Tesla is coming to India, just when it is losing some of its spark in the West. But it will be out of reach for much of India’s middle class. An entry-level Tesla which sells for Rs 30 lakh, will cost more than double that price, thanks to high custom duties.

Even though a typical middle-class Indian does not hope to own a Tesla, its entry has set off a debate over high taxes on cars in the country. Right now, the cheapest Maruti Suzuki model – the Alto K10 – probably fetches the company some Rs 3.3 lakh. But if I were to buy it in Delhi, I would have to pay more than Rs 4.7 lakh.

This is still less than what a buyer in Bengaluru would pay because the state registration charges are much higher there. Someone in Gujarat or Uttar Pradesh would pay a little less because of lower charges in those states, but on an average, a car buyer has to pay anywhere between 40-45 per cent extra in taxes and levies over and above what manufacturers charge.

If you buy a bigger car, like a Honda City or a Toyota Corolla, the levies could cross 60 per cent, depending on where you are. And luxury cars could face additional taxes and charges of 130 per cent.

Many, including car manufacturers, blame these excessive charges for the slowdown in car sales in India. The numbers seem to back their complaint. In the past 10 years, one-third of the price increases for entry-level hatchbacks was because of higher taxes and levies. For bigger cars, that share is more than half of the total price rise.

Is that a bad thing?

In the past 25 years, about 55 million passenger cars, SUVs and MUVs were sold in India. Industry estimates suggest that more than 80 per cent of these – about 45 million – are privately owned. Many affluent families own more than one car, especially in India’s metros. So, private cars are probably spread across some 35 million families. That means, not more than 10-12 per cent of Indian households own cars.

There is a case to argue that in a lower-middle-income country like ours, the government is right to extract high levies from those who want to buy cars. This is especially true given that this richest 12 per cent earn 60 per cent of India’s pre-tax national income, and hold 68 per cent of the country’s net personal wealth. Who else is the government going to tax?

The trouble is that this goes against the development path India chose from the mid-1980s, and officially sanctified during the liberalisation period of the 1990s. Policymakers and economists who influenced those policies have been arguing that the auto industry is one of India’s biggest growth drivers. Some go so far as to claim that the sector – which includes car manufactures, auto-ancillary companies, tyre companies, dealerships, repair and servicing agents – contributes 7-8 per cent to India’s GDP and generates 37 million jobs, directly and indirectly. These numbers can, and have been, challenged, but there is no doubt that the auto sector is very important to our economy. So, a slowdown in car sales has been a huge cause for concern.

Again, the data seems to be clear here. In the 10 years, between 2001-02 and 2011-12, the sales of passenger cars, SUVs and MUVs grew at 20 per cent per year. Since then, the growth rate has dropped to just 2 per cent. The real slowdown began in 2018-19, and car sales fell sharply the very next year, before Covid hit us, continued to fall in the lockdown year and recovered in 2021-22. But it wasn’t till 2022-23 that car sales had returned to the 2018-19 level. Since then, sales have grown at a tepid 2 per cent per year.

These numbers seem to suggest that the middle class was buying cars at a record pace in the 2000s, but then, sales collapsed from the end of the 2010s. This hides the fact that the real increase in car sales took place over just two years – 2009-10 and 2010-11. The total number of cars, SUVs and MUVs sold in these two years rose by 225 per cent, from just 12.7 lakh sold in 2008-09 to 41.3 lakh sold in 2010-11.

The biggest reason for this sharp increase was the arrears given to government servants by the Manmohan Singh government under the Sixth Pay Commission. The pay commission hikes were announced in August of 2008, but the arrears were paid with retrospective effect from January 2006. That means, families of government servants ended up with some 30 months of arrears in their bank accounts in one go. This allowed them to buy household durables, including cars.

In fact, right after this big boost, car sales began to slide again, with negative growth for the next two years. There was a recovery in the first four years of the first Modi government – car sales grew at 7 per cent per year. But since then, India’s middle class has seen its real incomes stagnate, and that has shown up in a stagnation of car sales: The number of passenger cars, SUVs and MUVs sold in the six years between 2013-14 and 2018-19 is more or less the same as the numbers sold in the six years after that.

A big reason for this slowdown is that families who used to buy smaller and mid-sized cars seem to have either fallen out of the car buying market or have switched to cheaper SUVs and MUVs. This is partly because of the decline of the middle class’ purchasing power and partly because of changing consumer tastes.

However, the data does suggest that a large chunk of the middle class in India can no longer afford to buy cars. This means that there is a case for reducing GST on entry-level cars and cheaper MUVs. The government will earn more in taxes, even if the rate is reduced if that results in a rise in car sales. That, in turn, could boost India’s floundering auto sector and revitalise our economy.