How Can The Indian Auto Industry Recover In 2020?

Rajan Wadhera Jan 08, 2020

The Challenge

2019 was a challenging year for the auto industry, which witnessed headwinds due to the slowing economy in last 6 years. The industry is expected to close with a drop in wholesale dispatches of 12% – 14% in 2019 vis-à-vis 2018. While passenger vehicles and two-wheelers will decline by 12% – 14%, commercial vehicles will go down by 15 – 17% overall and more than 40% for heavy vehicles.

Even retail sales are expected to be down by 3 – 4% overall and by double-digit for commercial vehicles. This steep drop had caused operational hardships for many companies and production plans had to be reevaluated through the year to adjust to market requirements.

Some improvement in consumer sentiment was witnessed during this festive season, however, the automobile industry has not recovered from demand contraction.

The government has come out with a few measures to help bring the industry out of this lull, including a reduction in the corporate tax rate to 22%, pumping of liquidity to boost the economy, increase in depreciation rate by 15% for vehicle purchase and also provided assurance that a scrappage policy is in the works. These interventions certainly provided some positive push to the subdued demand.

Reasons for demand deceleration

The major reasons for subdued growth in the Indian Auto Industry have been primarily:

Low consumer sentiments thereby impacting demand.

Clubbing of various regulations leading to increase in costs and thereby impacting affordability:

Cost of vehicle acquisition increased due to introduction of new regulatory and safety norms, SC order for upfront collection of Long-Term 3rd Party insurance premium for 3 years (new cars) and 5 years (new two-wheelers), increase in road tax / state taxes in many states in the recent times.

Regulations such as increase in Axel Load Limit for commercial vehicles by up to 25%, which expanded freight capacity leading to shrinkage of new vehicle demand, was detrimental for new commercial vehicle sales.

Finance availability:

NBFCs (Non-Banking Finance Company) have been a pillar of strength for the automobile industry, primarily lending to customers in semi-urban and rural areas where credit availability from the banking sector is generally difficult. Continuous access to easy and secure credit to the consumers has facilitated sales of vehicles over the years. However, the credit crunch that has now hit the auto sector is leading to a decline in automotive loan disbursals. Though the Government has announced infusion of liquidity into the economy, it is essential that the benefits of this move are passed down to the consumers by the banks and financial institutions.

Slowdown, along with the hard stop for BS IV vehicle registration until 31st March 2020, has led to the immediate concern of inventory clearance of BS IV vehicles. To induce demand in the market, the manufacturers are providing various incentives and offers, a move that has helped to spur demand to some extent during the festive month but that is clearly not enough.

Interventions required for Growth Revival

The key intervention that can support demand generation is a policy for incentive-based vehicle scrappage policy for vehicles registered from 1st April 1995 to 31st March 2005.

Government has been discussing a scrappage policy for removing old vehicles from the road. However, a scrappage policy without any incentive will not support scrappage and demand generation. SIAM has proposed that Government announces an incentive-based vehicle scrappage policy for removal of the old and polluting vehicles, registered between 1st April 1995 and 31st March 2005, from the Indian roads. The incentive could be in the form of 50% rebate on GST, 50% rebate on the road tax, and 85% of the scrap value to induce the customers to scrap their vehicles.

SIAM has also proposed the government to permanently increase depreciation rate for passenger vehicles and two-wheelers to 25% to make income tax leviable on the real-life of vehicles.

The Government of India’s FAME-II scheme has led to an increase in the adoption of electric buses in the country. However, the Government should make a significant budget allocation to the Ministry of Urban Development to support State Transport Undertakings in procuring Buses with other fuels like CNG, Diesel, Biofuel etc. This would also lead to reviving demand for Commercial vehicles which is very much needed in the current economic scenario.

Introduction of BSIV Emission norms is a very positive step to reduce emissions significantly. However, this could lead to an 8-10% additional cost because of which GST collections for Government are going to improve. However, this extra cost would lead to a fall in demand. It is, therefore, requested that the Government considers reducing GST on BSVI vehicles to 18% from the current 28%.