Auto sector in crisis

There is a strong case for reducing GST on the auto sector to 18% for a specific period as part of immediate revival package to arrest the slide

AuthorPublished: 15th Aug 2019  12:15 amUpdated: 14th Aug 2019  11:27 pm

India’s auto sector is reeling under an unprecedented meltdown, triggering massive job losses. The numbers are simply frightening: Passenger vehicles sales down by 31% in July, a record ninth straight month dip, over 3.50 lakh people rendered jobless and 286 dealerships closed in the last 18 months. The crisis, a reflection of the overall economic slowdown, is showing no signs of abating. In fact, there are fears that the job losses in the sector could go up to 10 lakh by the end of the year. While a combination of factors, including the external environment, has led to the present situation, one of the major reasons is the crisis that has enveloped the non-banking financial companies (NBFCs), which have been the traditional source of funding for the automobile sector. The crisis-ridden NBFCs are not in a position to finance passenger vehicles. Earlier, over 30% of cars and 65% of two-wheelers used to be funded by the NBFCs. Problems in the adoption of revised emission norms, uncertainty over the timeline to switch to electric vehicles and phase out diesel and petrol vehicles, structural changes in the transport sector influenced by changing preferences of the customers, growing concerns over pollution and congestion on city roads have also contributed to the slowdown. Since the automobile sector is one of the largest employers and contributors to the GDP, the crisis in the industry is bound to have a debilitating effect on the economy and employment.

Automobile sales have registered a steep fall across all categories of vehicles. Apart from liquidity squeeze and the decline in customer confidence, the mandatory upgradation of products to meet the Bharat Stage-VI emission norms by April 2020 has also led to the slide in sales because the manufacturers were forced to hike the prices. According to the data released by the Society of Indian Automobile Manufacturers, the domestic passenger vehicle production was down 16.52% last month while the production of passenger cars was down 20%. While there can be no quick fix solution, there is a strong case for reducing the GST on the auto sector from the base rate of 28% to 18% for a specific period as part of immediate revival package to arrest the slide. The present downturn is not just cyclical because cycles don’t last this long. The costs have gone up because of the revised emission norms, incentive for a consumer is low and there is a need for external intervention to kick-start the growth cycle. The deceleration in the rural economy is reflected in the worsening slide in sales in the tractor segment. Truck sales have been hurt by changes made by the government in the axle load norms.

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