GST rate cut for vehicles is a low-hanging fruit to drive demand: ACMA President

G Balachandar Chennai | Updated on June 18, 2020

The auto parts industry may see a capex cut of $3-3.5 billion in two years on Covid-19 impact, says Deepak Jain

With the Indian automotive industry expected to hit decadal-low volumes this fiscal due to the Covid-19 pandemic, the outlook for the auto component sector is bleak in the near term. While auto-parts makers across clusters have restarted their operations, challenges remain in scaling up their operations from both the supply and demand sides. Deepak Jain, President, Automotive Component Manufacturers’ Association of India (ACMA), spoke to BusinessLine on what the future for the industry looks like. Edited excerpts:

What are the major challenges you face in Unlock 1.0?

Supply chains are ready. But there are certain complexities. There is a complexity in the labour issue due to unavailability and movement of labour. The social distancing norms on the shop floor are constraining the utilisation levels, and hence productivity suffers. Also, because of certain discretions of the local authorities, sustainable production levels are becoming difficult. This will make operations inefficient and will add to the cost burden. The automotive supply chain is highly complex, integrated, and inter-dependent. If any element in any segment of the value-chain does not commence operations, the entire value chain will not be able to re-start.

Will the government and RBI stimulus measures help component-makers in Tier-II and -III locations meet working capital and cash flow needs?

A significant proportion of ACMA members are small and medium enterprises (SMEs). With the change in the definition for MSMEs, more than two-third of ACMA members will be able to gain these benefits. This has been a long-standing recommendation from ACMA. The Finance Minister and the RBI have done their best to ensure adequate liquidity in the system through collateral-free automatic loans and the subordinate debt scheme to ease the severe challenge of working capital being faced by the sector. Having said that, the government must ensure that the funds made available for MSMEs reach them.

With a weak outlook for OEM, export, and replacement segments, will the auto parts industry go through some structural changes?

The situation in the auto component industry is precarious. The dynamics of the business will change in multiple ways in the future. With vehicle sales declining by 50 per cent compared to those in 2018-19, there will be significant excess capacity in the system. This could lead to some consolidation in the industry. That apart, there will be a strong focus on deep localisation, as the industry strives to de-risk itself from over-dependence on imports. Further, the industry will witness automation/digitisation of shop floors as companies will try to reduce their dependence on people on one hand and adhering to social distancing on the other.

What will the estimated cut in capex/investment of auto parts industry due to the Covid-19 impact?

The demand in the market is still low and the industry is working only on 8-10 per cent of capacity utilisation. The current projection is the auto sale will degrow by 30-35 per cent in this fiscal compared to the previous. Going by the recent year’s growth pattern, the industry used to invest close to $2 billion every year. Considering the muted consumer sentiment and excess capacity in the system, we are not expecting any fresh capacity expansion investments in the component industry and this will be a lost opportunity. The capex cut is estimated at around $3-3.5 billion over two years.

What measures do you think will help stimulate demand in the near term?

We have been talking to the government about temporary interventions, including GST rate reduction. During previous slowdown periods in 2008 and 2014, the government did intervene and so there is historic evidence on government interventions. GST rate cut for vehicles is a low-hanging fruit to drive demand. But we understand that the government is unable to do this due to revenue-related constraints. But a uniform GST rate of 18 per cent on all auto components will help, as there are some components still in the high rate slab. Scrappage policy is a long-pending demand. Another key measure could be to put vehicle loans under priority lending category for a temporary period. Since vehicle loans carry low NPA rates, priority lending tag could be considered as it will help spur some demand.

Published on June 17, 2020

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