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Vol. XXIX No. 21 , February 16-29, 2020

Should Auto ­Sector Drive the Union Budget?

by The Editor

The Union Budget has just been presented in Parliament and the various measures that it carries are being analysed in detail. One of the interesting aspects of the latter exercise is the way most analysts have approached it from the industry which they represent. Almost all of them feel that it is overall a balanced budget except for their own specific industry which could have done with some more concessions. While we hold no opinion, for or against the budget, for this is not an area of expertise for us, it is worth pondering over what would have happened had the Finance Minister accepted all the suggestions of each of the industries and provided all the concessions they had demanded.

In the chorus of laments the one from the automotive industry is perhaps the loudest. And we are addressing it here as that is a dominant player in our city. The city is one of India’s three automotive centres, the other two being Gurugram (Gurgaon that was) and Pune. There are three important clusters here – Oragadam, Maraimalai Nagar and Sriperumbudur-Irungattukottai. Chennai churns out one car every 20 seconds and one commercial vehicle every one-and-a-half minutes. Last year, the State accounted for 45 per cent of India’s vehicle exports and since the Chennai port is the biggest in Tamil Nadu, it would be safe to assume that much of the cargo left from here. However, with export markets not yet shrinking, though flat for over a year now, the worry is more the near-total collapse domestically. That is pinching Chennai, for apart from the end products it churns out, it also makes around 33 per cent of India’s auto parts.

The automotive sector has expressed its disappointment over lack of concessions to it. But the question as to what exactly is the concession that is likely to spur demand remains unanswered and indeed, there can be no correct reply to this. The slowdown is largely due to very weak consumer sentiment and that can only be rectified if banks are induced to loosen their purse strings and lend. But with bad loans and NPAs hogging the news on a daily basis it is unlikely that banks will lend all that easily. It must also not be forgotten that it is the non-banking finance companies (NBFCs) that lend the most money for vehicle purchases and with that industry in more or less a shambles owing to successive governments alternating between no and excessive controls, not much joy is forthcoming from there.

We next come to the number of technical norms that automobiles (and here we include two-wheelers) have been facing mandated upgrades in. Each one poses a challenge in terms of sales for earlier models and this causes backlogs of inventory to pile up. The other major challenge is the way the Government appears to be pushing the electric vehicle agenda. While there is no denying that EVs are the way of the future there has to be consultation with industry. The Government suddenly declared that it expects three-wheelers to go electric by 2023 and two-wheelers by 2025. There is however no road map on how this is to be achieved but it immediately sank buyer interest as people think that EVs are just around the corner and so purchases can be postponed.
Overall, the auto sector needs to look elsewhere and not at concessions. It will be good if it did not view the present problem in isolation but in conjunction with other challenges facing the economy.

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