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Stimulus not the answer; let market forces drive automobile sector growth

Stimulus not the answer; let market forces drive automobile sector growth

Stimulus not the answer; let market forces drive automobile sector growth
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By Kartik Malhotra  Aug 21, 2019 1:23:18 PM IST (Updated)

The auto sector has been profitable for many years on the back of high internal demand and cost-competitive exports. A road bump, though not minor in this case, does not call for a track change.

The slump in the auto sector is said to be the litmus test for low consumer sentiment. The disillusionment is equally visible through low borrowing as well as spending across products, coupled with a bearish stock market scenario.

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While the RBI has cut 110 basis points on the repo rate in the last one year (35 basis points cut earlier this month in one of the biggest rate cuts in years) it hasn’t been able to rev up growth. Not yet at least.
Growth never comes overnight, even if markets start responding positively. As banks start doling out lower lending rates commensurate with the transmission of the monetary policy to the end consumer, the pace needs to be quicker. In times of uncertainty, consumers like to hold on to cash. The longer they hold on, the slower the growth revival.
It’s the economy, stupid
Liquidity has been in surplus. Inflation is in control. Despite global headwinds, the economy is stable.
Auto industry leaders are prodding the government for a fiscal stimulus to reignite growth. A tax cut could be one way to do it, cheaper auto loans another. Unlike the US, India should not expect a bailout package for two reasons – first, India ought not to take this hit because unlike Detroit of 2013, India’s auto sector is still solvent; second, market forces should continue to find the demand-supply equilibrium.
The auto sector has been profitable for many years on the back of high internal demand and cost-competitive exports. A road bump, though not minor in this case, does not call for a track change. If the market sentiment improves, buyers will be back and factories will start churning out newer models like before. If the sentiment remains gloomy, Motown will need to up the discounts game to reduce piled up inventory.
In any case, a fiscal stimulus is a short-term incentive. Those on the verge will stand to gain. It will not invite a massive queue outside showrooms. While still holding on to cash, prospective buyers will also want to see the BS-VI and EV story unravel before making a big purchase decision.
A stimulus given now will make it almost impossible for the sector to be weaned away when the slump naturally fades. That will cost the country dearly when the macro-economy ride gets smoother.
BS-VI or EV?
Making ICE motor vehicles more affordable through any fiscal incentive will make electric vehicles less competitive, which India should not permit at this stage. EVs are the future and getting consumers to buy them will be better for the environment. Should a short-term industry view overshadow a long-term social concern?
While it is understandable that migrating to BS-VI involves long-term costs that would take longer than ever before to break even, with the advent of EVs sooner than expected, auto makers should perhaps consider a strategic shift of jumping straight to EVs rather than making bad investments on BS-VI that may never pay dividends.
The long-term strategy for Indian auto makers should only be EVs. It calls for one maverick leader to make that drastic shift. Others will follow.
Any stimulus at this moment should be targeted only towards SMEs engaged in manufacturing auto components. Incentivising them to make EV-compliant parts will go a long way in getting the industry future-ready.
The concern over job losses is real. Industry estimates say that if demand does not pick up, close to 10 lakh workers could get impacted. This statistic can become catastrophic for India already reeling under a 6.1 percent unemployment rate. Any addition will compel politics to overtake economics.
The government and the auto industry should work in tandem to keep employees at work, even if that hits the P&L in the short term. Industry must sit tight and ride the slump wave. Nothing is permanent, least of all, a downturn.
Kartik Malhotra is Senior Executive Producer & Editor, Special Projects at Network 18. He is an alumnus of IIM Lucknow and, when not behind the camera, indulges in armchair analysis of strategy and technology.
Read Kartik Malhotra's columns here
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