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Budget 2021: Will FM Sitharaman announce relief measures for auto sector?

Vivek Punj     February 1, 2021

A stitch in time saves nine. But given the tattered state of Indian auto industry, mere stitches will prove too little, too late to patch the bleeding sector. It has been clear for some time that the sector needs a firm helping hand. Industry players, battered by one crisis after another, have already sought government's help for reviving demand. It remains to be seen whether this much-needed help finally arrives in Budget 2021.

The automobile and automotive component sectors have been braving low demand for the better part of three years due to a host of reasons  -  the absence of consumer confidence due to slowdown blues and liquidity crunch resulting from malaise in the NBFC sector to name a few.

At the beginning of this fiscal, the coronavirus pandemic added salt to the wound. Passenger vehicle sales in India, one of the benchmarks for gauging economic growth, tanked 78.43 per cent during the April-June period as dealerships were closed during a countrywide lockdown. This was the ninth quarter of de-growth in a row, making it the longest slowdown in past 20 years. By some estimates, the daily loss in turnover for the industry during this period was Rs 2,300 crore.

The auto industry found a much-needed purple patch during the festive season, as expected. October rekindled hopes as buyers turned up at outlets during the Dhanteras-Diwali period. But November saw auto companies' worst fear become reality  -  as festive season ended, so did consumers' enthusiasm. The short-lived revival proved to be pent-up demand  -  as feared  -  and not sustained recovery, as the industry had hoped.

The domestic automotive component industry finds itself in the equally troubled waters. The segment recorded a turnover of $15.9 billion during the first half of FY21, significantly lower than $26.2 billion recorded in the corresponding period of FY20, which itself was below $29 billion seen during H1 FY19. As for the impact of COVID-19, industry body Automotive Component Manufacturers Association of India (ACMA) estimated that the automotive component sector needs four years to return to the peak levels of 2018-19.

Now automakers are banking on two factors for a turnaround  -  a prospective rise in demand with COVID-19 fears driving preference for personal mobility, and projections of a robust economic recovery in the coming fiscal. The former is a cautiously optimistic attempt to find a silver lining amid this once-in-a-century crisis. The latter depends on how the aforementioned crisis plays out and the effectiveness of measures to fight it (read vaccines). And both factors currently stand in the realm of uncertainty.

Bottom line: government needs to step in with intent before the longstanding resilience of the Indian auto industry fails.

Automobile and automotive components have already been included in the production-linked incentive (PLI) scheme, along with eight other sectors. The motive of the scheme is to attract foreign players, boost production, increase exports, and create jobs. This move is likely to ease supply side pressure for the auto sector.

The last Budget was a lacklustre affair for a rather hopeful auto sector. The government could address some of those demands to revive demand. A GST cut for automobiles  -  something the industry has called for time and again  -  could go a long way in reviving demand.

In COVID times, discretionary spends have dwindled across the board and auto sector is not an exception. Putting more money in the hands of buyers, by the means of tax cuts or similar initiatives, along with reducing the costs associated with owning a vehicle, might be an effective combination to bring buyers back to dealerships.

All eyes will be on announcements that could affect fuel prices, considering how petrol and diesel became costlier despite falling crude prices during the lockdown. High fuel rates are likely to be detrimental to any steps taken to revive auto demand, and is expected to be on the Finance Minister's mind this Budget.

Coming to other end of the fuel spectrum, electric mobility can use a fillip from the Centre, considering the government's ambitious goal of making it the norm by 2030. This Budget could at least address the sticking point of high battery prices, which has forced electric vehicles to be a low or negative margin prospect for manufacturers in India. Bolstering charging infrastructure is another aspect that has been flagged by industry experts for boosting EV demand. Provisions for the same in Budget 2021 will be a welcome move.

But FM Sitharaman already has a lot on her plate. The pandemic has exacerbated the economic slowdown into a recession. Focus is likely to be on growth this Budget, as the Finance Minister had promised, while stating that it will be a Budget like "never before".

A lot needs to be done to rescue the auto industry and it needs to be done now. The sector accounts for 49 per cent of manufacturing GDP and 7.1 per cent of the nation's GDP, which make a compelling argument to this effect. How much of it happens in this crucial Budget of unprecedented times will depend on government's fiscal health. Tax collections have been bleak all fiscal; the Centre wrapped up a tussle with several states over non-payment of GST compensation towards the end of last year.

Meanwhile, COVID-19 has forced the exchequer's hand  -  first on relief packages and now on vaccination. The government is planning to spend thousands of  crores to inoculate 30 crore Indians falling under priority groups in the first phase of its mass vaccination drive.

Sector-specific measures might be sacrificed in favour of remedying the severe economic and health crises at hand; reviving economy is likely to take priority over rescuing a sector. If the government does take this approach, the auto sector will have to look for ways to make the most of it. In absence of tangible government support, Indian auto industry will have to make do with its cautious optimism and hopes of economic recovery.

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