There hasn?t been the slightest hint of a recessionary gloom at the 10th Auto Expo in New Delhi?s Pragati Maidan. In fact, the mood among carmakers and consumers seems to be the precise opposite?brimming with confidence. So, as the government begins to seriously ponder over its strategy to exit from stimulus, a withdrawal of the tax concession given to the automobile sector in the fiscal stimulus package of December 2008 should top the agenda. Sector-specific tax concessions are avoidable at the best of times, but the slowdown that accompanied the financial crisis of late 2008 was an exceptional circumstance. In that context, cutting excise duty for auto from 12% to 8% made sense as a way to boost sales. But the auto sector has shown a remarkable turnaround in the year that followed. Data from Society of Indian Automobile Manufacturers (Siam) shows that the production of passenger cars between April-December 2009 recorded 24.5% growth over the same period in 2008. The comparative growth figure for domestic sales is almost identical at around 24%. Interestingly, even the segment worst hit by the crisis?commercial vehicles?has registered a turnaround. Again, data from Siam shows that the production of commercial vehicles in the April-December 2009 period recorded a 15% growth over the same period in 2008. The comparative figures for sales were even better?a 22% growth over the two periods.
The aggregate data for the industry as a whole is corroborated by disaggregated firm level performance. Market leader, Maruti Suzuki, registered a 13% growth in FY08, which went down sharply to just 4% in FY09. In the first half of FY10, Maruti has already registered growth of 24%. Mahindra & Mahindra, a major player in utility vehicles, recorded 19% growth in FY08, which went down to just 1% in FY09. Now, in the first half of FY10, its growth is up to 30%. Even accounting for a base effect, these numbers seem to suggest a return to pre-stimulus levels of growth. Given the impressive comeback in GDP growth?7.9% in Q2, FY10, these numbers make complete sense. There is, therefore, no rationale for the government to dole out a fiscal concession to a sector that seems to be in good shape. Of course, the whole turnaround story in auto isn?t just because of the fiscal stimulus. It is reasonable to deduce that the monetary stimulus, which made vehicle finance much cheaper, has played a larger role. In fact, banks and financial institutions have reduced their interest rates by as much as 350-400 basis points in the last six-eight months. So, there continues to be a case for retaining a loose monetary policy, while doing away with fiscal stimulus.
