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The outbreak of the Covid – 19 pandemic exacerbated the crisis as it resulted in sudden crash of vehicle sales as customers stopped venturing in dealerships. (Bloomberg)
The outbreak of the Covid – 19 pandemic exacerbated the crisis as it resulted in sudden crash of vehicle sales as customers stopped venturing in dealerships. (Bloomberg)

With no fillip to demand generation, dismayed auto industry stares at an uncertain future

  • The automotive industry registered a double digit drop in sales across categories due to increase in vehicle prices
  • The outbreak of the Covid – 19 pandemic exacerbated the crisis as it resulted in sudden crash of vehicle sales as customers stopped venturing in dealerships

The automobile sector is staring at an uncertain future as the relief economic package announced by the union government may not be able to address the challenges faced by the sector adequately. According to executives and sector experts, the union government has done nothing to stimulate demand at a time when demand for big ticket items like automobiles has crashed due to the Covid-19 induced slowdown.

Also, for the MSMEs in the sector, will not stand to gain much, since most of the money has been given through banks and bulk of these entities may not take loans to pay expenses like employee salaries and invest in new capacities. Also lack of capacity utilization due to lack of demand and increasing fixed cost, in absence of a direct cash transfer, will also increase the financial burden of such entities.

“There is not demand stimulus. We will have to wait and see how the economy grows. For component manufacturers also it will not be an issue if we (OEMs) buy from them. Demand will be the biggest issue," said Vikram Kirloslar, vice-chairman, Toyota Kirloskar Motor.

The automotive industry registered a double digit drop in sales across categories due to increase in vehicle prices because of new emission and safety norms and overall contraction in demand. The outbreak of the Covid – 19 pandemic exacerbated the crisis as it resulted in sudden crash of vehicle sales as customers stopped venturing in dealerships. Subsequently, automakers had to stop their factories and showrooms due to the lock down measures announced by the government.

According to Rajan Wadhera, president, Society of Indian Automobile Manufacturers, the announcements related to the agriculture sector may benefit the auto sector indirectly in the medium term but the automotive industry needed an immediate stimulus to boost demand, which has not happened.

“The sector was already facing an unprecedented challenge with 18% decline last year. As per an assessment made by SIAM on the impact of Covid-19 on demand for vehicles in the current financial year, sales could drop in the range of 22% to 35% in various industry segments, for the year FY21, if the overall GDP growth is around 0-1%," added Wadhera.

Due the drop in affordability of customers as a consequence of the Covid -19 induced economic downturn, sales of big ticket items like automobile is likely to stay subdued. Hence, the auto makers, suppliers and dealers have been urging the government to come up with measures like direct cash transfers, reduction in goods and services tax and an incentive based scrappage policy to stimulate demand.

According to Manav Kapur, executive director, SteelBird International, a component manufacturer, at this point MSMEs needed a package which will help them deal with their manpower costs which is biggest component after raw material cost.

“They have enhanced the loan taking ability of the companies but that will not help, since none one will take loans to pay the salaries. Ideally it should have been directly credited to the accounts. We all have idle capacities and it will be around 50% after the decline in demand this year. Nobody will invest in capex going forward," added Kapur.

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