricey for a while, with a top panel tasked to review GST compensation cess on them yet to formally meet even once, in the backdrop of a divided auto industry. Besides, any change in automobile taxes is unlikely without a comprehensive overhaul in the GST framework, Mint had said. In that scenario, approaching a price rationalization by way of reduced on-road costs instead of ex-showroom price is a sound alternative strategy, the auto industry executive cited above said.

Passenger vehicle dealers have been seeing stocks swell since May, as retail sales started showing signs of muted growth from March. “We are seeing a build-up in inventory, especially for entry-level SUVs and some other models for which we usually expect high demand ," a dealer said on condition of anonymity.

How automakers respond to the UP government move, by way of a novel EV and diesel pricing strategy, will remain key to the segment's performance in the months to come.