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    View: Tackling India’s auto slowdown

    Synopsis

    An industry neutral booster of lower corporate tax, announced last week by finance minister Nirmala Sitharaman, will improve the ability of corporates to invest.

    Auto-mobile-Reuters
    By Ritesh Kumar Singh

    India is witnessing the worst kind of slowdown in its automobile industry amidst slowing economic growth and increasing cost of vehicle ownership. Given its strong backward and forward linkages with other industries and services, slump in the sales of cars and bikes will pull down many upstream and downstream industries and services including parts and components, steel, tyre and retailing, among others.

    That will deepen the economic crisis with the country’s GDP growth already down to 5% in April-June quarter. No wonder, there is a growing clamour for tax cuts and other stimulus measures.

    An industry neutral booster of lower corporate tax, announced last week by finance minister Nirmala Sitharaman, will improve the ability of corporates to invest. However, high GST and cess will continue to put the automobile industry at a disadvantage. Moreover, the package doesn’t address the problem of demand deficiency that calls for deeper cuts in GST that will make bikes and cars cheaper, and possibly personal income tax cuts that improve buyers’ ability to buy.

    India’s automobile industry accounts for 49% of the country’s manufacturing GDP, and it directly and indirectly employs 37 million workers. According to the Society of Indian Automobile Manufacturers (SIAM), 3,50,000 jobs (mostly contractual) have been lost and over a million are at a risk due to plant shutdowns and bankruptcy of dealers and component makers.

    The sales of passenger vehicles fell for the tenth straight month in August by a whopping 31.57% over the same month last year. The slump in automobile sales is quite pervasive globally. However, India has local factors to add to its woes. Among them, bad regulations top the chart.

    Indian government has provided protection to the automobile industry from imports and helped expand it substantially, but it has started to squeeze it for meeting tax-expenditure gap. The auto sector contributes roughly 15% to GST collection. It attracts the highest GST slab of 28% and the imposition of additional cess pushes the effective taxation to a whopping 50%. India’s excessive steel protectionism is artificially jacking up input cost for this steel intensive industry.

    Further, the upward revision in road and registration charges by state governments are making vehicle ownership unaffordable as rightly highlighted by the Maruti chairman. If that was not enough the decision to not buy Iranian oil and supply disruption in Saudi Arabia following the attack on Aramco facilities, will push up fuel prices and play spoilsport for the automobile industry.

    With government reducing GST on electrical vehicles to 5% while leaving those on conventional vehicles untouched, the relative tax gap between the two categories goes up. That will further reduce the relative attractiveness of diesel and petrol vehicles and add to misery of their manufacturers. That will cost thousands of jobs.

    That is not all. The rush to adopt emission standard BS-VI from BS-IV is making things difficult. As only BS-VI compliant vehicles will be allowed to register from April 1 next year, prospective buyers want to wait till the very end for hefty discounts on BS-IV vehicles or better buy BS-VI as resale value of BS-IV vehicles is likely to take a hit once new emission norms are enforced. Besides, the adoption of BS-VI – needed to reduce air pollution – will increase the cost of vehicles and further depress demand.

    Rapid expansion of metro trains further reduces the demand for cars. Even those who want a car can easily go for Ola or Uber, amidst the ever-increasing hustle of navigating traffic and shortage of parking space. To add to that, insurance premiums have gone up substantially. Moreover, the liquidity crunch in the shadow banking space has dragged down demand and will continue.

    The near crash in prices of most agricultural commodities (aggravated by demonetisation and resultant cash crunch) has inflicted serious damage on the rural economy, from which it has not yet recovered. That is adversely affecting the demand for two wheelers, tractors and entry level cars. To make matters worse, one can’t foresee the rural economy reviving in the short run.

    The growing popularity of Ola and Uber has no doubt reduced the need for having personal vehicles and that might be affecting car sales, as the finance minister observed. However, the government can’t shirk responsibility for adding to the list of poor regulations – expensive steel and fuel along with high GST and cess lie at the root of the auto sector slowdown, which only the government can fix.

    The industry is right about demanding reduction in GST. However, the government remains non-committal given its poor finances accentuated by the shortfalls in tax collection and now corporate tax cuts in a slowing economy. Yet, GST cut is the minimum that’s needed on the part of the government. That would mean a short run hit on tax revenue but increased sales volume should make up for lower GST rate.

    Despite the worsening slowdown, customers have responded enthusiastically to budget SUV offerings by new entrants – MG and Kia Motors. That some auto companies are doing better than others offers lessons for players in a cost conscious market where buyers want more for less. Obviously, auto companies will need to align their product portfolio to changing consumer preferences. This is not something that the government can fix.

    The writer is a business economist with Indonomics Consulting.

    DISCLAIMER: The views expressed are solely of the author and ETAuto.com does not necessarily subscribe to it. ETAuto.com shall not be responsible for any damage caused to any person/organisation directly or indirectly.


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