Sustained economic growth is vital for better prospects of the domestic passenger car industry in the long run and to increase vehicle penetration, an ICRA study has said.

The study, conducted by ICRA Information and Grading Services, said lowering excise duties might boost demand in the short term but continued growth of the economy was required to sustain demand in the long term.

"The Union Budget 2003-04 reduced the excise duty by eight per cent on passenger cars and multi-utility-vehicles in order to give a demand impetus to the automobile industry in the near term.

"However, the long-term growth of the automobile industry hinges on sustained economic growth," the INGRES March 2003 study said.

It said the car industry, which has grown since it was opened up in 1993, still fell short on many factors when compared with the global automotive industry due to government regulations and high taxes.

The passenger car and MUV industry having an estimated annual turnover of Rs 23,600 crore (Rs 236 billion) was reeling under pressure of excess capacity and low demand, which picked up in 2002-03 due to attractive finance schemes, price cuts and festive discounts by manufacturers.

However, increased cost of environmental compliance has pushed up production costs thereby putting pressure on margins.