The automobile industry is notoriously cyclical. It is also a lead indicator for economic growth. And it has been in a tizzy since this time last year when the signs of an impending slowdown were first seen. Sure enough, the decline began in the last quarter of calendar year 2018 and intensified with the passage of every month in 2019.
So, if the industry goes through cycles of ups and downs, is the current slowdown something to worry about seriously? Yes, indeed. Are auto manufacturers heading towards an apocalypse? No, certainly not. So, why do we need to worry about this slowdown? Simply because the current downturn is like nothing that the industry has seen in a long, long time in terms of depth, scale and character.
So, what’s different this time? First, every segment of the auto industry, beginning from two-wheelers to passenger cars, light commercial vehicles and heavy commercial vehicles, and even tractors, has been hit. The downturn this time is all-encompassing.
Second, what was a natural, cyclical downturn has been amplified by extraordinary circumstances unleashed by reform measures that may have been well-meaning but have come back to bite the government.
Finally, an unthinking approach to a critical policymaking area such as electric vehicles has only intensified and prolonged the slowdown. Yes, key Ministers are now scrambling to contain the damage by retracting some of their earlier statements and reassuring the industry that the electric motor will not be privileged over the internal combustion engine but it has come too late.
Revision in axle-load norms
Let’s take the case of the commercial vehicles (CV) industry. In July 2018, the government revised axle-load norms (for the first time since 1983) for cargo carriers by between 12% and 25%. The idea was to legalise over-loading, which is common practice, and help reduce freight costs for both consignors and consignees.
But by applying the higher cargo rules to all trucks on the roads, instead of only trucks to be produced after a given date, the government, in one stroke, raised existing carrying capacity by up to a quarter, forcing per-tonne freight rates down. This at a time when carrying capacity was already increasing due to the introduction of the Goods and Services Tax (GST), which helped in quicker turnaround of trucks. Operators were able to keep the trucks gainfully deployed for 25% more days in a month than before.
These two reform measures only served to advance the cyclical slowdown which was on its way. The CV industry has a well-earned reputation for sharp practices such as steep-price discounting and dealer dumping by vehicle manufacturers. Like elephants that spray their own heads with sand, vehicle manufacturers — CVs and cars — have honed into a fine art the practice of clogging the pipeline by over-producing vehicles without a care for demand, and dumping them on dealers to sell.
This became a particularly painful issue because of the approaching deadline for the transition to BS-VI norms from April 1, 2020. Dealers are saddled with inventory of BS-IV vehicles that they need to clear out before the deadline. For the manufacturers, the problem is that they’re unable to plan their production schedules for BS-VI vehicles as freight operators are watching the fun from the sidelines. They’re waiting for the steep discounts that are bound to come by as the deadline nears and are not in a hurry anyway to add new trucks given the slowdown in goods movement.
If it was a deadly cocktail that consumed the CV industry, in the case of cars, it appears to be one of model fatigue. Between Maruti and Hyundai, the two big players that account for two-thirds of the industry, there have been hardly any exciting new launches in the last one year. There have been facelifts and limited editions of existing models but the two biggies have not ventured into launching fresh models, at least until very recently.
The model-fatigue theory is proved by the response that two new kids on the block — the Kia Seltos and the MG Hector — received. Though they’re not mass-market cars and are priced considerably higher than the median range, the two models have attracted bookings in excess of 30,000 units each in what is supposedly a depressed market. Maruti and Hyundai have clearly been caught sleeping at the wheel.
The onset of festival season sales and the impact of recent measures by the government may help the cycle play itself out soon but is there something that the government can do to quicken the turnaround? Of course, yes. Should it reduce GST on automobiles from 28% to 18% as per the demand of the industry? Yes, it should, but not for all vehicles.
The government should consider dropping GST only for BS-IV vehicles — CVs, cars and two-wheelers — that are now idling in stockyards of vehicle manufacturers and dealers. It should consider a scheme where all BS-IV vehicles sold until March 31 will suffer only an 18% GST. For the industry, this will help clear the clogged pipeline and for the government, it will help contain the fallout on its revenue as the lower rate will apply only on a limited stock and until a specified time.
A quick GST Council meeting by video conference should be called right away instead of waiting for September 20 when it’s slated to next meet. Prospective buyers, of cars as much as CVs, are delaying their decision as the word is out that the government may consider a tax cut. If rates are to be cut anyway, it makes sense to do it immediately. Two weeks can make a huge difference to an industry writhing in agony.