First Time Buyer and Unaffordable Sub-Rs. 5 Lakh Cars

By: Damini Mehta

Share of entry level cars - those priced under Rs 5 lakh - crashed from 33.6% in 2015 to 0.3% in 2023. The sub- Rs. 5 lakh car segment also witnessed the biggest jump in prices in the last five years, by nearly 65%, compared to a 24% rise for SUVs, luxury vehicles and sedans.

The year 2023 recorded the highest ever sales in the passenger vehicle segment of the domestic market with 41 lakh units sold. A release of pent up demand during the COVID pandemic, positive macroeconomic indicators and an extended festival season are said to have pushed up the numbers. A deeper understanding of the sales in this segment points one towards a shift in the price segment of passenger vehicles from sub-5 lakh to more costlier ones. Accordingly the share of entry level cars - those priced under Rs 5 lakh - crashed from 33.6% in 2015 to 0.3% in 2023. This was replaced by a preference for the mid to high range vehicles such as the SUV and MUVs. 

Interestingly, the sub- Rs. 5 lakh car segment also witnessed the biggest jump in prices in the last five years by nearly 65% compared to a 24% rise for SUVs, luxury vehicles and sedans. This also means that with a rise in prices, the vehicles costing near about 5 lakh no longer remain within that range. Comes along with this a considerable decline in the models that car makers are offering below the Rs. 5 lakh range. Barring Maruti Suzuki, no other vehicle brand offers a model in this segment, clearly reducing options for the low income group and the first time buyer.  

According to the National Family Health Survey (NFHS)-5, conducted in 2020-21, only about 8 per cent of Indian households — or 1 in 12 households — own cars. The first time buyers shifting from a two-wheeler to a four wheeler are mostly known to start with the low price segment. Limited model options, rise in prices and muted increase in incomes, as indicated by several reports, clearly mean that purchasing low segment vehicles will no longer be as attractive and easy as it used to be.

The average Indian consumer is widely recognised to be highly price sensitive. Marketing and advising experts often factor this price sensitive nature while designing products and campaigns. This is more pronounced when it comes to ‘luxury; item purchases such as vehicles or a house. Add to this the decline in incomes, the impact on purchase decisions is even more pronounced. Nearly 7% households projected a 25% drop in annual income for FY 22-23, 22% projected a 10-15% drop while 10% projected a drop of up to 10%. The study was conducted by LocalCircles in January 2023 covering 37,000 respondents across 309 districts of India. 

Apart from prices, operating costs of maintaining and running a car right from petrol prices to maintenance, spares, tyres, and labour charges, all have shot up. Car manufacturers are also known to push higher value cars to the buys given the fatter profit margin they offer. This also explains the nearly four time jump in market share of cars priced upwards of Rs 10 lakh in the past eight years from 12.5% in 2015 to 46% in 2023.

The common man with a limited pocket to purchase one off items such as a vehicle facing a triple whammy with decline in incomes, higher prices of low segment vehicles plus a jump in operational costs along with limited options in this segment. With barely 8% of the Indian households owning a vehicle, the expansion in the middle income household means more people are likely to make a vehicle purchase but for that several factors discussed above need to work in their favor for them to be able to afford their first car.