The Re-Beginnan | Vol.2 | Issue 15
Reviving the Automotive Sector — GST reduction and Scrappage Policy
Pre-Covid19 Scenario (Industry at a Glance)
The Indian auto sector contributes 7.1 per cent of the GDP, it accounts for almost half of the manufacturing GDP in India and provides employment to 5.2 million people in manufacturing, sales and service fields. In FY20, the industry manufactured 26 million vehicles out of which 4.7 million were exported.
In the pre-covid19 scenario, the automobile industry was already facing challenges like leapfrogging from BSIV to BSVI (with increased investment by the sector and creation of dead stock), volatility in oil prices, consumer financing, stringent insurance norms, technological disruptions and shared mobility. In addition, the government also announced that there will be a 100 per cent shift to electric cars by 2030 — a big blow to the sector. Also, the 2018 NBFC upheaval that kicked off the liquidity crisis, caused financing trouble for customers.
Just when the automobile industry was beginning to adapt to these difficulties, came in the mammoth of ‘Covid19’.
Impact of Covid19 on the Automobile Industry
When lockdown measures were imposed by the government in March 2020, at first the whole economy had shut except essentials. The initial lockdown disrupted both, the demand and supply side of the automobile industry. Border tensions with China coupled with the lockdown, had a heavy impact on the supply side as India is highly dependent on China for raw materials. On the demand side, the month of April-20 saw zero sales.
May-20, June-20 and July-20 were rebound months for the automobile sector, as it witnessed unexpected month-on-month rebound sales due to ease in the lockdown restrictions and the revival of economies around the world. In the light of low base last year, industry players in the passenger vehicle and two-wheeler segment reported year-on-year domestic sales in green. While the commercial vehicle segment still struggled to recover, the tractor segment treaded its regular growth path in August 2020. Domestic vehicle sales declined by 75 per cent with sales down to 1.49 million units in Q1FY21. The sale of vehicles in the first 5 months of FY21 was down by 50% compared to FY20. With the easing of supply chains coupled with the arrival of the festive season, automakers hope to see a rise in sales. Though, the recent upturn in covid19 cases makes the market trend for the fiscal year FY2020–21 ambiguous.
The Silver Lining; Plan of action by the Government
The government has been working on various policies and ideas to revive the auto sector. Here are steps that the government is planning to take:
a. Vehicle Scrappage Policy:
- Nitin Gadkari, India’s Road Transport and Highways Minister, on 5th September said that the much-awaited vehicle scrappage policy is in its final stages of approval. He also said, “The policy will come within a month. It may even come within this month-end”. The policy implies if you scrap your vehicle, you will get a sop from the government with which you can buy a new vehicle and get a 1 per cent discount from the carmaker. With this, recycling clusters will also be set up with an objective to use recycled materials instead of new raw materials, thereby cutting costs. The government is also considering road tax cuts and vehicle registration fees waiver under the policy. This policy aims to boost demands for vehicles when the consumer confidence is low amid covid19.
- According to HDFC Bank study, vehicle scrappage policy can create an industry of its own worth USD 6 billion (INR 43,000 crore). The creation of this new industry will help in employment generation and trigger economic growth. Also, according to the study, 9 million vehicles could go off-road by the fiscal year 2021 and 28 million by 2025 that will reduce carbon dioxide emission by 17 per cent and cut particulate matter in the air by 24 per cent. Additionally, if on-road BSII and BSIII vehicles are reduced to half its numbers, it would save 8 million tonnes of oil a year.
b. Temporary GST Rate Cut:
- The government is considering the automobile industry’s recommendation to cut GST rates temporarily by 10 per cent across all categories of vehicles, the decision for which is expected to be out soon. This GST cut benefit will be transferred to the customers and will also reduce the cost for carmakers. This will be a demand driver for the automobile industry, the sales of which are already suffering.
c. Other Association Suggestions:
- Society of Indian Automobile Manufacturers (SIAM) also has appealed to the government to postpone forthcoming safety regulations and regulations on Corporate Average Fuel Economy Norms (CAFE) & Real Driving Emission Testing (RDE regulation) as they would further add to the cost and have a negative impact on industry sentiments.
The Way Forward…
All of the mentioned initiatives are still in the pipeline and not yet implemented. Though, the government has assured that these initiatives are in their final stage of approval and will be implemented as soon as possible. These steps, if implemented correctly, are aimed to help revive the automobile sector. But the question is, how effective will these steps be in an economy that is already at -23.9 per cent GDP?
