Indian auto industry seeks growth injection from new government

The Indian automotive industry has experienced a tough time over the past couple of years. From a high of 12.24 percent growth and sales of 17,376,624 vehicles in 2011-12, overall industry growth slid to only 2.61 percent in 2012-13 to 17,815,618 units. In 2013-14, year-on-year growth was only 3.53 percent with sales of 18,421,538 units, that also thanks to the smart 23 percent growth in the scooter segment and 7.31 percent growth in the overall two-wheeler segment. All other vehicle categories (passenger vehicles -6.05/ CVs -20.23 percent / three-wheelers -10.90 percent) fell by the wayside.  

High fuel prices, high interest rates and an overall dampened market sentiment have been playing spoilsport for long and the industry is crying out for some stimulus. Among the key asks are a better infrastructure, implementation of the long-pending Goods and Service Tax (GST) and the excise duty cuts on vehicles to be extended after June 30.

Autocar Professional spoke to a few industry leaders to find out their specific requirements from the new government, which is all set to be announced later today.

Dr Abhay Firodia, chairman, Force Motors, says: “India is at the moment at an early stage in the global automotive industry. It can become a truly competitive industry globally, provided the existing policy hurdles that are on its way are removed. Two key areas that the government should tackle are simplification of labour laws and simplification of taxation policy.” Firodia is hopeful that Narendra Modi will be able to bring about the changes.

According to Jnaneswar Sen, senior vice president, sales and marketing, Honda Cars India, there is need for a strong strong government with GDP and infrastructure growth that will boost the growth of the automotive market and demand for cars. He says, “There should be clarity on diesel pricing and continuation of subsidies to plan better, a lowering of interest rates and the reigning in of inflation, continuation of excise duty cuts as OEMs have not really been able to  capitalise on the cuts so far and imposition of GST to ensure that there is a fair pan-India tax structure.”

The commercial vehicle sector, which is the barometer of the economy, has borne the brunt of the slowdown since over two years. The decline in sales has been particularly sharp in the past year. In 2012-13, the sector sold a total of 793,211 units, down 2.02 percent over 2011-12. But in the last fiscal (2013-14), as a result of a ban on mining activity in the country and a host of other factors, the CV sector shipped even further, down 20.23 percent to 632,738 units.  

According to Sugato Sen, deputy director general of the apex automobile industry body SIAM, “I expect the economy, growth rate and infrastructure to improve so that demand for vehicles picks up, which in turn will boost market sentiments. There was negativity in market sentiments because of high interest rates on automotive loans  and high inflation. These should come down and rising fuel prices should be arrested.”

For Vinod Dasari, managing director, Ashok Leyland, the wishlist reads as:

“Reduce interest rates, introduce GST, implement Aadhar to prevent leakage of funds meant for poor, get infrastructure projects up and moving, ban overloading, expand bus transport to reduce pollution, scrap old vehicles, restart mining activities and bring back credit for exports.”

The automotive component industry too has had its share of tough times. According to Dr Surinder Kapur, chairman of the Sona Group,

“My hope and prayer is that we have a strong government and not a khichdi. As  businessmen, we are mostly apolitical and want good economic growth because India requires it and deserves it. To me economic growth means employment. Every year 12-15 million youngsters look for jobs when they graduate. Therefore, jobs have to be investment- and infrastructure-led because that’s what really kick-starts the economy. And in the past five years, there has not been that kind of investment in infrastructure.

So my hope for the new government is a strong Centre that is able to really push through good legislation; for instance, the Goods and Service Tax (GST) which we have been awaiting for long. It will add 1.5-2 percent to the GDP growth rate.

The auto sector grows because of three things – good interest rates (they are high today) that need low inflation, fuel prices (diesel and petrol prices need to be contained, which in turn needs investments in the petroleum sector) and, most importantly, a feel-good factor which will surely come about if you have a strong government. If we have a khichdi government, we are in trouble.

The slowdown has affected the auto sector, which is very sensitive to fuel pricing and high interest rates. To stabilise interest rates and inflation which in India are supply-sided, investments are the key. And, for investments we require FDI. I recently read a report that said European nations believe that India is a great place to invest, provided there is a strong government. Retrospective tax in business is putting people off. We need to correct that. There has to be a vision to take the economy forward.

Harish Lakshman, president, ACMA, has a five-point agenda for the new government.

“While we have seen growth come to a standstill due to uncertainty and lack of confidence, the challenges for the future are equally daunting. Lack of availability of power, poor managerial bandwidth and low return on investment add to the challenge of unutilised capacity, especially for small Tier 2 and Tier 3 manufacturers. Further, our government continues to push for more multilateral and bilateral Trade Agreements (FTAs), increasing the threat of imports; this is in contrast to many of our competitor nations imposing Non-Tariff Barriers on imports. 

While the present seems to be gloomy, I am optimistic about the medium to long-term growth prospects of the component sector. Although the industry has a lot more ground to cover and become cost competitive, the need for government support to provide a dependable and competitive ecosystem and infrastructure is being acutely felt.

Firstly, there is an urgent need for demand creation and bringing back footfalls into auto dealerships. The recent excise rate cut in the interim Budget needs to continue for some time, as also interest rates need to be brought down to make vehicle financing attractive.

Secondly, introduction of GST has been long pending. This single reform has the potential to revolutionise the entire manufacturing sector by eliminating the cascading effect of taxation and can overnight make ‘made-in-India’ products cost competitive.

Thirdly, the infrastructure deficit needs to be addressed immediately. It is an irony that some of the major automotive clusters have to go without power for several hours at a stretch. Further, the government needs to accelerate the building of highways that will not only benefit the automotive industry and improve connectivity, but also promote the social agenda of inclusive growth. 

Fourthly, the government should ensure long-term stable export promotion schemes with a 10-year term or more. It is unfortunate that we are a net importing industry although our potential to service the global exports markets is immense. It is hard for us to place big bets in the global market without knowing whether the existing export promotion measures will stay or be changed.  The last export-import policy has been beneficial to the auto component industry with several incentives introduces over the five-year period of its validity, these measures need to continue unabated.

Last but not the least, labour reforms have been a sensitive subject which, unfortunately, no political party is willing to address. The labour laws in India are archaic and are not conducive to the growth and development of the industry. As a result, the auto industry is constrained to employ significant number of contractual labourers which is neither in the interest of the industry or even the labour.”

N K Minda, chairman of the UNO Minda Group, a Rs 2,500 crore Tier 1 supplier with 34 plants in India and manufacturing facilities in Indonesia, Vietnam Spain and Design Offices in Japan, Europe and China, says: “The entire nation including the automotive industry has high expectations on several fronts ranging from revival of economic growth to bringing down interest rates and much more. However, as far as the automotive industry is concerned, we believe the new government is expected to address some practical reforms in terms of FTA, labour, reform policies and interest rates and ensure good and decisive governance.

FTA:  We expect negotiations between India and the European Union to resume at a positive note after these elections. It has been a long wait and simultaneously the foreign investments should go up as per the past trends.

Excise duty: Following sluggish demand and high interest rates, the automotive industry has been going through a bad phase since the last two years. However, the recent cut in the excise duty may boost up the sagging morale of the automotive sector. Post elections, we expect the cut in the excise duty will remain and there may be further reduction in taxes owing to the fact that the automotive sector is one of the most taxed sectors.

Raw material: The appreciation of the dollar against rupee over the last year has led to a decline in the imports contribution in the automotive industry, encouraging more exports.

As far as raw materials are concerned, industry should continue strengthening its raw materials base and be less dependent on the economy fluctuations.

Infrastructure: For infrastructural facilities, industry including us have pegged hopes on a new, stable government for better facilities which may even control high transition rates.

Labour law: The automobile sector is a major manufacturing sectors and has created a significant number of jobs. We expect the new government will ensure better employment opportunities for fresh talent and bring some good reforms related to trade unions following the increasing number of labour strikes we’ve seen in the last two fiscals.

Ashwani Keswani, country head, Oetiker India, is rather candid: “The overall sentiment of business is so dampened with the current government that any change will be a refreshing one!” He adds, “ Both the passenger car and commercial vehicle segments need to bounce back. While cars are a victim of the rising fuel costs and interest costs, CVs are a victim of poor overall growth of the economy for the past two years. Tax sops will not be the answer in the long run. So growth will be key followed by a resurgent rupee to help the industry recover.

Ashwani Aggarwal, president, Brose India Automotive Systems, commented: “Formation of the new government with clear majority will definitely improve the sentiments across the industry as well as the consumers. A clear majority means that the new government will be stable, and hence, will be more active in terms of taking favourable policy decisions without depending on their allies. I believe that this will bring an end to the prevailing policy paralysis and is good news for the industry. However, the new government faces a big challenge, which is to prove what they have promised. They need to ensure influx of investments into the country and create new jobs in the market to restore the consumer confidence. The consumers must be confident while spending their money.”

Hella India’s managing director Dr Naveen Gautam said, “A clear mandate is always good for the country. We expect that the new government makes fast and sustainable decisions to lead the path of economic growth. This will also help to boost consumer confidence level.
Transparent and rationalisation of taxes and friendly incentives for new technology will certainly help the auto industry in fast recovery. In our opinion, people will pick the ball once it starts rolling through these government initiatives and growth will continue.”

Shrikant S Bairagi, managing director, Tremec India, said: “We are expecting pro-industry policies by the new government at the Centre, which can kick-start the investment cycle, create jobs and restore the consumer confidence and optimism in the market in the foreseeable future. We hope that the new policies and reforms help Indian economy jump back to its original growth rate of 8 percent. We expect that the new government would take on the inflation by de-bottlenecking supply side constraints, which would result in to softening the interest rates. Other focus areas should be revamping labour laws, single window clearance for setting up businesses, quicker green clearances for infrastructure projects.”

Pankaj Kapoor, deputy managing director, Tenneco Automotive India, remarked: “We look forward to a stable government which will ensure the continuation of policies. We are expecting pro-industry, liberal policies for the manufacturing and automotive sector, which will bring relief and positive sentiments in the market.”

Gajanan Gandhe, senior VP & executive director – IAC International Automotive India, the global supplier of automotive components and systems, including interior and exterior trim, said: “Infrastructure growth, creation of new jobs, liberalising the number of controls on the (auto) industry and a definite control on inflation should be the focus of the new government. Single-point decision making is effective and I have felt the same in Gujarat. Also, action on the front of labour issues would be an important area to be looked into. While the formation of the new government is already reflecting in the market with positive vibes, the trickle-down effect on industry will take some time, say, by the end of this financial year. I believe that with focussed growth-oriented policies, we might register double-digit GDP growth next fiscal onwards.”

YVS Vijay Kumar, CEO, Mahindra First Choice Services, said: “I am glad that a government has won with a clear majority, which will ensure stability in the policy level decision making and the economy. The Modi-led government is likely to give a big push to the manufacturing sector, where we have unutilised resources. Also, investments in the infrastructure sector must be the priority. We expect sops and subsidies should come down to make way for a clear development led growth. The new government must also rationalise the controls on the auto industry. Consumer confidence is surely turning around.”

Adarsh Gupta, director, Autolite (India), says, “Firstly, vehicle finance needs to be cheaper for sales to pick up. Therefore, interest rate reduction will boost automotive sales. Secondly, the government must encourage exports and the new government should extend 3 percent of subvention of interest on loan taken for export. The benefit, which had continued till March 2014, hasn’t extended further. This should be extended to the whole of the auto industry and not for just a few segments. Thirdly, the infrastructure spend should happen consistently as that will boost the auto industry. The excise duty relief (in February 2014) didn’t really help boost sales mainly because excise benefits helped those buyers who upgraded their purchase through higher variant or top-end models instead of buying a basic model. And the two-wheeler buyer hasn’t really moved upward to buying cars.”