Not a very stimulating ‘stimulus package’ for Auto

Not a very stimulating ‘stimulus package’ for Auto

The ‘stimulus package’ announced by the finance minister for the auto sector remains incomplete

 The auto industry is more hopeful of a quick turnaround after stimulus announcement, but a lot still needs to be done

When the Society of Indian Automobile Manufacturers (SIAM) released the monthly sales and production data early this month, most people tracking the auto sales numbers knew that there was a crisis on hand.  The July 2019 data released by SIAM showed that the overall sales (as compared to July of last year) were down 18 per cent. Sales of cars, the one product that signals the collective aspiration of India’s vast middle class, was down by 35 per cent;  commercial vehicles, that indicates the robustness of the country’s economic activity at a micro level, by 25 per cent and two-wheelers by a good 16 per cent. These three segments, together, account for around 97 per cent of the domestic automobile industry in volume terms. 

The auto industry body was quick to point out that we had the worst month in nearly two decades. The industry was crying hoarse for the government to announce a stimulus package. SIAM representatives even made a beeline for Finance Minister Nirmala Sitharaman’s North Block office to brief her on why the Modi government must step in to save the auto sector from a crisis only getting worse.

The industry recommended three areas where the government can help immediately: Cut GST on automobiles from 28 per cent to 18 per cent; infuse more liquidity in the market and announce a scrappage policy to create room for new vehicles on the road. The FM’s stimulus package, on August 23, effectively met the industry half way, satisfying one-and-a-half of the industry’s three demands.

SIAM believes that while the GST cut was not announced, it is still under consideration and hopes Sitharaman will relent. The government has also ‘in principle’ agreed to announce an automobile scrappage policy and spoken of the release of Rs 70,000 crore for PSU banks recapitalisation and Rs 20,000 crore for National Housing Bank that will give banks and NBFCs enhanced liquidity in the system. “Moreover, the linking of repo rate to interest rates charged for vehicle purchase would support lowering of EMIs for auto purchases, thereby boosting demand,” a press note from SIAM said.

There were a couple of more minor sops for the industry in the announcement, but we will come to that in a moment.  

The GST cut, that topped the three-point recommendations by SIAM, was given a skip. A 10 per cent cut in the GST would have been a real stimulus for consumers to rush to the nearest auto dealership to book their new vehicles.  One of the biggest reasons for the substantial drop in automobile sales in the country was due to a rise in cost to the consumer. A host of new safety features mandated by the government and also compulsory insurance of three and five years for cars and two-wheelers respectively at the time of purchase had snuffed the enthusiasm out of new vehicle buyers. The stimulus package without a cut in the GST rate, therefore, failed to address the single biggest reason for the fall in automobile sales.

The government also said that BS-IV vehicles that are purchased till March 31, 2020, will all remain operational for their entire period of registration. But this is only a clarification and cannot be really counted as a stimulus measure.  Again the doubling of depreciation on vehicles from 15 per cent to 30 per cent on all vehicles acquired from now till March 2020 is more a sop for commercial vehicle buyers and will have little effect on improving the sentiments of car and bike buyers, who can’t claim depreciation as an expense as individual buyers. Further, the lifting of the ban on central government purchase of automobiles is just a drop in the ocean and will make little impact on the volume of sales in any serious way.

After the August 7 meeting with the FM, the auto industry seems to be a little more enthused about the prospect of a quick turnaround. For now, the fact that the government is listening and willing to help seems to be good news as noted by Mahindra Group Chairman Anand Mahindra, who wrote on Twitter: “...I applaud the methodical approach of ‘bucketing’ key drivers of the economy & administering a healthy dose of 1st-aid to each. I’m naturally enthused that the Auto industry was recognised as a major growth generator & given a bucket of its own.”

Save for the massive infusion of money into the banking system, which is not something exclusive to automobile buyers and an earlier promise by the government that it will go easy on the electric vehicle push, there is not much of a stimulus in the stimulus package.  Hopefully, a cut in the GST and a concrete scrappage policy that will make room for new vehicles on the road is just around the corner.

(Kalyan Subramani is a Bengaluru-based writer)

The views expressed above are the author’s own. They do not necessarily reflect the views of DH.