India witnesses SUV boom - FT.com SUV demand is growing so strongly it is possible that eager consumers will ignore a planned tax increase on 4x4s As India's finance minister presented his annual budget last week, many observers predicted that Palaniappan Chidambaram would introduce new tax rises to curb a growing fiscal deficit. But having soaked the nation's richest and added levies on luxury car and yacht sales for good measure, Mr Chidambaram unveiled a less expected change: a 3 percentage point sales duty increase on sport utility vehicles. The move caused squeals of protest, not least from Anand Mahindra, head of Mahindra & Mahindra, India's largest SUV maker by revenue, who took to Twitter to complain that the increase "destroys a level field" with other vehicles. But while Mr Chidambaram argued that 4x4s take up extra road and parking space and hence deserved higher tax, he likely had a craftier motivation: Indian SUV demand is now growing so strongly it is just possible that eager consumers will ignore the price rise altogether. Overall, the car market in Asia's third-largest economy is set to shrink this year for the first time in a decade, against a backdrop of sluggish economic growth. But the SUV segment is booming, with sales racing up 59 per cent in the nine months to December, according to industry figures. India is still a relatively small market by global standards, with just 363,000 SUVs sold last year. But that number is forecast to shoot above 1m by 2019, making it the world's third largest behind the US and China, according to consultants LMC Automotive. This is partly a tale of homegrown success, notably for Mahindra itself. The Mumbai-based conglomerate kicked off the country's love affair with trendy jeeps about a decade ago with the launch of its ultra-cheap Scorpio model, the first such vehicle designed and produced by an Indian company. Today, Mahindra has more than half of the market by sales and even though it makes few cars, SUV growth alone helped it overtake Tata Motors late last year to become the country's third-largest seller of passenger vehicles. Some foreign producers have benefited too, especially those able to sell at prices appealing to frugal Indian tastes. Renault's inexpensive Duster, for instance, has proved hugely popular since its debut last summer, part of a spate of new models that have helped boost demand. "In the 2008-09 slowdown, when many companies cut down on product development, we continued to invest in everything we had planned," says Pawan Goenka, head of Mahindra's automotive division. And those new products came to be launched in 2011 and 2012. Indians do love SUVs. In a way we are very much like the Americans for that Deepesh Rathore, IHS Automotive Despite much protestation over Mr Chidambaram's increase in sales duties last week, regulation has generally helped, too. SUVs tend to run on diesel, which is treated favourably under India's tax system, providing a comparative advantage against petrol-driven cars. Deeper social changes are also at play, as vehicles once used to ferry farmers and tourists over the rickety roads of rural India have found favour among an increasingly wealthy and brand-conscious urban middle class. Take Aasif Lanewala, a 39-year-old architect in Mumbai who decided to upgrade from his old hatchback last year. "If you know the [Mumbai] streets, you'll know why you need an SUV," he says, explaining his decision to pick up a Renault Duster in September. But it is also a European car, it has a nice design and actually it is fairly economical, too. Ammar Master at LMC Automotive in Bangkok points to a further development: "Some with higher incomes are now becoming two-car owning families, where you have one subcompact smaller model for ease of parking, but also add on an SUV." Even so, the road ahead will not be without obstacles. India's government is planning to increase diesel prices, potentially making these fuel-hungry vehicles less attractive. Further tax increases are possible, too. Yet such irritants are doing little to discourage other manufacturers from entering the fray, bringing with them the promise of increased competition and lower prices over the next couple of years. Ford plans to introduce its first low-priced SUV in coming months. Other big players, including Tata Motors and Maruti Suzuki, India's leading carmaker by sales, are also planning new models to appeal to the country's expanding SUV-owning classes. In a way we are very much like the Americans for that," says Deepesh Rathore, head of IHS Automotive, a consultancy based in New Delhi. The market really now has the potential to explode.