The intervention of the central government is needed to at least stop vehicle sales from falling further
In the last decade, there have been precedents of the government stepping in to support the auto industry
Mumbai: Whether you blame it on cyclical factors, liquidity crisis, technological change or weak consumer sentiment, one thing is certain—the auto industry has slipped into a deep gorge. It is high time policymakers take cognizance of this and give the industry a shot in the arm to revive demand for vehicles.
With July auto sales plunging to the worst in two decades, hopes of a revival in the second half of FY20 are dashed. The country’s largest carmaker, Maruti Suzuki India Ltd, posted the steepest fall of 36.7% in sales year-on-year, even as sales of other firms fell by 10-15%. Two-wheeler sales across firms fell 11-15%. Commercial vehicle sales were pathetically low, falling by about 40%.
Amid this gloom, the government’s inaction is glaring. “The industry needs immediate government intervention to spur demand for vehicles as we are unable to see any positivity in the system," said Sugato Sen, deputy director general of Society of Indian Automobile Manufacturers (Siam).
Three-four consecutive quarters of sales and margin contraction have now started denting ancillaries, dealers and other stakeholders. Recently, the Automotive Component Manufacturers Association of India said that a million jobs could be at stake if the slowdown persists.
Siam’s recommendations to the government to lower the goods and services tax (GST) to 18% from 28%, at least temporarily, incentivize scrappage of old vehicles and increase depreciation rate for cars from 15% to 25%, have gone unheard, so far.
In fact, there have been precedents of the government stepping in to support the auto industry. In the last decade, during two instances (2008-09 and 2012-13) when auto sales were hit badly, the government cut excise duty and placed orders for buses through state transport undertakings to support demand.
“Incentives are not uncommon even in developed markets. The ‘cash for clunkers’ offer in the US in 2008-09 that incentivized buyers to scrap old vehicles and subsidize new ones pushed up sales," said Kavan Mukhtyar, partner and leader-automotive at PwC India. Government intervention is needed before there is further deterioration in sales because the auto industry has a multiplier effect on the economy, with linkages to consumer demand and industrial demand, he said.
But leave alone timely help, the government appears to be making things worse through its new rules and regulations for the sector. Hasty regulations and a slew of unexpected policy decisions by various governing bodies and ministries have worsened the crisis. Anant Goenka, managing director of Ceat Tyres Ltd, said the timing of the recent proposal to raise vehicle registration fees is bizarre. When sales are abysmal, hiking registration by 5-10 times is unprecedented and irrational, he added.
Likewise, the increase in vehicle insurance costs and the cess on fuel that have increased the cost of ownership of a vehicle.
The need of the hour is a corrective course of action by the government that will at least stop vehicle sales from falling further.
Also, the government’s thrust is on electric vehicles (EVs), which reflects prioritizing the environment over economic growth.
To be sure, there is nothing wrong in incentivizing EVs through a cut in GST from 18% to 5%. But according to Nilesh Shah, managing director of Kotak Mahindra Asset Management Co.: “Earlier, the country moved from BS I to BS VI in an orderly manner. Now, if regulators aspire to move from third-world to first-world standards of technology and efficiency, it must be done in consultation with manufacturers, financiers, component suppliers, financiers, etc. The income of people, too, has to rise such that demand expands. Aspirations are good, but targets need to be realistic."
In short, the push towards EV may be a tad premature in the Indian context, some argue.
While commensurate income growth did not happen in the last few years, credit lines that drive retail auto demand also dried up with the crisis in the non-banking financial companies industry.
The onus is on the regulators to ensure that repo rate cuts by the Reserve Bank of India purported to enhance credit flow into the system are passed on to end users.
Industry experts say that excessive borrowing by the government is crowding out private borrowers, including retail. Besides, high deposit rates in national savings schemes mean transmission of the central bank’s rate cuts isn’t all that effective.
Meanwhile, auto dealers stuck with high inventory of 40-50 days across segments are staring at losses. With banks demanding 25-30% collateral, along with upfront tax deduction under GST, it has made survival tough for dealers.
Obviously, industry angst is not unfounded. Until a year ago, they were gearing up only for one big cost by way of transition to BS VI emission standards to be implemented by 1 April 2020. As one commercial vehicle maker told analysts recently, BS VI alone will increase truck costs by 15-20%.
Of course, cyclical factors are also at play, aggravated by a deficit monsoon and liquidity crunch in the economy.
Along with industry and consumers, the resulting fall in auto share prices has burnt deep holes in investors’ pockets.
The Nifty auto index has plummeted by 35.4% compared to the benchmark Nifty, which is down 2.2% in the past year.