Construction equipment industry faces GST headwind

Vipin Sondhi has every reason to be concerned with the paltry 5 per cent growth projection for the construction equipment industry in 2017.

“This number is way too little,” says the Managing Director & CEO of JCB India. “It is only when a machine is sold that will it be used for digging earth and if this means only 5 per cent more, it is just not good enough.”

For an industry that has already gone through a torrid time between April 2012 and September 2015 when growth plummeted, this means revisiting an unwelcome phase all over again. It was only last year when the revival process began and sales were getting back to 2011 levels. Since then, the construction equipment sector has been hit by a series of headwinds, with the most recent being the Goods and Services Tax that came into effect last month.

Sondhi makes it clear that he is all for GST, which “is the right thing to do and a great step forward from the viewpoint of tax reforms”. Yet, what took his industry by surprise was the move to classify it under the 28 per cent levy.

By and large, construction equipment has been attracting 18 per cent duty across different parts of the country and the move to impose 28 per cent GST has been a shocker of sorts. As the JCB India chief says, this has come at a time when a lot of investment has gone into manufacturing of technological construction equipment. By the end of the way, all this will be used for creation of infrastructure where a hefty levy hardly helps the cause.

Obviously, this will have to be passed on and will definitely hurt the end user who is not affluent by any stretch of imagination. “These are people who rent equipment, get loans from banks and pay EMIs,” he says. It remains to be seen if the Centre will relook at a lower GST levy for construction equipment since this is an imperative to stimulate growth.

It was only some months prior to this that another unexpected challenge erupted in the form of the Supreme Court verdict on Bharat Stage IV norms. This happened in end-March when the automotive industry was directed to clear up its BS III stocks over the next couple of days and ensure that only BS IV vehicles were sold from April 1.

While this directive only extended to cars, trucks and two-wheelers, for some oddball reason, the construction equipment industry as well as tractor makers found themselves trapped in this crossfire. As Sondhi recalls, this lasted a good 45 days simply because nobody had a clue about the rules. In reality, both construction equipment and tractors do not have a roadmap for BS IV and, to that extent, can legally stick to BS III-compliant products. While 65 per cent of the RTOs had no issue, the problem lay with the remaining 35 per cent, who refused to register sales of either tractors or construction equipment. Things now started to look tricky and the only way out was to seek the Supreme Court’s intervention to end the impasse. Had this not happened, things could have got worse with dealers getting increasingly edgy.

Today, all’s well that ends well but for construction equipment (and tractor) makers, this has been a case of once bitten, twice shy. They had no desire to go through an encore and, keeping this in mind, are now keen on jumping directly to BS VI. However, Sondhi cautions that the industry will need a four-year window from the date of notification to undertake this challenging task.

There are discussions underway with the Ministry of Road Transport and Highways and, hopefully, there will some light at the end of the tunnel soon. Should the notification be issued during the course of this year, the construction equipment industry is confident that it will have BS VI-compliant engines over the next four years. In other words, it will be one big jump from BS III but the key remains the date of notification.

Sondhi reiterates that the right fuel should also be available by this date to ensure that engines do not pack up. “These machines work in very difficult conditions and the refined BS VI fuel should reach a village in Rajasthan or Madhya Pradesh without a hitch,” he says.

The transition will also see a change from mechanics to electronics where the entire supply chain will also go through a makeover in terms of service network and dealers. “The exercise will be heavy on investment, supply chain and training, which means we need to prepare ourselves for some hard work ahead,” adds Sondhi.

From the construction equipment industry’s point of view, the only sector that grew last year was roads and highways. The JCB India chief believes at least two more have to come on stream to ensure sustainable growth. The first is the railways where there has been some progress but it still needs to “break free” for big growth. The other is irrigation where it is now getting increasingly clear that the country just cannot continue to depend on the monsoons year after year.

“We have to ensure that there are irrigable areas such as canals, rivulets and ponds to ensure better distribution of water,” he says. Telangana started desilting village ponds last year, which was a good start. Andhra Pradesh, likewise, has been proactive with Maharashtra showing some interest too. However, this needs to be a countrywide approach where “more earth needs to be dug for asset creation”.

Beyond the railways and irrigation sectors needing to fire on all cylinders, the real estate sector has to get back on track. In the meantime, Sondhi knows only too well that the show must go on at JCB in terms of new products and expanding capacity.

The company’s exports account for 20 per cent of production and this component could gradually increase with new regions like Myanmar now coming under the JCB India fold. Whether this will translate into more opportunities deeper into ASEAN remains to be seen even while there have been talks of better road connectivity to these countries from India.

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