India’s ailing auto industry needs long-term reforms for revival

Priya Jestin

18-May-2020

MUMBAI (ICIS)–While the Indian government’s recent move to infuse liquidity into the economy through a $266bn fiscal stimulus package could help the domestic auto industry, the sector will require long-term reforms to revive it, said industry experts.

Last week, Indian prime minister Narendra Modi announced a $266bn fiscal stimulus package to help revive the economy after a nearly two-month long pandemic-induced lockdown, which began on 24 March.

On 17 May, India extended its lockdown for two more weeks until 31 May.

The Indian automotive industry has seen a steady decline in sales for the past one year and nearly all automakers recorded zero domestic sales in April.

“Well after 30 years in the motor industry this will be the first time in my career that I will have officially sold zero cars in a month,” Zac Hollis, director, Skoda Auto India said in a tweet regarding April sales.

The comprehensive economic package focusing on economic activities and an overall aim of a self-reliant India will provide the right boost to demand once again, Rajan Wadhera, president of the Society of Indian Automobile Manufacturers (SIAM), said in a statement.

The trade body represents most major automakers in India, including Maruti Suzuki, Tata Motors, Mahindra & Mahindra, Hero MotoCorp and the local units of Toyota Motor, Hyundai Motor, Ford and Volkswagen.

However, industry experts believe that the stimulus package will only provide small relief as it does not address the larger concerns of the industry.

The recent economic package will help the industry in the short term but the auto industry would require policy interventions and long-term reforms for it to survive, said Vipin Sondhi, managing director of Ashok Leyland as per financial daily The Economic Times.

SIAM has been asking for a reduction in goods and services tax (GST) on automobiles to help spur demand, revive production and prevent layoffs.

Carmakers have been asking for a 10% reduction in tax on the sale of all automobiles and auto parts, SIAM said in a statement.

They also want the government to offer incentives like tax rebates to car owners to scrap their old vehicles.

Currently GST on vehicles in India stands at 28%, which is on par with GST on luxury goods.

On 7 May in a web conference with government officials, SIAM executives had warned that sales of vehicles, including cars, trucks and motorbikes could decline by nearly 45% year on year if the Indian economy contracts by even 2% in the current fiscal.

As automakers began a staggered ramp up in production in early May, social distancing norms and logistical issues have made scaling up operations challenging.

While the government has eased certain restrictions in the latest lockdown, industry leaders said they need to be eased further without which the economic stimulus measures may lose their impact.

Currently, the lockdown is being imposed in a colour-coded manner with red zones recording the highest number of coronavirus cases.

Until recently, most economic activity was barred in red zones.

On Sunday, the government opened up the red zones to economic activities, and inter- and intra-state movement of passenger vehicles. Now only containment zones will remain out of bounds.

“I hope that the zones where business has started are expanded and supply chains can start working,” said Vikram Kirloskar, president, Confederation of Indian Industry (CII) and vice-chairman, Toyota Kirloskar Motor India in a statement.

“Demand is very low. Most of our dealers and suppliers are in red zones; so, we can’t do much,” he added.

The zoning off of regions had also caused a problem in sourcing components.

Nearly 85% of components for all vehicles are manufactured in the Indian national capital region, including New Delhi, Pune in Maharashtra, Mysore in Karnataka, and Sriperumbudur and Hosur in Tamil Nadu.

Some of these regions were under the red zones until recently and the government is yet to notify if they can restart full operations.

“There is always a long chain of suppliers who contribute to the manufacturing of vehicles … even if one or two of them are in the red zone or not operational, then the production of vehicles will be in trouble,” Deepak Jain president of the Automotive Components Manufacturers Association (ACMA) said.

Another problem is restoring demand said automakers.

“We will be able to restart 50-70% of our production. That’s not the problem. The demand side is a huge challenge. We need demand stimulus so that volumes can come back. That’s the biggest challenge the industry is going to face,” said Rajan Wadhera of SIAM.

The automotive industry is a major global consumer of petrochemicals which contributes more than a third of the raw material costs of an average vehicle, and production disruptions could severely weigh on demand.

Visit the ICIS coronavirus topic page for analysis of the impact on chemical markets and links to latest news.

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