9th September – Putting the pedal to the metal

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.

Putting the pedal to the metal

Why the slowdown?

  • 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.

Policy decisions –

  • 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. With reduced costs, the vehicle manufacturers honed into the practice of clogging the pipeline by over-producing vehicles without care for demand, and dumping them on dealers to sell.
  • Dealers are saddled with the inventory of BS-IV vehicles that they need to clear out before the deadline of April 2020. 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.

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.

What can be done?

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 limited stock and until a specified time.

SourceThe Hindu

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