Govt’s stimulus package offers no direct benefit to domestic consumption demand: Bajaj Auto CFO

Nandana James Mumbai | Updated on May 21, 2020 Published on May 21, 2020

Soumen Ray, Chief Financial Officer, Bajaj Auto

The recently-announced government’s stimulus package is not going to directly help trigger domestic consumption demand, said Soumen Ray, Chief Financial Officer, Bajaj Auto. Demand is under severe strain due to the coronavirus pandemic, which is yet another blow to the automobile industry, which was already reeling under a prolonged downturn.

The packages announced lean more towards generating cash flow than expenditure mitigation, Ray told BusinessLine. When it comes to the automobile industry, a reduction in the Goods and Services Tax (GST) rate and in income tax would have had a direct impact on domestic consumption or been of direct benefit to the customer, said Ray. This would have been an incentive as it increases affordability, he said.

“To kick-start consumption, two things are important, one is, affordability — either through the reduction of cost or increase of income — and second, there must be (a sense of) urgency, which would be brought about by a temporary reduction in the GST rate,” he explained. These measures would have acted like a catalyst in terms of kick-starting the domestic consumption, given that the Indian economy is primarily driven by domestic consumption, he added.

The automobile industry was already facing a prolonged downturn even before, due to a slew of factors like liquidity crunch, rise in prices and new regulations, with the pandemic aggravating matters. The automobile industry had reported zero domestic sales and limited exports in April, for the first time in history, as factories remain closed due to the coronavirus-induced lockdown.

“During the time of a crisis like now, when it is important to save the livelihoods of people, it is important that we see how we can directly touch the lives of people (people who have lost jobs). In that, one of the big ways is to trigger domestic consumption demand,” said Ray. For this, the consumer, who creates this demand, has to be given the impression that it makes sense to spend, he pointed out.

He also added that for discretionary purchases, which automobiles are generally considered to be, people will have to be given reasons or incentives to spend at a time like this, when sentiments are muted amid the pandemic. This is also integral for the economy, as the automobile sector is an important contributor, he pointed out.

Ray acknowledged that there have been measures rolled out, especially concerning the important Micro, Small and Medium Enterprises (MSME) segment. “If those sops really reach them and if they are able to retain jobs which they would have otherwise not retained, that will indirectly help domestic consumption. (But) there is no direct benefit which has been given to the average person on the road,” he said.

Reduction in GST

The government should actively consider a reduction in the GST rate, especially in the case of the two-wheeler industry, which has been subjected to multiple stresses like price increases, safety regulations, emission norms, increase in insurance, etc, in one go, he said. If the cost of buying increases by 25-30 per cent in less than 18 months, this will dampen consumer sentiments, he added.

Talking about the demand situation that the sector will be faced with, he said that demand can be driven by two factors. After being under a lockdown for a long time, people may want to make purchases to elevate their mood or as a feel-good factor, he said. Most importantly, the government can insist on social distancing measures, going forward, which will make the usage of public transportation difficult, especially in cities. “Whether people will avoid public transportation because of the fear of infection, or because of the government necessitating social distancing — this may give a spurt to individual mobility.” This will be especially true for two-wheelers, as they are not very expensive in India, he added.

Moreover, in China and Europe, ‘revenge buying’ post the lifting of the lockdown was perceptible. It remains to be seen if a similar trend will be seen in India, he said.

Published on May 21, 2020

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