Stimulus Package : More noise, less action for Auto sector

Parvatha Vardhini C | Updated on August 25, 2019

A lot of announcements have been made on the auto sector, but only a few are significant.

The ongoing slowdown in the auto space can be attributed to regulatory issues ( BS VI ), financing issues ( NBFC crisis) and a rise in transaction costs ( hike in third party-premiums, for instance).

That these issues came at a time when the sector was headed for a cyclical downturn worsened matters for the industry.

Read more: New measures unveiled for auto sector to boost demand

Tight liquidity situation among non-bank lenders after the IL&FS crisis and also the limited transmission of the reduction in repo rates by the RBI to interest on bank loans meant that customers found it difficult to obtain financing for their new vehicle buys.

In this context, it has been announced that to ease up borrowing costs, banks will pass on rate cuts to all borrowers through MCLR reduction and also that banks will launch repo-rate/external benchmark linked retail (including vehicle) loans. Also, the liquidity infusion into public sector banks is expected to indirectly boost lending.

What could help sales is the doubling of depreciation rates to 30 per cent for vehicles (cars are depreciated at 15 per cent currently) bought until March 31, 2020. Given the upcoming festival season, this carrot may nudge the fence-sitters into biting the bullet. But it needs to be clarified if the enhanced rate is only for the first year and if purchases after September 30, 2019 qualify for full year’s depreciation.

Limited impact

Beyond these moves, many of Friday’s measures at best only assuage the negative sentiments, in the hope that it will help kick-start a recovery in new vehicle sales.

The lifting of ban on government procurement of vehicles – predominantly cars – may not mean much for the industry as the numbers are anyway too small. Companies such as Maruti Suzuki and Hyundai may marginally benefit from this.

The announcement on BS IV vehicles purchased until March 31, 2020 to be allowed to be operational for entire period of registration is only a clarification. However, it is not that this was unclear earlier. Following the confusion on whether April 1 , 2017 was the date for start of production or start of sale for BS IV vehicles, the Supreme Court made it clear that April 1 , 2020 would be the start of sale of BS VI vehicles. This mandate remains.

As was the case earlier, customers can buy BS IV vehicles until end-March 2020. While the government may see the clarification as a trigger for improving the demand for vehicles now, the question remains as to whether BS IV vehicles (which will be cheaper than BS VI) will be available until that point in time. If April 1, 2020 is the date to begin sale of BS VI vehicles, surely, auto manufacturers will need to scale down production of BS IV vehicles much earlier. Managing the inventory of BS IV and BS VI vehicles will be a major challenge for auto makers.

The statement that both electric vehicles and fossil-fuel based vehicles can continue to be registered – also a clarification – doesn’t do much to boost demand now as the switch to EVs is still some time away and it is not that customers are postponing purchase of fossil-fuel vehicles due to wait for EVs.

While the proposed hikes in registration fee for vehicles has been deferred till June 2020, it must be remembered that this does not reduce the transaction cost today. The hike in registration was anyways only a draft notification under the Central Motor Vehicle Rules, which was open for comments.

What could have helped reduce transaction costs is the bringing down of third party insurance cover – which was recently made long-term - back to a year. This has not been announced.

Besides, a scrappage policy for commercial vehicles over a certain age would have been what the doctor ordered but it continues to be in the works.

CV sales have been dipping sharply not only due to the economic/cyclical slowdown but also because of the higher utilisation of existing fleet, however old the vehicles may be.

Quicker turnaround times in inter-state transport after GST implementation as well as higher axle load norms have improved utilisation.

Published on August 24, 2019

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