The return of the Rs5-lakh car
A sudden surge in demand for entry-level cars raises hopes of a 2026 revival. Can the momentum sustain?
Last Updated: Jan 12, 2026, 18:09 IST4 min
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Sales of hatchbacks accelerated after the government cut indirect taxes in late September, pushing quarterly market share higher for the first time in years and forcing automakers to reassess production and marketing plans for 2026.
Hatchback share climbed to 24.4 percent in the December quarter from 23.5 percent in the first nine months, data from Jato Dynamics shows, reversing years of decline that many in the industry had assumed were structural.
India’s largest carmaker, Maruti Suzuki, said mini-car dispatches to dealers jumped nearly 92 percent in December. “Despite that, we have pending bookings of more than 1.5 months in the mini segment,” Partho Banerjee, Senior Executive Officer for Marketing & Sales at Maruti Suzuki, said during a press briefing on January 1. He said Maruti was producing more small cars, but growth would have been higher if it could step up production, a process that will take time.
Only three automakers currently operate in the mini-car segment, defined as vehicles priced below Rs 5 lakh. Maruti Suzuki accounts for most of the category, selling the Alto and S-Presso, alongside the slightly larger Celerio and WagonR, which are also under Rs 5 lakh (ex-showroom) but are classified as compact cars. Tata Motors offers the Tiago, while Renault sells the Kwid.
At Tata Motors, the refreshed Tiago delivered 22 percent growth in calendar 2025.
“After the GST cut, monthly average retail volumes rose by about 50 percent compared with the pre-GST cut period this fiscal,” Amit Kamat, Chief Commercial Officer of Tata Motors Passenger Vehicles Ltd, told Forbes India.
“When we compare CY25 with CY24, Tiago ICE has grown by 34.5 percent, with CNG as the key contributor, while CNG Automatic grew by 41 percent in the same period.”
Renault did not reply to requests for comment.
The Fall
Once the default choice for India’s first-time car buyers, the humble hatchback has been steadily edged aside. Higher taxes and more stringent emissions rules made small cars more expensive, while consumers and automakers have both gravitated towards larger, more profitable sport utility vehicles (SUVs). The shift has left many would-be buyers opting for motorcycles or used cars instead of new ones.
Hatchbacks accounted for over one-third of passenger vehicle (PV) sales in 2021. By 2025, their share had fallen to 23.6 percent, according to data from Jato Dynamics.
Then came the tax overhaul which—automakers agree—reshaped the industry and unlocked demand.
From September 22, the goods and services tax (GST) on small cars was slashed to 18 percent from 28 percent. Prices dropped overnight—by as much as 25–30 percent for models like the Alto and S-Presso—as carmakers passed on more than the GST benefits, leading to a surge in demand.
Whether that rebound hardens into a revival in 2026 is now one of the most closely watched questions in the auto market.
Rajesh Menon, Director General of automakers’ body Society of Indian Automobile Manufacturers (SIAM), said the GST 2.0 reforms have provided a timely boost to the auto sector. “The impact has been immediate and visible, reflected in improved retail activity throughout the festive season, including in the entry-level segments.”
At Maruti Suzuki, which dominates the mini category, the signals have been strong enough to force a rethink. Chairman R C Bhargava told reporters in October that stronger-than-expected bookings could prompt revisions to Maruti’s volume assumptions through FY31. The company could weigh upgrades and additions to its entry portfolio, even as it debates price hikes that could test the segment’s newfound momentum.
Analysts, too, see the tax cut as more than a short-term sugar rush. Puneet Gupta, Director, S&P Global Mobility, argues that the math for first-time buyers has fundamentally changed.
“With the huge GST cuts of 10–13 percent and Maruti Suzuki introducing financing schemes starting from Rs 1,999 per month, there is a strong possibility of mini cars making a strong comeback in 2026,” he said.
Marketing budgets for mini cars, he said, are set to rise sharply in 2026—an unusual move for a segment long starved of advertising attention.
Also Read: Car buyers are trading up after GST 2.0: Mahindra Auto CEO
Entry Again
Tata also sees the entry-level segment reviving. Tata’s Punch—which is a slightly pricier, SUV-styled hatchback but is considered entry-level—finished the year among India’s top 10 best-selling cars.
Dealers, too, sense a shift, albeit a cautious one. Saharsh Damani, Chief Executive Officer of the Federation of Automobile Dealers Associations, says “entry-level demand has picked up over the past three months even as SUVs continue to grow faster.”
The key change, he notes, is that small cars are no longer losing market share—a modest but meaningful victory after years of retreat.
Macroeconomics may yet determine how far the bounce goes. Saket Mehra, Partner, Auto & EV Industry Leader, Grant Thornton Bharat, points to steady rural spending, easing inflation and signs of an interest-rate cut cycle as tailwinds for affordability-sensitive buyers.
“Entry-level is a very sensitive segment influenced by factors like stability of income, pricing and benefits offered by OEMs and the general economic environment.”
A weak monsoon, currency swings or fresh global trade shocks could still upset the trajectory.
Regulation Ahead
There is also a regulatory subplot quietly working in small cars’ favour. Draft CAFE-III fuel-efficiency norms, due in April 2027, will tighten fleet-level emission targets. Lighter vehicles with smaller engines make that compliance math easier. In an industry dominated by bulky SUVs, the humble hatchback suddenly offers strategic value.
None of this guarantees a return to the glory days of 2018, when small cars last had an unambiguous run. Consumer tastes have changed, and aspirational buyers still gravitate towards taller, tougher-looking vehicles. But the GST cut has overhauled the floor of the market, bringing the entry-level car within reach of many.
First Published: Jan 12, 2026, 18:24
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