Small cars are increasingly slipping out of reach for the average Indian household. R C Bhargava, Chairman of Maruti Suzuki India Ltd, and a venerated voice in the automobile industry, recently sounded the alarm. “Around 70 per cent of India’s population currently lacks access to an affordable upgrade from two-wheelers to safer and more comfortable cars. They remain dependent on two-wheelers for an extended period simply because no viable alternative exists.” Laying bare a reality, many industry watchers have seen unfolding in recent years, he threw the harsh spotlight on a rapidly widening affordability crisis.
For a long time, the market has been skewed towards small car segments including micro, mini and compact vehicles whose lengths vary from 3.2 to 4 metres which have, predictably, drawn the most action from original equipment manufacturers (OEMs). In recent years there has been a major shift in consumer preference, especially in urban centres. Today, the utility vehicle (UV) market, encompassing SUVs, MPVs, and MUVs, is more than twice the size of the passenger car segment. Lately, the passenger vehicle market has seen more new launches in the UV segment. More UV models are being lined up, while many OEMs have exited the small car market.
The price of progress
For decades, small cars served as the first rung on the ladder of personal mobility for millions of Indians. Iconic models like the Maruti 800 and Alto were more than just vehicles. They were symbols of progress, aspiration, and newfound independence. These compact cars bridged the gap between two-wheelers and full-sized automobiles, making car ownership accessible to India’s vast lower and middle-income population. Automakers like Hyundai with its immensely popular Santro, and Tata Motors through models like the Indica, further fueled this revolution. Together, these companies democratised mobility, offering reliable, affordable four-wheelers that brought millions into the formal automotive fold. For many, owning a small car wasn’t just a purchase. It was a milestone. However, that segment is now crumbling rapidly.
Regulatory tightening-such as the introduction of Bharat Stage VI (BS-VI) emission norms and mandatory features like airbags, ABS, crash compliance, and rear sensors-has significantly increased the price of entry-level cars. While these new norms have undoubtedly made vehicles safer and cleaner, they have also pushed the prices of entry-level cars beyond the means of millions. What once cost Rs 3 to 4 lakh now starts at approximately Rs 6 to 7 lakh or more. This shift places new cars out of reach for a large section of the population.
Nearly 200 million Indian households earn Rs 5–6 lakh or less per year. For these families, even a car that starts around Rs 6 lakh is a financial stretch, let alone the Rs 10 to 15 lakh SUVs that now dominate dealership floors. The government’s noble push for cleaner and safer vehicles has come with an unintended consequence, making cars unaffordable for the masses.
A two-wheeler-dependent nation
Today, India’s roads are ruled not by compact hatchbacks, but by two-wheelers. Last year alone, India sold over 20 million two-wheelers, said Bhargava. The number continues to rise not because people prefer them, but because they have no choice. The two-wheeler has become the default for millions who can’t afford a car, despite the inherent safety disadvantages and limited functionality.
This is an issue that cannot be addressed by the market alone. Government intervention is essential. If the right measures are taken, this segment has the potential to become a very large market in India. “If we don’t create an upgrade path for these consumers, the car market simply won’t expand,” he warned. Unless an affordable and safe alternative is created, India risks creating a dual-speed mobility market – one where only the relatively affluent get to enjoy the safety and comfort of a four-wheeled vehicle.
Japan’s K-car model
India’s mobility conundrum is not without solutions, explained Bhargava. Japan faced a similar situation decades ago and responded with the introduction of Kei cars, ultra-compact, low-tax vehicles built under relaxed regulations. These small, nimble, and efficient cars became a massive success, helping millions transition from motorcycles to cars. Could India adopt a similar framework? He said that for car sales to revive, small cars would need to become more affordable for the income groups that typically purchase them. He added that this would require two things: lower taxes and reduced regulatory costs, both of which are necessary.
Taxation trouble
If one looks at the tax rates, the GST applied on cars in India varies based on several factors, including the vehicle’s length, fuel type, and engine displacement. For cars in the sub-4 metre segment, those powered by petrol, CNG, or LPG engines with a displacement of 1200cc or less attract a GST of 28 per cent plus a compensation cess of 1 per cent, totaling 29 per cent. Diesel cars in this segment, with engine displacement of up to 1500cc, incur a slightly higher rate 28 per cent GST and a 3 per cent cess bringing the total to 31 per cent. For vehicles with petrol engines exceeding 1200cc or diesel engines over 1500cc, a significantly higher rate applies-28 per cent GST plus a 15 per cent compensation cess, totalling 43 per cent. However, cars that are over 4 metres in length and have larger engines fall into even higher tax brackets. Petrol cars over 1200cc and longer than 4 metres attract a total tax of 50 per cent (28 per cent GST + 22 per cent cess), while diesel vehicles over 1500cc in the same size category are taxed at 48 per cent (28 per cent GST + 20 per cent cess).
Special tax rates are levied for some SUVs, which for GST purposes are defined as vehicles with a length greater than 4000 mm, engine capacity above 1500cc, and ground clearance of at least 170 mm. These SUVs attract the maximum applicable rate of 50 per cent (28 per cent GST + 22 per cent cess). In contrast, electric vehicles benefit from a concessional GST rate of just 5 per cent, with no compensation cess applicable.
SUV: the new face of India’s car market
While the small car segment is in decline, another trend is rising sharply: the domination of utility vehicles (UVs). In FY25, the UV market (encompassing SUVs, MUVs, and MPVs), captured a record 65 per cent share of the passenger vehicle market. SUV sales alone surged to 55 per cent, a monumental jump from just a few years ago. Conversely, hatchbacks, which once accounted for nearly half of all car sales, have seen their share collapse to just 23.5 per cent in FY25, down from 46 per cent in FY19. This is more than a shift in consumer preference; it’s an economic signal. Wealthier buyers, unaffected by price hikes, are flocking to premium models, while the less affluent are priced out altogether.
Even within the budget-conscious crowd, there’s a visible drift. Many consumers now prefer buying a used car from a higher segment rather than shelling out a similar amount for a new, lower-end model that no longer offers value for money. With urban chaos and environmental strain, SUVs have become more popular than smaller cars in India due to factors such as greater safety, comfort, road presence, and versatility. These vehicles are particularly appealing for their higher ground clearance, commanding driving position, and ability to handle poor road conditions. These are features that resonate strongly with Indian buyers, especially in regions with uneven or underdeveloped infrastructure.
However, this surge in SUV ownership is also posing significant challenges for urban infrastructure across major Indian cities. Urban centres in India were primarily designed during an era when compact hatchbacks and sedans dominated the roads. The rapid influx of larger vehicles is putting considerable pressure on public amenities especially parking and road capacity. Narrow residential lanes and limited public parking spaces, already stretched by high vehicle density, are now increasingly overwhelmed by these bulkier vehicles. This has resulted in heightened congestion, reduced manoeuvrability in traffic, and an overall decline in urban mobility efficiency.
From an environmental perspective, the growing dominance of petrol/diesel-powered SUVs runs counter to India’s climate and sustainability goals. These vehicles often come with larger engines, higher fuel consumption, and increased greenhouse gas emissions compared to smaller, more efficient cars. While there are strong policy-level initiatives aimed at decarbonising transport such as lower GST rates on electric vehicles, subsidies under the FAME (Faster Adoption and Manufacturing of Electric Vehicles) scheme, and expanding EV infrastructure, the popularity of internal combustion engine (ICE) SUVs persists. This is partly because the ecosystem for electric mobility and alternative fuel is still developing, making conventional fuel-powered SUVs a more practical choice in the short term.
EVs rise, but affordability remains elusive
While the rise of electric mobility promises significant environmental benefits by reducing pollution, it is yet to offer meaningful relief to the millions of households still waiting for an affordable transportation solution. Most electric vehicles currently available in the market belong to premium or high-priced segments, making them inaccessible to the average consumer. Although the recently concluded Bharat Mobility Global Expo 2025 in New Delhi showcased a promising lineup of upcoming electric models, many of these vehicles are still expected to be priced above Rs 10 lakh. As a result, the gap in affordable, clean mobility options for lower- and middle-income households remains largely unaddressed.
The slowing growth
This growing disparity is already impacting the industry’s momentum. Although total passenger vehicle sales surpassed 4.3 million units in FY25, the sector’s growth has decelerated sharply slipping to just 2.5 per cent, compared to 8.4 per cent in the previous year. The slowdown has been attributed to a high base effect, a mix of external challenges, and persistent affordability issues, particularly in the entry-level car segment. While the UV segment recorded robust growth of 11 per cent in FY25, the passenger car segment saw a sharp 13 per cent decline. Without broad-based participation from the lower-income segments, sustainable long-term growth looks unlikely. Unless the industry recalibrates towards inclusivity, car ownership risks becoming an aspiration only for the upper middle class and beyond.
If India’s car market continues to be driven by a narrow, affluent segment, the long-term implications for the auto industry could be severe. As Bhargava cautions, “If the market continues to be limited to a small segment of households, car sales electric or otherwise—will grow slowly.”
The auto sector is one of India’s largest employers and a key pillar of its manufacturing economy. If the small car segment withers, it doesn’t just spell trouble for manufacturers. It endangers the future of domestic mobility, employment, and industrial growth.
There’s also a geopolitical dimension. With the domestic market losing momentum, exports have become a crucial buffer for manufacturers. But as Bhargava points out, relying solely on overseas sales is risky. Long-term growth must include the domestic base and that means reigniting the small car engine.
Reigniting the engine
To revive small car sales, Bhargava argues for decisive government intervention: lower GST rates for compact cars, differentiated regulatory norms like Japan’s K-cars, and incentives that directly benefit first-time buyers. Without these, India risks creating a deeply divided automotive market booming at the top, barren at the bottom.
The current policy path is pushing carmakers to follow the money and that’s in high-end SUVs and electric vehicles, not affordable four-wheelers. But while the top of the pyramid grows, the base remains fragile.
If India wants its mobility story to be inclusive, sustainable, and globally competitive, it needs to bring its small car dream back to life. Otherwise, millions will remain stuck in traffic not on the road, but in an economic bottleneck with no safe way forward. -From Our Editorial Team n
