From GST cut to BS-VI extension, KPMG recommends steps to revive Indian auto industry
Among lower demands, a liquidity crunch, and an economic slowdown, the current nationwide lockdown to curb the spread of coronavirus is only going to add more stress to the auto industry.
The Indian automobile market's volumes fell by 18 percent from 33.77 lakh units in FY 2018-19 to 27.76 lakh units in FY 2019-20.
Among lower demands, a liquidity crunch, and an economic slowdown, the current nationwide lockdown to curb the spread of coronavirus is only going to add more stress on the market.
The Society of Indian Automobile Manufacturers (SIAM) estimates that plant closures due to the lockdown will amount to a loss of over Rs 2,300 crore in turnover for each day of closure.
Further, disruption in the supply of raw material and other critical components, and availability of contractual labour will be a hindrance even after the situation normalises.
Component manufacturers had already begun exploring alternatives to fulfil supply chain demands. However, it would take substantial time to reach stable production scale as these components would need to undergo regulatory testing.
Once the pandemic abates, market spending by consumers on discretionary items will be put-off due to increase in spending share of essential items including food and medicines, for the immediate period. Essential repair and service related services may continue, but under a reduced demand.
In view of these challenges, global research and analysis agency KPMG has made several recommendations to help in the revival of the Indian automobile market.
Tax sops
KPMG recommends a GST cut on internal combustion-powered vehicles, which will help the sector not only in the short-term but also in the medium to long-term.
Manufacturers and SIAM have been requesting a lower GST rate for nearly a year now.
Earlier last year, Rajan Wadhera, President of SIAM, had said, “All this while, the industry has pulled out all stops in offering attractive deals and discounts to the consumers. However, the ability of the industry to provide large discounts is limited and this only highlights the need for the government to consider reducing the GST rates from 28 percent to 18 percent, which would significantly reduce the cost of vehicles and in turn create demand.”
Besides, the government can also help the sector by expediting GST refunds and duty drawbacks for exporters.
Another short-term measure, which can help the sector is allowing temporary income tax deduction on auto loans that will help in increasing consumer attractiveness.
Scrappage policy
The industry has been waiting for a vehicle scrappage policy for the better part of the last decade. While Nitin Gadkari, Union Minister for Road Transport and Highways, in February 2020, said that the policy is expected to get a clearance from the cabinet within a period of 15 to 30 days, it still seems like a distant dream.
While the coronavirus pandemic is to be blamed for the current delay, Gadkari has been talking about it since 2015.
Fast tracking an incentive-based scrappage policy is the need of the hour and can boost the purchase of not just new passenger vehicles but also commercial vehicles.
Easing financial stress
Operational benefits in the form of a wage subsidy to small industries or income support for contract workers for three months from the government’s side can be hugely beneficial to give the industry a short-term support.
A reduction in interest rates on delayed payment of taxes for three months by the companies can also help in a similar way.
In the long run, a repayment support scheme for automobile and related firms, especially the MSME dealers and auto component manufacturers needs to be developed for a sound rebound.
BS-IV to BS-VI shift
While the country officially shifted to BS-VI emission norms, the Supreme Court had granted dealers across the country (except Delhi-NCR) a grace period of 10 days to sell 10 percent of their BS-IV inventory.
As per FADA, unsold BS-IV vehicles in India amount to seven lakh two-wheelers, 15,000 passenger cars, and 12,000 commercial vehicles.
An extension beyond the Supreme Court’s ruling may not be easy to be sanctioned but can go a long way in helping dealers and automobile manufacturers.
Support to transportation and logistics sector
Relaxing terms on existing loans through measures like interest deferment and increased moratorium period can help revive the transportation and logistics sector, which will ultimately help the Indian automobile industry by increasing demand for commercial vehicles.
Several companies had been delaying new model introductions for 2020 as India was going through a paradigm shift in terms of emission norms. Now, manufacturers should delay new model launches by at least a few quarters or until market sentiments improve.
However, the Indian auto component industry can emerge as an alternative source of supply globally if duly supported by policy framework.
(Edited by Saheli Sen Gupta)