Insights into Editorial: Symptom as cause: On automobile industry woes
- August 17, 2019
- Posted by: InsightsIAS
- Category: EDITORIALS
Insights into Editorial: Symptom as cause: On automobile industry woes
India’s automobile industry is experiencing a snowballing crisis of demand that shows no signs of abating, leave alone reversing.
Domestic sales across all vehicle categories slid 19% year-on-year in July, as passenger vehicle despatches plunged 31% to register the segment’s steepest fall in almost 19 years.
And with the wheels having come off both two-wheeler deliveries and commercial vehicle shipments, with the former contracting 17% and the latter slumping 26%, the picture is one of widespread gloom.
While the Federation of Automobile Dealers Associations recently warned of more jobs being at risk, on top of about two lakh positions that have already been shed, the Society of Indian Automobile Manufacturers (SIAM) admitted that the industry had laid off at least about 15,000 contract workers in the last three months.
That the broader economy is experiencing a serious slowdown has been evident for some time now and the latest data from the auto sector only bears testament to it.
Liquidity crunch in NBFC Industry: Decrease in Private Consumption:
- The straightforward interpretation of the data is that demand has dried up in all corners and among all key consumer segments of urban, semi-urban and rural and personal and institutional.
- As the RBI acknowledged last week “private consumption, the mainstay of aggregate demand” remains sluggish.
- While some of the factors currently bedevilling demand in the auto sector are well established the liquidity crunch in the NBFC industry and the resultant tightening of credit availability to finance vehicle purchases.
- An increase in up front insurance costs and the 28% GST charged on cars, motorcycles and scooters — the fact that manufacturers overestimated demand when setting up capacity, especially of fossil-fuel powered vehicles, has largely been overlooked.
- For example, Maruti Suzuki, India’s largest car maker, has announced plans to stop selling diesel cars from April 1 as demand has slumped.
- In 2012, the company decided to invest Rs.1,700 crore in a new diesel engine plant in Gurugram, capacity that it now needs to repurpose or idle.
- Simultaneously, the ride-share industry has mushroomed in recent years, especially in urban areas where choked roads and lack of parking space have incentivised rapid adoption of app-based commuting. The outlook too, especially for the near term, looks far from hopeful.
- The Automotive Component Manufacturers Association of India has warned that nearly a million jobs could be lost if the contraction persists.
- For an economy accustomed to high single-digit growth, the travails of its main manufacturing industry have turned business sentiment especially gloomy.
Reasons for this Slowdown of Automobile Industry:
There are several reasons for the famed Indian automobile sector, fourth largest in the world, to experience this unprecedented slowdown.
First, the sector was impacted due to impending general elections, where uncertainty over outcome drove people to postpone vehicle purchases.
Then, a combination of factors worsened the industry’s prospects:
- Severe liquidity crunch due to the IL&FS crisis since late last year and
- A simultaneous increase in ownership costs, an overall weak economy affecting demand and
- Now, severe floods in some key vehicle buying states further hurting demand.
The impending deadline of mandatory transition to the Bharat Stage VI (BS VI) emission norms is another irritant.
To top it all, the face-off between the industry and the policymakers over a proposed deadline to convert some vehicle categories to electric from the present internal combustion engine (ICE) technology obviously did not help either.
The government has been considering a proposal to ban all ICE-driven two-wheelers under 150cc in the next six years and all three-wheelers within four years.
More than three in four vehicles sold in India currently would be impacted if this proposal were to be implemented and the automobile industry has mounted a quiet revolution against this proposal.
According to the Supreme Court of India, from deadline is April 1, 2020 onwards, no motor vehicle following the currently existing BS IV norms will be allowed to be sold across the country.
On the emission transition, the deadline is April 1, 2020 and this too is a major pain point for vehicle makers.
Bajaj Auto, the second largest two-wheeler maker in the country, has described this mandatory transition to BS VI from next fiscal as the “joker in the pack” while providing a positive outlook for its business in the current fiscal.
- However, it is difficult to anticipate the state of BS VI readiness of our competitors. If some, or most, of them have a large stock of unsold BS IV vehicles in the second half of FY2020, they will perforce have to dump these in the market before the advent of 1 April 2020.
- That could trigger an unwarranted price war, to the detriment of all. We cannot claim that such a scenario will definitely play out; equally we cannot ignore a distinct risk overhang on that account.
- This scenario will likely play out for other vehicle categories too, making the industry even more competitive than it already is and skewing price points.
The chairman of Maruti Suzuki India, has already said that his company’s decision to stop producing vehicles with up to 1.3 litre diesel engine capacity was taken keeping in mind the rising cost of compliance with newer emission norms.
Fall in Farm Incomes And Its effect on Rural Demand Creation:
It all started with agriculture from around mid-2014. Global agri-commodity prices crashed, it led to a collapse in export demand for Indian farm produce and simultaneously its increased vulnerability to imports.
The problem became serious during the past three years or so. Consumer food inflation during the past 34-months ruled below general retail inflation level and averaged just 1.3% year-on-year.
This resulted to automobile sector also. India’s famed automobile sector has been hit by a severe slowdown for many months now and its unprecedented sales decline has ceased to surprise. The latest numbers have instead begun raising severe concerns.
Arguments from Industry to revive the growth:
SIAM has already sought a GST relief coinciding with the implementation of the new emission norms to prevent a further slide in vehicle sales.
On the tight deadline for transition to EVs too, the industry appears up in arms and a solution to this prickly issue seems difficult at the moment.
The government has mitigated some concerns by lowering GST on EVs and on the other nagging issue – lack of liquidity too – it seems to be making some moves. But the industry expects a comprehensive “revival” package to emerge from the present slowdown.
This includes lowering insurance costs, putting in place a scrappage policy for phasing out older vehicles and slashing GST rates across vehicle categories.
In commercial vehicles, the economic slowdown has coincided with an increase in freight carrying capacity of trucks, which led to a sharp fall in sales as fleet owners could carry more freight on their existing trucks.
Lower demand from agriculture and other sectors also contributed to the weak market as fleet owners witnessed a drop-in rental.
Will the government listen to the industry’s woes, given its own fiscal troubles? This remains to be seen.
If half the manufacturing GDP of the country is in doldrums and declining sales of cars, two wheelers and trucks will result in lower GST collections, the government’s already precarious fiscal math could worsen further in 2019-20.
There’s a combination of frequent changes that led to this slump. Higher and non-standard road taxes, which have been too frequent and inconsistent have led to auto-makers having to increase prices of vehicles.
Apart from this, the ever-rising GST on automotive parts and vehicles has also added to the woes of the industry. This has eventually led to customers shying away from buying these vehicles and a downturn in sales.
The RBI’s July round of its Consumer Confidence Survey, which reflected a decline in consumer confidence in July, shows 63.8% of respondents expect discretionary spending will stay the same or shrink one year ahead.
In June 2018, the comparable reading was 37.3%. The onus now lies on the government to urgently formulate policy interventions to address this sectoral crisis or risk wider contagion. Reviving the automobile sector should, therefore, become one of the top priorities of the government.