Automobile industry: Analysis

Headline : Putting the pedal to the metal Editorial 6th Sep’19 TheHindu

Details :

Automobile industry:

  • The automobile industry is notoriously cyclical (that is, it sees frequent cycles of ups and downs).

It is also a lead indicator for economic growth.

  • The industry is also a lead indicator for economic growth.
  • It has been slowing down for about an year, indicating the signs of an impending slowdown.
  • The economic growth has also been seeing a decline since the last quarter of calendar year 2018 and intensified with the passage of every month in 2019.

Current auto industry downturn is a major worry:

  • While the industry goes through cycles of ups and downs, the current slowdown is something that must be taken more seriously.
  • The current downturn in the auto industry is the worst it has seen in a long, long time in terms of depth, scale and character.

How’s the current slowdown different from the usual cyclical downturns?

  • The downturn this time is all-encompassing: 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.
  • Downturn amplified by other factors: A potentially natural, cyclical downturn has been amplified by extraordinary circumstances unleashed by reform measures that may have been well-meaning but have impacted the sector negatively.
    • Case of commercial vehicle industry:
      • For example, the Goods and Services Tax (GST) has helped in quicker turnaround of trucks. Operators were able to keep the trucks gainfully deployed for 25% more days in a month than before.
      • The government is 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. This raised existing carrying capacity by up to a quarter.
      • These two reform measures impacted the commercial vehicle (CV) industry and only served to advance the cyclical slowdown which was on its way.
    • Pollution norms:
      • The deadline for the transition to BS-VI norms (from BS-IV) has been set as April 1, 2020.
      • Dealers are saddled with inventory of BS-IV vehicles that they need to clear out before the deadline.
      • Freight operators are 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.
      • This also had a negative impact on the CV industry.
    • Little innovation by car manufacturers:
      • 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.
      • In contrast, some new entrants into the market have seen huge interest and bookings, much more than expected.
  • Policy choices:
    • Finally, an unthinking approach to a critical policymaking area such as electric vehicles (eVs) has only intensified and prolonged the slowdown.
    • Key Ministers have tried to contain the damage by retracting earlier statements about eVs and reassuring the industry that the electric motor will not be privileged over the internal combustion engine (ICE) but it has come too late.

Way ahead for the industry

  • The onset of festival season sales and the impact of recent measures by the government may help the cycle play itself out soon.

Government can cut GST to quicken the turnaround:

  • The government can reduce GST on automobiles from 28% to 18%, even if only for BS-IV vehicles, as they are now lying around in stockyards of vehicle manufacturers and dealers.
  • For the industry, this will help clear the clogged pipeline.
  • 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 (say till March 31).
  • 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.
  • The rate cuts could be announce immediately, and it make a huge difference to the industry.

Importance:

GS Paper III: Economy

Section : Editorial Analysis

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