Higher depreciation rate may lift used-vehicles market

Besides bringing down resale value, it will lead to lower insurance premium: Industry players

The doubling of depreciation rate to 30 per cent for vehicles bought until March 31, 2020, as announced by Finance Minister Nirmala Sitharaman on Friday, augurs well for the used-vehicles market, say industry players.

A higher depreciation rate will mean that the resale value will come down faster, which will prompt customers to replace the car sooner. It will also bring down insurance premium from the second year, apart from allowing businesses to claim higher business expenses, which would lead to more tax benefits.

“Thirty per cent depreciation is likely to encourage customers in general, and corporate customers (companies, fleets, leasing companies etc) to buy BS-4 vehicles, which in 25-35 per cent of cases will be accompanied by sale of existing used vehicle. The used vehicle will be additional business for the industry. My expectation is that it would lead to 5-10 per cent incremental growth for used vehicles this year (about 20,000-30,000 vehicles per month, additionally),” Ashutosh Pandey, MD and CEO, Mahindra First Choice Wheels Ltd, told BusinessLine.

Gaining momentum

The clarification that BS-4 vehicles can be used throughout the registration period will clear any doubt or misapprehension that prospective buyers might have had when considering used vehicles, said Pandey.

“We had seen some cooling off of used vehicles in the past couple of months on account of this (unfounded) confusion. I believe used vehicle sales will now regain the growth momentum in the coming months,” he said.

The BS-6 emission norms will be enforced from April 1, 2020 onwards.

Shubh Bansal, Co-Founder, Truebil, a virtual marketplace for pre-owned cars, said that depreciation is the most influential factor in the long-term value and total cost of ownership of cars. “Because of an increase in depreciation, the resale value of a car will reduce faster, prompting the customer to go for a replacement sooner. Instead of selling their cars after using it for 5-7 years, people will try and sell it after 3-4 years of usage in order to get the maximum value. This upgrade/selling pattern will bridge the demand-supply gap in the used car market,” he said.

Due to the new depreciation rate, MSMEs and corporates — who constitute a significant portion of the car-buying audience in India — will be encouraged to buy new cars as they can now claim more tax benefits, said Sunny Kataria, V-P, Auto, OLX India, which sells secondhand goods from smartphones to high-end cars on its platform.

Kataria said that when the demand for new cars increases, it subsequently leads to an increase in fresh supply available to the pre-owned car market.

Fresh supply

“This fresh supply will lead to cars being available which are in good condition and are the latest models, thereby increasing the choices available to users. While the pre-owned car market has been growing steadily at a rate of 15 per cent over the last four quarters, we expect that over the next one year, the growth could rise to 20 per cent (with the doubled depreciation rate being one of the contributing factors),” he said.

Hailing it a “very lucrative” measure, Sandeep Aggarwal, CEO and Founder, Droom, an online automobile marketplace, also affirmed that the used cars sector cannot do well on a long-term basis unless the new cars sector is doing well and this measure is bound to positively impact sales. It can improve the used cars sales by 5-8 per cent points, he said.