Explore - Experience - Excel

Is GST cut an answer to the auto industry slump?

 – Anshu Sharma

“India auto sales decline for 10th straight month, worst slump in two decades” read a headline in a leading business daily. The sales of cars and SUVs have been on a constant decline and have shown no signs of recovery. As per SIAM’s recent report, Truck & bus sales declined 39% and two-wheeler sales fell 22%. Year on year sales decline numbers in August for India’s leading auto companies are staggering, with Tata motors at 49%, Maruti Suzuki at 33%, M&M at 26%, and Hyundai at 17%. Contributing to 7% of the GDP of Asia’s 3rd largest economy, and directly or indirectly providing employment to millions, this slump presents a serious concern. Various industry leaders have expressed their opinion on the reasons for this slump. There seems to be prominent schools of thought for and against the GST rate cut demand.

GST cut will spur demand

Society of Indian Automobile Manufacturers (SIAM) believes that high GST bracket of 28% has made it unaffordable for new buyers. Most players through the industry body are lobbying for a GST rate cut to bring it down to 18% in order to boost demand. SIAM said that “A lower tax rate would allow companies to reduce their vehicle prices, potentially attracting more buyers.” This demand for a cut in GST is also supported by The Automotive Component Manufacturers Association of India (ACMA) and Federation of Automotive Dealers Associations (FADA).

The GST council met on September 20th and decided not to toggle with the current GST slab of 28% for the auto sector. The SIAM led lobby still persists with its demand for a GST rate revision. However, there are contrarian school of thoughts which believe that a GST rate cut is not the answer to the unprecedented slump that the auto industry is facing currently.

Policy matters are to blame

Maruti Suzuki India (MSI) chairman R C Bhargava believed that GST rate cut is not the answer to this situation. He said that reasons such as lenders’ lack of risk taking appetite, mandatory safety features, higher taxes on petrol and diesel, increase in road & registration charges, and increase in insurance cost together are making cars unaffordable. He says that all these factors put together have added a further Rs. 55,000 to the cost of an entry-level car.

Auto makers are being cry-babies

Some of the key industry opinion leaders are opposing this demand for GST rate cut. This gives rise to our second school of thought which says that auto makers are just being cry-babies. N Srinivasan, MD of India Cements and Rajiv Bajaj, MD of Bajaj Auto are leading this contrarian school of thought.

In their opinion, the automakers are themselves to blame for their poor planning. This school of thought finds auto companies guilty of piling up inventories without making their products attractive and economically viable. They believe that a GST cut will not spur demand. “Take Maruti, their quarterly net profits even now is more than Rs. 1,400 crore and they are sitting on piles of cash” says Srinivasan adding his weight behind the lobby opposing a rate cut for the auto industry. He argues that the auto industry should learn from how the cement industry has managed to thrive with a 28% GST slab through robust operational planning.

Rajiv Bajaj on similar lines argues that a correction is imminent as no industry can keep growing forever. He believed that the unprecedented slowdown is due to ‘overproduction and stocking’ led by demand forecasts which have gone wrong. The government, in his view, should not look to bail out an industry where the fault lines might lie within the same industry.

Millennials are to blame

This is something which has led to a barrage of memes and social media ridicule over the past few days once the finance minister Nirmala Sitharaman opined that the millennials are to be blamed for this slump. She cites studies which point towards millennials’ aversion to commit to EMIs for buying a vehicle, and are instead preferring services such as Ola & Uber.

Shashank Srivastava Executive Director Maruti Suzuki (Marketing and Sales) disagreed with this view and expressed the need to watch and study the slowdown more before arriving at such a conclusion. Cab aggregators in India have been around for last 6-7 years, and this period in-fact has been a golden period for the Indian auto industry. The finance minister’s argument also ignores the prestige and aspirational aspects which drive car ownership. Also, there is no precedence of a similar slump in countries such as US which also have a strong Uber presence like India. Thus there seems to be some weight in Shashank’s argument for caution before conclusion.
Author’s PoV

The author concurs that GST r
ate cut is not the answer to the current situation. On the other hand, it cannot be denied that the millennials are driving the new products that we see on the shelf, however it is still a far cry to attribute them with this unprecedented slump.
The author believes that there needs to be a concerted two-pronged approach with the government and the auto industry in complete alignment. The government needs to relook at the policy framework which seems to be adding too much burden on the auto buyer. While it is admirable to move to world class safety norms, we also need to keep in mind the affordability aspects driven by India’s per capita income levels.

Auto companies on the other hand need to be a little more robust in planning their production and stock levels. They need to be more innovative by coming up with product offerings which are affordable within the existing policy framework. What possibly looks like a step in the right direction is Hyundai offering the entry-level version of SUV Creta for a monthly rental of Rs 17,642 inclusive of all taxes for a period of five years. Buying the same would amount to Rs. 2.7 lakhs as down payment followed by an EMI of Rs. 18,901 for five years. Similar offers are in the pipeline from other prominent auto companies.
Let’s see what the government decides on GST while we watch the trajectory our auto industry takes, both in the long and short term, with keen interest.

DISCLAIMER: The views, opinions and content on this blog are solely those of the authors. ISME does not take responsibility of content which are plagiarised or not quoted.