Imagine this! You are a salaried employee in a Public Sector Unit in Delhi or a small trader in Moradabad. You have been travelling to work by a Phat-Phati (in Delhi) or an auto in Moradabad. The question to you is this: Will the Finance Minister’s announcements on Friday, August 23, to boost auto sales change your sentiments enough to go out and apply for an auto loan to buy a four-wheeler? Will the auto sector get a boost? And for how long?
This question is important, since auto sales are a bell-weather of an economy and are a leading indicator for economic growth. And the leading indicator has been less than encouraging in the past nine months. The latest figures from the Society of Indian Automobile Manufacturers (SIAM) reveal a drop in passenger vehicle sales in July by a whopping 31 per cent (to 200,790 vehicles) compared to a year earlier, marking a ninth straight month of decline and the worst performance in nearly two decades. The market leader, Maruti, reported a 36.7 per cent sale loss of passenger vehicles compared to the same month in 2018 and struggled to even reach 1 lakh units in July 2019, with sales totalling only 96,478 units.
As an academic dealing with family businesses all over India, with a large number of them directly and indirectly dependent on auto-sales, the sense of despondency is palpable. One of the reasons why the auto sector has been facing a decline has been the restrictions on credit by both banks and NBFCs to only those with high credit rating.
This has affected auto sales, especially in tier 2 and tier 3 cities. Despite the recent rate cuts announced by the Reserve Bank of India, auto-dealers and customers in these cities have not witnessed the translation of these policy rate cuts into higher sales. Another problem faced by the auto sector was the pile up in the inventory of the BS4-compliant cars, in the face of India moving on to the BS6 emission norms from April 2020.
Auto-dealers and suppliers of auto-ancillary parts have been looking at these developments with a sense of doom and gloom. How are the latest announcements set to change things for the auto-sector?
The new measures include a revoking of the ban on the purchase of new vehicles by government departments, so that government departments will now replace their old vehicles with new ones. Similarly, business establishments can claim additional depreciation of 15 per cent on their purchases of vehicles till March 2020. The current announcements also seek to get banks to lend auto loans based on the (falling) repo rates, rather than the earlier relatively higher banks’ Marginal Cost of Funds Based Lending Rates (MCLR). Such lower rate auto loans are expected to boost auto sales.
These measures will provide some breathing space for the auto sector, with greater purchases by the government and the business establishments seeking tax exemptions. However, for the government official in Delhi and the trader in Moradabad, the purchase of a shiny new car is more to do with crowded Indian roads, lack of parking space and the increased cost of maintenance of an owned vehicle than merely higher borrowing costs. Again, the easy availability of ride-share apps like Ola and Uber in metros, which are quite convenient affect the willingness to purchase. As these apps spread into in tier 2 and tier 3 cities, structural issues such as lack of adequate infrastructure to justify auto purchases will bite far more.
Finally, the announcements augur a catch-22 situation. Visualise this: the government announces fiscal stimuli by way of higher government spends on automobiles and tax exemptions to business establishments for auto spends. Next budget, the government runs into high revenue and fiscal deficits and reduces spending on infrastructure. The auto sector then has come a full circle.
In sum, the announcements will do much to boost the sagging confidence in an economy, which despite the government’s hubristic stance, desperately is in need of a strong stimulus. However, these measures are not enough to kick-start the economy on to higher levels of growth. The point being made is this: The government seeks to change the ability to purchase. Of far greater concern is the willingness (or rather lack of it) to purchase, which will affect the smooth running of auto businesses. The need of the hour is a set of deep structural reforms involving infrastructure.
The writer is Professor of Economics, and Chairperson, FMB at SP Jain Institute of Management & Research, Mumbai. Views are personal.
- Tulsi Jayakumar