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Centre’s economic relief package leaves auto sector disappointed

Centre’s economic relief package leaves auto sector disappointed

Centre’s economic relief package leaves auto sector disappointed
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By Parikshit Luthra  May 19, 2020 6:12:48 AM IST (Updated)

India’s auto sector has been disappointed by the government’s recently announced economic revival package.

India’s auto sector has been disappointed by the government’s recently announced economic revival package.

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After near zero sales in April, the industry was hoping for some intervention which would help revive demand. Industry bodies SIAM, ACMA and FADA had hoped for a 10 percent reduction in GST and an incentive-based scrappage policy to boost demand, neither of which materialised.
Industry executives say the measures to inject liquidity in the system may aide the supply chain, but won’t make a difference to demand.
India’s auto sales declined 18 percent in FY20. The industry produced 3.4 million passenger vehicles during the year, just about half the installed capacity.
RC Bhargava, Chairman, Maruti Suzuki told CNBC-TV18 that Maruti would be producing only about four to six thousand cars this month compared to 1.5 lakh cars last May.
India’s auto sector has only recently restarted manufacturing and production numbers will pick up in the coming weeks. However, continued weak demand and consequently lower production could lead to job cuts in the coming months, says industry sources.
Reacting to the government’s economic package, Rajan Wadhera, President of the Society of Indian Automobile Manufacturers said, “SIAM welcomes the focus towards MSMEs, NBFCs and the agri-sector. The agri sector package may benefit the auto sector indirectly in the medium term but the Indian automotive industry needed an immediate stimulus to boost demand, which has not happened”. According to SIAM estimates, the auto sector could decline by 22-35%, if overall GDP growth is 0-1% for FY21.
Industry experts feel that overall demand is expected to remain subdued in FY21 as well. Rahul Mishra, Principal, Lead - Automotive at Kearney India believes more people may want to have their own transport going forward because of social distancing norms, and this could fuel demand for small cars.
“Auto makers should expect customers to bargain harder and demand more value for money. Financing will play a key role in restoring liquidity. Small surge in spares and service demand is expected which OEMs and dealerships should be ready to address. The demand for commercial vehicle will need a significant revival of economic activity. Interventions like scrappage policy will provide the much needed demand push. The uncertainty associated with economic activities, employment, personal finances will keep customers away for showrooms and discretionary spend for a few months at least”, he said.
Wadhera said that the industry was looking forward to direct fiscal measures which would have given a boost to demand and prevented job losses. “In several discussions with the government, SIAM had made specific suggestions for demand stimulus including reduction in base GST rates from 28 percent to 18 percent for a limited period and an incentive based vehicle scrappage policy, which would have made it a less painful revival and kickstarted the industry”, he said.
The Automotive Components Manufacturers Association or ACMA has welcomed the expansion of the MSME definition which would help 350 component makers to be included under the MSME Act. Speaking to CNBC-TV18, Vinnie Mehta, the Director General of ACMA said, “Change in definition of MSME’s, allowing for collateral free loans and a pause on fresh insolvency proceedings for a year are indeed welcome steps. The government also urgently needs to consider a stimulus to boost automotive demand, this will allow for the entire value chain to come back on track”.
The Federation of Automobile Dealers had been urging the government to include automobile dealerships under the definition of MSME’s, but this request has not been accepted either. “There is also an urgent need to support the dealers in terms of improving their liquidity and including them under MSME Act by changing its definition”, said Rajan Wadhera.
Kearney’s Rahul Mishra says it would be important to watch out for supply chain normalization, in both domestic and international markets. “Given the expected low demand, plant utilization will remain low and budget cuts are expected across companies. This will worry players with already low volumes. Projects and launches will get reviewed closely and likely to be pushed out. Working capital will continue to remain a challenge both for suppliers and dealerships. Additionally, OEMs and dealerships will have to adapt to newer contact-less ways of selling, given that the customers may be reluctant to visit dealerships and go for at home services”, he said.
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