CV segment seeks further stimulus as core demand fails to pick up

Written by Yogima Seth | New Delhi | Updated: Jun 18 2009, 05:14am hrs
With Budget round the corner, the commercial vehicle industry, which has been the worst hit by slowdown and registered a decline of 14.78% in May, is seeking sops from the government in order to revive sales. This comes on the backdrop of two stimulus packages by the Centre in December and January which have failed to turnaround sales in a big way despite a special emphasis on the sector.

The Centre must ensure substantial increase in allocation to road transport projects, especially the ones under the NHAI as it will boost demand for commercial vehicles in a big way, says K Sridharan, chief financial officer, Ashok Leyland, adding that since BS IV emission norms are about to set in from April next year, the Centre should provide allowances for depreciation of plant and machinery.

Moreover, normal depreciation should be reversed back to 25% as earlier from 15% now to help in capital formation which in turn will act as an incentive for setting up new plants, he said. According to Sridharan, the two stimulus packages announced earlier have stimulated demand, especially assistance under the JNNURM for the purchase of buses for improvement of the urban transport systems but there is need to extend it beyond the June 30, as most of the orders are yet to be placed. As per industry estimates, all states put together have identified a need of around 15,000 new buses and till date orders have been placed only for 6,000 units.

The commercial vehicle segment continues to be low despite two stimulus packages as credit is still not coming and demand from core sectors like infrastructure and real estate is yet to pick up, said Price Waterhouse auto analyst and partner Abdul Majeed.

According to Majeed, the upcoming Budget should have a vehicle replacement policy, similar to the ones present in developed countries, to ensure timely renewal of older vehicles.

There have been a series of reduction in interest rates in the past. But unless banks bring down the rates by another 300-400 basis points to low single digit, it is really difficult for the players to raise money and retail borrowing will continue to be low, said another Mumbai-based analyst.

While industry experts and analysts are of the view that the provision of accelerated depreciation in the second stimulus package announced in January failed to spike demand, its extension till September 30 this year will result in some kind of spurt in demand in the second quarter of 2009-10.

Lastly, all players, including Ashok Leyland, Tata Motors and other component suppliers, who have made investments in states of Uttarakhand and Himachal Pradesh to cash on the excise benefits that were offered from these state governments are seeking a two-year extension from the respective state governments to complete these investments. This gains importance as almost all players had put their expansion plans on hold in the middle of last year to tide over the slowdown.