As they brace for a possible deceleration due to yet another round of price increases post the new safety and emission norms, auto sector executives are pressing for cut in GST rates or cess.
By Pritish Raj
With consumers not buying cars and two-wheelers in enough numbers, auto makers have been compelled to resort to frequent production cuts and factory shutdowns. But this doesn’t appear to have brought any major relief because inventory continues to pile up, remaining higher than usual. Registrations, which reflect retail interest, fell 5.4% year-on-year (y-o-y) across segments in June versus 7.5% y-o-y in May and 8% y-o-y in April.
Overall, during the April-June quarter, registrations fell 6% y-o-y across segments, according to the Federation of Automobile Dealers Associations (FADA), which said while the passenger vehicle (PV) inventory has eased slightly, commercial vehicle and two-wheelers’ inventory have risen to higher levels.
As they brace for a possible deceleration due to yet another round of price increases post the new safety and emission norms, auto sector executives are pressing for cut in GST rates or cess. “The worst is not over yet,” Pawan Goenka, managing director, Mahindra & Mahindra, told FE late last week, adding the measures announced in the Union Budget to resolve the issue of financing may not be enough to revive sales.
“I am suggesting that the government remove the cess on small cars and keep a single rate of cess of 17% for the large cars for the next four-six months,” Goenka had said.
Hero MotoCorp chairman Pawan Munjal and TVS Motor chairman Venu Srinivasan have been batting for a GST cut, saying the mass mobility item like a two-wheeler should not be bench-marked against luxury goods. Maruti Suzuki chairman RC Bhargava, on the other hand, isn’t calling for tax cuts, as he believes the government needs revenue to accelerate the economy. Earlier this month, he said costlier loans since September last year have continued to keep customers away and the trend was unlikely to change for another few months. “I hope the banks will pass on the benefits of lower RBI rates to customers in the next few months, which may help in inventory easing out,” Bhargava had said.
Notwithstanding discounts and other sops offered by major manufacturers, registrations, which is an actual indicator of auto demand, remained under pressure, hit by high prices and unwillingness of the NBFCs and banks to lend to a large customer base on fears of defaults. According to the FADA data, the worst-hit was the commercial vehicle segment, with registrations falling by a huge 19.3% y-o-y in June. Passenger vehicle and two-wheeler registrations fell around 5% y-o-y. Auto sales have suffered since the second half of FY19, due to hike in insurance premium, increase in vehicle prices owing to safety features added to comply with the norms and cash crunch in the system following defaults by financial services companies like IL&FS and DHFL.
FADA president Ashish Kale said the decline in Q1FY20 was due to continued liquidity tightness and a much-delayed monsoon. “With NBFCs and banks still in a cautious mode, the normalcy in lending which is required to get us back to growth still cannot be seen,” Kale said.
Analysts believe the volume recovery is unlikely to be as quick as it was in the past when auto sales had tumbled, owing to distinct concerns prevailing this time. Analysts at Edelwiess Securities said historically, some or the other global events like the Asian currency crisis in 1997 or the global financial crisis in 2008, have triggered demand slowdowns. “But this time around, domestic factors like NBFC crisis and rise in insurance premium have led to a steep slowdown and therefore, current slowdown in auto sales is different from the earlier ones,” they noted.
Not to forget, sharp price hikes taken by two-wheelers effective April 1, 2019, and a hike to be taken by PV makers from October 1, 2019, will further hit demand, with initial estimates of jump in prices in the range of 5-30% over FY19-21. A decade earlier, the per annum price increase of vehicles was in the range of 1-5%. The current and future price hikes will also factor in the BS VI emission-related compliance costs, due to which prices will go further up from April 1, 2020, when the new norms kick in.
Rahul Mishra, principal at AT Kearney said unlike previous periods of slowdown, this time a combination of a number of factors impacted at the same time and therefore, number-wise, the slowdown is more severe. “A full-scale revival is certainly going to take time, it won’t happen over a quarter. Even if the liquidity is made available cheap, it has to flow in the system and transmitted to the consumer level, which doesn’t happen often,” Mishra told FE.
According to Rajan Wadhera, president, Siam, this is the worst slump in auto sales ever. Earlier, the slowdown in sales was restricted to one or two categories, but this time it’s across segment. Hiring is already frozen in the auto industry and we are staring at job losses if the situation persists,” he said.