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Small cars in India are losing popularity due to rising costs, stricter regulations increasing prices, and a widening gap compared to two-wheeler affordability; consumers are shifting towards pre-owned premium cars and feature-rich compact vehicles, with SUVs gaining significant traction; Maruti Suzuki hopes for a small car market revival with potential policy support.
Customers are increasingly ready to settle for a pre-owned premium car rather than buy an entry-level one. Parallelly, prices have gone up across segments. That has led auto-makers such as Maruti Suzuki to press the brakes on augmenting their capacity for building small cars, explains Swaraj Baggonkar
l Why are small cars losing their charm?
NOT TOO LONG ago, India was the biggest producer of small cars in the world, satisfying the aspirational and practical needs of buyers. Over time, this demand has evaporated and in just 5 years the share of entry-level small cars slumped to 3% from 14%. Historically, a major chunk of buyers opting for entry-level cars have been two-wheeler buyers. While a two-wheeler served the needs of an individual user, the car was considered to be the natural progression.
Since 2018 the gap between the two-wheeler and the entry-level car has only widened. A Hero Splendor (100cc) in 2018 cost Rs 56,000 while a Maruti Alto cost Rs 283,000, a gap of Rs 227,000. However, in 2025 this gap expanded by 50% to Rs 346,000 as the Alto now costs Rs 423,000 while the Splendor costs just Rs 77,000.
The price of fuel (petrol) has also gone up by more than 30% during the same period; deterring two-wheeler owners from progressing to cars. Besides an increase in the cost of maintenance of a car, the rate on interest on auto loans has also inched up to 10.15% from 8.2% in 2018.
l Why have companies stopped bringing out new small cars?
THE MULTIPLE CHANGES in the regulatory norms for vehicles adopted by India in the last 6-7 years. These stringent norms are related to emission and safety. These changes have been the primary reason behind the jump in vehicle costs besides increase in insurance costs. Six airbags, safety sensors, anti-lock braking system, to name a few, have become standard on all car models. Besides, new car buyers now have to compulsorily buy insurance for 5 years at one go which adds to the overall cost. The portfolio of many global car companies does not include entry-level small cars. Therefore, such cars and engines need to be developed from scratch which entails significant investment. Since the margin on such vehicles are relatively wafer-thin, companies typically tend to avoid investing in this segment. Volkswagen intended to rely on Suzuki for cracking the small car segment. Even after the deal fell through, VW continued to struggle having a small car for India.
l Where have customers veered to?
ONE PART OF the market space of new small cars has been occupied by used cars while the other part consists of premium but more powerful compact cars. In both cases, the buyer gets a rich array of tech-enabled features that makes the vehicle more attractive than an entry-level car with no bells and whistles.
The boom in the new car market over the last five years has driven up the availability of cars in the pre-owned space. A less-driven, optimally maintained, used car today costs as much as an entry-level car.With significant income growth across segments, customer aspirations have also changed. Higher disposable incomes and easy access to auto loans are bringing more expensive cars within the reach of customers.
This has pushed up the desire to own premium cars. The average cost of a new car has moved up to Rs 11-12 lakh now from Rs 6-7 lakh around eight years ago.
l Is vehicle form factor also at play?
THE POST-PANDEMIC RECOVERY saw a significant tilt in demand towards sports utility vehicle (SUV), not just in India but across all major auto markets. Powered by such SUVs, the utility vehicle (UV) segment clocked more than double the volume recorded by passenger cars at 2.79 million units during FY25, capturing 65% of the domestic passenger vehicle market. Hyundai Creta, Tata Nexon, Maruti Vitara, Kia Seltos have enticed customers with their design and styling.
With the rapid shift of demand towards premium and large vehicles, several global manufacturers like Volkswagen, Skoda, Honda among others have questioned the continuity of India’s 4-meter tax structure. This rule allows only vehicles shorter than 4 meters (and with petrol engine of up to 1,200cc and diesel engine of up to 1,500cc) to enjoy a lower GST plus cess of 29% whereas for all other cars it surges up to 50%.
l Is there a future for small cars?
MARUTI SUZUKI CHAIRMAN RC Bhargava said recently that 88% of the Indian households can’t afford a car. “People in the lower-income households, comprising a bulk of Indians, have dropped out of the market because the overall the prices have gone up so sharply,” said Bhargava.
He further advocated for policy intervention citing the success of Japan’s kei cars which enjoy a differentiated tax structure. “We need something similar in India if we want the small car market to thrive,” he said. Kei cars (3.4-meter length) are four-seater mini cars measuring only slightly longer than the now-phased out Tata Nano (3.1 meter). Kei cars are tiny and affordable and easy to park.
While most carmakers such as Kia, Hyundai, MG Motor, Honda, Toyota, are not interested in entering the small car space, Maruti said it is hoping for a revival in demand for such cars in 2026-27. It is also working on at least one compact car project.
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This article was first uploaded on April thirty, twenty twenty-five, at forty-five minutes past seven in the evening.
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