A few years back, the Central government and the Indian auto industry prepared the Automotive Mission Plan (AMP) 2026 with an objective to bring the domestic industry among the top three of the world in engineering, manufacture and export of vehicles and components. The mission also aims at growing the sector’s value to over 12 percent of the country’s GDP and generating an additional 65 million jobs.
That was, however, in 2016. At present, the plan is viewed with skepticism at best and serious concern at worst. In the last ten months, the auto industry has posted a consistent decline in sales. The alarm bells started to ring from the last festive season itself, usually the peak sales months, when new registrations for passenger vehicles declined 11 percent year-on-year (YoY)and over 14 percent in the case of passenger vehicles, according to a Crisil report. Approaching another festive season, things are only looking worse.
High costs of vehicle ownership owing to new third-party insurance norms, rising cost of financing and soaring fuel prices kept the demand low in the July-Sept period last year. Matters are looking worse now, with an additional liquidity squeeze, and a 20-quarter low in economic growth keeping customer sentiment low. Vehicle registration data compiled by Federation of Automobile Dealers Associations of India (Fada) shows that de-growth in the sector has continued for the second month of FY20, with total registration numbers dropping 7.5 percent YoY. The Fada said it looks forward to a ‘progressive budget’ to boost consumer sentiment.
So, what do dealers, the crucial link between OEMs and customers, whose health indicates the health of the sector and is a good indicator of the economy at large want?
A simplified, rationalised GST
The primary demand seems to be a rationalisation of the GST rate on vehicles, and a simplification of the complicated compensation cess levied on the GST imposed on vehicles.
“Currently, we have a very complicated method of calculating compensation cess, depending on length of the car, ground clearance, engine size and petrol or diesel version, which makes it very confusing. I don’t know why it needs to be so complicated,” said Amar Sheth of Shaman Motors. “Of course we’re looking at a rate cut from the 28 percent slab too, which should provide a large impetus to car sales,” he added.
Currently, automobiles are placed in the highest tax bracket of 28 percent in the GST system, next to cement, luxury and sin goods.
Market analysts CNBC-TV18 spoke to anticipate that a 10 percent GST rate, though it will be a huge demand trigger, is unlikely to be announced before the implementation of the BS-VI emission norms from April next year. Manufacturers have indicated that the introduction of BS-VI engines will increase the cost of vehicles by 10-15 percent. The government is likely to offset the increase in price with a cut in the GST rate, which will also boost sentiment.
“Another pain-point for us is our held-up money in GST,” Gautam Modi of Modi Hyundai pointed out. The Fada this week sent a representation to the GST Council ‘on the undue hardship caused to auto dealers on charge of interest on gross value instead of NET of ITC value in case of delay in monthly GST payment’, according to a press release issued by the association.
While GST rates, strictly speaking, are outside the budget’s purview, the budgeting provision from the loss in revenue is expected to be announced in the Budget.
To speed up replacement cycles and incentivise customers to make new purchases, automobile dealers have made a strong case for the Vehicle Scrappage Policy for both commercial and private vehicles to be provisioned for in this Budget.
“The only way to take old and polluting BS-III and BS-IV vehicles off the roads is by giving the customer an incentive to buy a new car,” said Nikunj Sanghi, Director, Fada. The government, however, has indicated a mandatory scrapping policy for 20-year-old vehicles, but it is considering hiking re-registration fee for such vehicles and also increase the compliance burden on them.
Dealership lending “Dealers earlier used to enjoy a lot of unsecured loans from banks and NBFCs, but over the last six months we’ve seen a pullback of funds from the finance industry. Funding is important to keep any business ticking, and for auto dealers the costs of inventory financing form a large chunk of expenses,” Amar Sheth said.
“The problem that happened with liquidity started after the collapse of IL&FS. The reason for its collapse was very clear – there was a mismatch between borrowing term and lending term. The lending was long term and IL&FS couldn't repay short-term borrowing. Specifically in auto loans, most good NBFCs don't have this mismatch, and are therefore not in the similar position as IL&FS. We definitely want a special package for NBFCs so that liquidity is not a concern in the market, and they should give auto loans the way they were giving pre- IL&FS collapse. If that happens demand will pick up,” said Sanghi.
Sanghi also pointed to the auto dealers’ association demand for being recognised as an MSME industry to reduce cost of funds required to be put towards working capital. As dealerships generate millions of employment opportunities annually, the benefits of being accorded industry status will give a huge fillip to the industry, he observed.
Industry status for auto dealers