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Rating agency Fitch has maintained a stable outlook for the auto sector on the back of falling ownership cost due to lower fuel prices and new launches.
"With a consensus expectation of better monsoons this year and new model launches intensifying competition in the passenger car and two-wheeler segments, the agency believes replacement demand will increase, supporting commercial vehicle demand," the report noted.
"In addition, the 23.5% salary hike for government employees will provide a one-time demand boost to all automobile segments."
Industry lobby SIAM, in April, had revised downwards its growth forecast for passenger vehicle sales to 6-8% for the current fiscal, citing high taxation and unfavourable environment around diesel vehicles.
In March too, the Society of Indian Automobile Manufacturers (SIAM) had lowered its growth forecast for 2016-17 to 11%, from the earlier 12%, after the imposition of infra cess ranging between 1-4% in the Budget.
Car sales logged the highest sales growth in five years at 7.8% in 2015-16, driven largely by new model launches and heavy discounts.
Motorcycle sales for the fiscal were down 0.24% to 1,07,00,466 units while sales of commercial vehicles rose 11.5% to 6,85,704 units as against 6,14,948 in 2014-15.
The Fitch report said that between 2010-11 and 2015-16, total auto sales have grown 35% to 24.1 million units.
Of this, domestic sales accounted for 85% and exports accounting for the rest. Rural and middle-income customers drove two-wheeler demand, constituting 80% of domestic sales in the past fiscal.
Out of the total sales, passenger vehicles made up only 13% and commercial and three-wheelers brought up the rest.
Robust macroeconomic expansion last year supported the 7.2% growth in domestic passenger vehicle sales to 2.8 million units, up from 3.9% in 2014-15.