What does the auto sector expect from the Union Budget 2019?

The bigger challenge is to bring down the cost of funds, which has gone up because NBFCs are not able to raise funds at low cost. This will be the key to reviving auto sector demand

The Indian auto sector has been facing one of its worst periods in the last year. Year-on-year (YoY), the sales of automobiles has dropped by over 20 percent and the inventories are piling up.

It is in this backdrop that the Union Budget 2019 is being presented. So, what exactly are the expectations from the Union Budget for the auto sector?

The auto industry does not call it a reduction, but a rationalization. According to auto sector insiders, imposing 28 percent GST on automobiles literally puts it on par with sin goods like cigarettes and other items of luxury consumption.

Actually, automobiles are neither!

The first expectation is that the GST on automobiles should be reduced from 28 percent to a more rational level of 18 percent at a policy level.

The auto industry believes that this reduction in prices can be passed on to the end customer, which would be instrumental in boosting demand.

A recovery plan for NBFCs:

If there is one sector, other than reality, that has borne the brunt of the NBFC crisis, it is the auto sector. The crisis in the NBFCs after the IL&FS fiasco has not only tightened the liquidity but also hardened interest rates.

Nirmala Sitharaman has already discussed the issue of creating a dedicated window to make liquidity available to the NBFCs. But this window will only be made available to NBFCs having a problem of liquidity and not of solvency.

The bigger challenge is to bring down the cost of funds, which has gone up because NBFCs are not able to raise funds at low cost. This will be the key to reviving the auto sector's demand.

The scrapping of old vehicles with incentives:

The Society of Indian Automotive Manufacturers (SIAM) has been lobbying with the finance ministry on this subject for a long time. The auto industry's representative body has already proposed a scrappage incentive scheme, which takes old and polluting vehicles off the road.

This will be a boost to renewal sales. Secondly, the SIAM has also been demanding increased customs duty on imported commercial vehicles and semi-knocked down commercial vehicles by 5-15 percent, depending on the slab they are operating in.

Clarity on the introduction of electric vehicles:

The auto industry is really looking forward to a comprehensive policy paper on the phased introduction of electric vehicles in India. The NITI Aayog has recently moved a note to the Finance Ministry calling for the scrapping of all fossil fuel based vehicles by 2030.

Most auto manufacturers are up in arms as they feel that a big shift in a short span of time would be too disruptive and tumultuous.

Especially, given the current situation, auto companies do not have the capacity to take up such investments.

What the government could do in this budget is to lay out a clear roadmap for shifting to electric vehicles, which is realistic from the point of view of the climate commitments and the profitability of auto companies.

The auto industry is normally a lead indicator of robust consumption in the economy. It is time the government put its best foot forward to provide succor to this sector!

(The author is AVP – Mid Caps at Angel Broking.)

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