Budget pressure on two-wheelers, tractors

Decline in food subsidies and lower NREGA allocations proposed would impact rural incomes and thus two-wheeler and tractor sales.

By Brian de Souza calendar 05 Feb 2022 Views icon4864 Views Share - Share to Facebook Share to Twitter Share to LinkedIn Share to Whatsapp
Budget pressure on two-wheelers, tractors

The proposals in the budget presented last Tuesday are expected to put continued pressure on two-wheelers and tractors segments, director, Crisil, Hemal Thakkar has said. Explaining the rationale for this, Thakkar said that the proposed reduction in food subsidy for the next fiscal which is down by 28 percent as compared to this year’s revised estimates, will lead to lower food procurement  which will have a negative impact on farm incomes. This will have a bearing on sales of these two segments that depend on farm earnings.

Farm incomes, already under pressure because of Covid waves, combined with the lower allocation for the NREAGA in the next fiscal, will add to an already-stressed segment of the Indian economy. The proposal to tax unblended fuel will further affect the two-wheeler sales as users would feel the pinch.

On the tractors front, Thakkar said that going forward, sales could well record a CAGR in single digits due to a fall in incomes. The impact, however, may be cushioned by good monsoons which have been the order of the day for the last four years. A bad monsoon would give the farm sector very little to cheer about. In terms of sales, Crisil says the focus will be higher hp segment which can be used for operating farm implements.

Putting things into context, Thakkar says that while the Indian economy was impacted by food inflation in the FY 21, it was fuel-related inflation that dominated the scenario in the on-going calendar. With crude oil having breached the $ 90 mark just days before the budget, the way prices move in the months ahead will have a bearing on the economic performance. For the automotive sector, the foray of the top 3 OEMs into the CNG space, most recently being Tata Motors, is clearly aimed at offering a more affordable cost of ownership to existing and potential car buyers. A Mumbai-based pre-owned car dealer says he gets more walk-ins to day for CNG cars as against the pre-pandemic days.

In this context, it is worth noting that at the press meet post the tabling of the Economic Survey, the chief economic adviser in the finance ministry, Sanjeev Sanyal said that the future would be determined by a quartet of factors including climate change, supply change, technology and consumer behaviour. He stated these factors could interact in unpredictable ways. Thus, he emphasised, the need for a flexible approach and innovative ways for the economy to respond.

According to the Society of Indian Automobile Manufacturers (SIAM), sales of two-wheelers including mopeds for calendar 2021 were just under 200,000 units more than in CY20, the year in which the first wave of the pandemic led to lockdowns and curfews. The numbers were 14,469,514 units in 2021 as against 14,269,821 in CY 2020. However, it is also important to mention that over the last 2-3 years as a result of insurance costs, the introduction of ABS and the transition to BS 6, two wheelers have become more expensive. The entry level two-wheelers have borne the brunt of these increased costs. A decline in rural incomes will only exacerbate this.

With regard to the government’s electric mobility proposals, the proposal to grant infrastructure status to grid scale battery storage will help fund the sector, and create job opportunities. As batteries account for 40 percent of the costs of an EV, the battery swapping proposal will encourage the adoption of electric mobility for three wheelers, taxis and LCVs. The proposal will also lead to economies of scale thus lowering battery costs. It will lower EV acquisition costs on the one hand as it encourages a pay for use approach. For those operating taxis and LCVs, the proposal promises plenty in the form of better operator profits. It will give companies including start-ups entering this space to strategise on new business models.

The government’s road building proposals will spell good news for the ICV and medium and heavy CVs segment, Thakkar said. Elaborating on the proposal for additional roads, the addition to the network of national roads is more significant than for the PM’s Gram Sadak Yojana even though the allocations to the former and latter are 3 percent and 36 percent higher. The allocations for the national highway network at Rs 1.30 lakh crore in the current year going up to Rs 1.35 lakh crore could well be eaten into by inflation.

Yet from an overall perspective, the government’s plan for economic growth over the next 2-3 years is premised on infrastructure. The gross budgetary support currently 55 percent of capex is proposed to be enhanced to 62 percent which “will feed directly into infrastructure”, as Thakkar puts it. Its spin-offs for the CV sector and allied industries such as cement and steel, and the resultant direct and indirect jobs creation will be closely monitored.

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