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Slow auto sales due to govt indecision; let sector reforms flip-flop not kill the industry

The current crisis that threatens the very base of the industry has been mainly precipitated by policy vacillation than any generic factor
  • Surajit Mitra

There is no doubt that the Indian automotive industry is on a steep downward slope, perhaps worst ever in the last four decades. This is the same industry that, last year, recorded a turnover of Rs 8.2 lakh crore ($119 billion) with a huge export component. Within a year's time, the industry is resorting to 'no-production days', large-scale laying-off of workers, inventory-clearing sales, etc. The pain is deeper for supply chain handlers and dealers. A modest estimate reveals more than 3,50,000 job losses in the last few months, and if the trend persists, there will be an unprecedented crisis in the sector, like Detroit of 2008.

How did we reach this stage in less than a year? Is it because of the general slowdown attributed to both indigenous and more exogenous factors as the official pundits would have us believe, or is there a more credible story behind this? If the general slowdown was the only reason, then how come in the same period FMCG companies recorded a decent year-on-year growth, with net sales of Dabur and Nestle achieving 11% growth and HUL 7%. White goods like ACs, washing machines and refrigerators also witnessed 5%, 3% and 11% growth, respectively, during April-May 2019. So we need to demystify the myth of the omnibus reason called the slowdown.

In my opinion, a number of factors mostly owing to systemic failure have arisen in the auto sector in a very short span of time. Most vehicle purchases are being financed through banks/NBFCs. No doubt, liquidity crunch coupled with risk-averse approach of banks and high interest rates have played a big role, but these conditions have been prevailing for quite some time. Then why is there a sudden dip? The real reasons lie somewhere else. Probably it's bunching together of several regulatory changes announced by the government in a very short span of time without realising their full implication, a classic case of 'reform for reform's sake'. Let me list out a few: regulatory changes in safety norms; leapfrogging to BS6 putting enormous stress on the industry to achieve it in the shortest time; frontloading of third-party insurance, etc. On top of it, the auto industry got no relief in the new GST regime. The last straw on the camel's back was huge increase in road tax, by as much as 13% in some states. This was too much for a product that is already highly taxed. It is estimated that these so-called big-ticket reforms happening at the same time pushed up the cost of vehicles by 7-15%, depending on size and make. When the BS6 kicks in, the cost will further go up by 5-6%. Fuel prices, which are already high over the last two years, are likely to go up further with BS6.

This high-cost scenario is further complicated by extraordinary policy modulation by the government through its think tank, the NITI Aayog. The 'Tughlaqi farmaan' of NITI mandating that all two-wheelers of a certain engine size to be electric by 2023 and all three-wheelers by 2024 has really taken the cake. Even the recent reassuring by the Prime Minister that there is sufficient space for both EVs and ICEs to coexist has not been able to douse the fire fully. NITI continues to make outlandish statements that not only demotivate both manufacturers and consumers but also distort the market. For instance, just the other day one of the prime movers of NITI publicly declared that EVs will attain price parity with petrol/diesel vehicles in 3-4 years. I wonder whether this statement is based on data or part of NITI's pipe-dream. Even the latest forecast of Bloomberg New Energy Finance (BNEF), which is closely followed by NITI, mentions that EVs will constitute a mere 6% of all car sales in India in 2030.

I've been highlighting for two years through my articles in national dailies that this kind of whimsical flip-flop of policy will destroy a sunrise sector like auto. It's time India formulates a consistent long-term policy with realistic targets. After the Automotive Mission Plan: 2006-2016, there has not been any comprehensive holistic auto policy; we've been strategising in bits and pieces.

I also wonder why this unusual rush for EVs, which have not succeeded in any country, including China. Moreover, EV is not the ultimate tech. Why we, as a forward-looking country, are not investing in fuel cell technology, which probably is the future of energy for mobility. If our main concern is the environment, escalating demand for electricity owing to EVs will result in generating more pollution, since we produce a lot of coal-based electricity. As per the government's own estimates, carbon intensity of power generation will continue to increase till early 2030s. If the concern is import of hydrocarbon, then advanced hybrid engines are a solution, allowing the industry time to transit to EVs in viable manner. Meanwhile, introduce structural reforms in auto taxation by linking GST to fuel-efficiency/carbon-emission, instead of irrational factors like engine size, fuel type, ground clearance, etc. Also introduce a scientific auto scrapping policy so that inefficient old engines get replaced by fuel-efficient ones.

The current crisis that threatens the very base of the industry has been mainly precipitated by policy vacillation than any generic factor. Auto is a very complex sector and requires deeper understanding and deft handling at the policy level. No investor, foreign or domestic, will be comfortable with such policy flip-flop. I only wish that pipe-dreams and unrealistic farmaans do not distort a vital national asset so carefully built over the last two decades.

(The author is former secretary, Government of India, and vice-chancellor, IIFT Delhi)