Manufacturers hope for the best after FM meeting

Murali Gopalan | Updated on: Aug 09, 2019

They would welcome a GST reduction but that does not look likely

The auto industry will be hoping for some good news after Wednesday’s meeting with Finance Minister Nirmala Sitharaman and other ministry heads. The auto side had representatives from vehicle manufacturers, ancillary suppliers and dealers during this session.

The good thing, according to sources, is that the Centre now knows that there is a serious problem on hand and is keen on resolving it to the extent possible.

The downside is whether the help rendered eventually will be adequate to pull the entire automotive ecosystem back from the brink. After all, the situation on hand is rapidly spinning out of control with thousands of layoffs happening in plants and dealerships. Nearly 300 dealers have already shut shop while this would well be replicated with smaller suppliers struggling to stay afloat. Vehicle-makers are announcing shutdowns almost every month on an average, which pretty much puts the crisis in perspective. For now, it looks as if the Centre can set in motion one part of the solution, which is to make finance more accessible in the coming weeks. NBFCs are just not lending, which means that those interested in buying a car or motorcycle are finding it increasingly hard to get a loan.

This may well change soon, according to a section of industry stakeholders who were present at the meeting. “The feeling we get is that lending will get a boost soon,” says an official. This is welcome news but may not be quite adequate to set the wheels in motion quickly.

The bigger need of the hour, he adds, is to reduce the GST levels to 18 per cent from the present 28 per cent. Any price cut is enough to entice buyers to showrooms and bring the mojo back into the overall system. However, it is not entirely clear if the Centre would be inclined to obliging the industry with this slash in tax.

GST equation

After all, GST collections are critical to keeping the fiscal deficit in control and any further cuts may just end up becoming a risky proposition. Yet, from the auto industry’s point of view, it is still worth it since the higher volumes will more than make up for any revenue shortfall.

And it is not as if this has not been attempted in the past. The 2008 Lehman crisis had the world in a state of paralysis but India managed to weather the storm quite effectively thanks to timely intervention by the Centre. The UPA was then at the helm of affairs and excise duties were brought down by four percentage points across vehicle segments.

Consequently, demand soared and there was no serious setback in market consumption. It was a tricky situation across the world but India stuck its neck out and ensured that it stayed afloat without any risk of imploding. Those were difficult times with crude oil prices also soaring to levels of $150/barrel but the country managed to hang in there and fight it out.

Industry observers believe that the present BJP government at the Centre can, likewise, take a chance and reduce the GST levy to 18 per cent. After all, this is a prolonged slowdown that has lasted a year now without any signs of an immediate recovery. The auto industry has also invested big time in technology to meet the new frontier of Bharat Stage VI emissions, which come into play in early 2020.

Till about a year ago, the mood was quite gung-ho with manufacturers reasonably confident that there would be some brisk pre-buying before BS VI. After all, they reasoned, customers would rather buy the current range of BS IV vehicles instead of the more expensive BS VI range. Nothing of the kind has happened with the entire automotive ecosystem now in a state of total despair.

Major problem at hand

Perhaps some manufacturers paid the price for dumping excessive stocks during the festive season last year anticipating huge demand. When this did not happen, they realised that there was a big problem on hand. Companies with effective inventory management did not suffer as much but others, especially in the two-wheeler space, were not as fortunate.

Today, with job losses mounting by the day across the supply chain, the situation is rapidly spinning out of control and this is where Government intervention is absolutely mandatory. How this pans out in the coming weeks remains to be seen but clearly, urgent remedial measures are the need of the hour. Customers will have to be drawn back to showrooms, which means that the incentives on hand need to be generous enough.

In this backdrop, manufacturers may be justified in feeling that they have been getting the raw end of the stick more often in recent times. The hike in insurance costs last year was steep enough for two-wheeler buyers to take a pause and steer clear of showrooms for a while. Then came the liquidity crunch even while manufacturers were grappling with the challenges of higher input costs.

Electric question

Things did not quite improve with the Centre’s decision to focus solely on electric and dole out a host of incentives in the Budget. It is not as if the auto industry does not support the cause of clean air but companies were quite right in saying that there was no point giving the cold shoulder to the internal combustion engine (ICE) in the process. This was made evident in the meeting between two-wheeler companies and the Centre’s policy think-tank, Niti Aayog, some weeks ago, when the message that came in loud and clear was that two-wheelers under 150 cc would have to go completely electric by 2025. Given that this product space accounts for over 85 per cent of sales, this was clearly a tall order especially with considerable investments already made for BS VI.

Additionally, two-wheeler makers export ICE products and such a directive would result in a competitive advantage being lost. More importantly, the new BS VI regime would in any case cut down on emissions and could comfortably coexist with electric options. It looks as if the issue has been put in cold storage for now but the entire exercise clearly indicated that there were too many arms of the Government speaking in different voices. The auto industry now has to deal with the ministries of heavy engineering, power, petroleum and finance in addition to Niti Aayog. Obviously, this will mean a host of opinions from different heads at a time when policy consistency is far more important.

From the industry’s side too, there are different bodies like the Society of Indian Automobile Manufacturers (SIAM), the Automotive Component Manufacturers Association of India (ACMA) and the Federation of Automobile Dealers Associations (FADA). It is not entirely clear if divisions persist within each of these associations. Purely, from a hierarchical point of view, SIAM is on top considering it represents the OEMs with both ACMA and FADA next in line. Again. within SIAM, there are a host of members across vehicle segments and consensus may often end up becoming a challenging proposition.

By the end of the day, government and industry must work hand-in-hand even though it is not the easiest of tasks in the Indian context with myriad ministries to deal with.

Yet, for a country which is a potential force to reckon with in the global automotive arena, all stakeholders must put their best foot forward and ensure that there is a pragmatic goalpost ahead that is devoid of any needless disruptions. For now, however, the industry would rather have a lifeline thrown quickly to pull it out of the abyss.

Published on August 09, 2019
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