Small cars hit a steep decline as SUVs shift gears, leaving hatchbacks in the dust

Small cars are stumbling downhill, posting their steepest sales decline in recent times last fiscal even as demand for more premium SUVs rose in double digits, reflecting the growing divide between entry-level buyers and more affluent consumers.

Absolute volumes of compact cars, or hatchbacks, fell 13% year on year to just about one million units in FY25 - less than half of SUV sales of about 2.35 million units, industry data accessed by ET showed. SUV sales rose 10.2% on year.

Hatchbacks' share in the overall passenger vehicle market fell for the fifth straight year to a new low of 23.4% in FY25. Annual small car sales have tumbled 35% from a peak of 1.58 million recorded in FY18, signalling continued fiscal constraints in low-income households.

However, industry executives are not writing them off even as they expect SUVs to continue to drive overall sales growth in the near future.

Tarun Garg, chief operating officer (COO) at Hyundai Motor Company, said the income-tax incentives announced in the budget should support demand at the affordable end of the market as it "will put more money in the hands of buyers."

But with compact SUVs like Hyundai Exter and Tata Punch in the fray, this uptick may not remain limited to the hatchback segment.

"While there are a lot of challenges, there are some positives coming in," Garg told ET.

He expects a positive cycle to start in the next 3-4 months.

The government in the budget increased the nil taxation threshold to ₹12 lakh income from ₹7 lakh earlier. This move will benefit 10 million people who can save between ₹20,000 and ₹80,000 per year on taxes they paid till last fiscal.

"Some people have written off small, entry-level cars. But despite the rising popularity of SUVs, the WagonR has maintained its leading position," said Partho Banerjee, senior executive officer (marketing and sales) at Maruti Suzuki. He agreed that customers' growing preference for SUVs had led to a change in the structure of the local market.

The country's largest carmaker saw nearly 28% of its FY25 sales come from SUVs, up from 21% in FY24. It plans to strengthen its portfolio with the e-Vitara SUV.

Banerjee said Maruti Suzuki will offer a range of options to meet varied needs. "India is a big country and there will be customers who will like different forms (hatchbacks, sedans, MPVs, SUVs, vans). We need to give the customer the option to decide instead of pushing one form factor (SUVs) or one technology," he said.

A key reason for the fall in sales of small cars is a 30-40% jump in their prices over the past 5-6 years due to changes in safety and emission norms, according to V G Ramakrishnan, managing partner at management consultancy Avanteum Advisors.

At the same time, disposable income of people who used to buy them was hit by high inflation and low single-digit rise in incomes, demonetisation and implementation of GST, he explained. "These customers could no longer afford cars and those who could wanted biggish vehicles," Ramakrishnan told ET.

The overall industry consensus is that SUVs will continue to drive market growth.

"SUVs, CNG, and EVs will remain key growth drivers, fuelling the industry's expansion," said Shailesh Chandra, managing director of Tata Motors Passenger Vehicles.

Varinder Wadhwa, vice president, (sales, service, used car business and profit enhancement) at Toyota Kirloskar Motor (TKM), said, "MPVs and SUVs will continue to lead growth in the industry."

TKM is investing ₹3,300 crore to enhance capacity by 100,000 units per annum in Karnataka to meet demand for its range of SUVs and MPVs. "We are in the process of commissioning a third plant in Bidadi to reduce the waiting period on our products like Fortuner, Hycross and Hyryder," Wadhwa said.

Post commissioning, the company can manufacture 442,000 units annually in Karnataka, he added.