Budget 2019 wishlist: Here are the key challenges for automotive sector

In FY19, the automotive industry's sales volume grew 5%. However, all vehicle segments have witnessed degrowth in the first two months in FY20 — the passenger vehicle (-19%) and the 2-wheeler (-11.6%) segments have been the worst-hit. The primary reason is the weak customer sentiment, credit squeeze, and higher cost of finance and insurance. The uncertainties before elections also contributed to this.

Key challenges

• Higher upfront cost (insurance premiums) - Q3FY19 onwards, customers are required to pay a higher upfront price on insurance (third-party premiums). This has been one of the primary reasons for a dip in the passenger vehicle and two-wheeler sales
• Credit squeeze - A liquidity crisis in the NBFCs has led to a credit crunch on auto retail financing. Nearly 70% of two-wheeler sales and 60% of commercial vehicle sales are financed by NBFCs (source: SIAM)
• Product cost increase (BSVI transition) - Huge investments have been made by OEMs, suppliers in providing cleaner technology which, in turn, will make vehicles pricier
• Channel profitability - The long subdued demand conditions have resulted in a sharp rise in vehicle inventory at dealerships. While the situation has improved over the past 3 quarters, further measures (working capital improvements etc.) have to be taken to improve dealer health

Industry ask
 

• The FY20 Union Budget should aim to address the key industry challenge of demand degrowth. The government would also look to forge together an ecosystem for a "greener" mobility system. The government could consider following actions to stimulate demand in the auto industry
• GST rate cut on all vehicles from 28% to 18% - This will act as a growth catalyst to support the industry that is suffering from a rise in insurance costs and expected price increase associated with BSVI changes.
• One of the key asks from NBFCs is to ease out the process and cost of financing; such measures combined with the recent repo-rate cut from the RBI would have a positive impact on purchase decisions
• Incentive programme for scrapping more than 15-year-old commercial vehicles - The effects would be beneficial for the environment and act as a major demand driver for the automotive industry
• On rural demand - Tractors and two-wheelers demand see healthy growth with expected significant investments in the rural and agriculture sector
• In line with its 'Make in India' programme, the government should promote localization, especially in the commercial vehicle segment 
• Another big area to look forward to is the government initiatives for closing the skill gap. This is an extremely critical initiative for India to have a competitive automotive industry
• Electric vehicle rollout incentives
• Priority-lending by PSU banks for purchase of EVs and raising government subsidy to push sales
• Incentives for corporates and personal mobility companies for bulk-buying of green vehicles
• Reduce GST rate on EV to 5%

Kavan Mukhtyar partner & leader - automotive, PwC India

PWC point of view

“In FY19, the Indian automotive market has gone through a roller coaster ride from record high to sharp trough in demand. FY20 may turn out to be choppy with the shift to BSVI and dynamic regulatory environment. Budget FY20 should play a critical role in stabilising demand and ensuring healthy development of the automotive industry as it sails through massive change.”

Industry voice

“Further strengthening of banks and NBFCs in terms of liquidity will help the economy. Since the IL&FS crisis, which impacted the overall NBFC sector, overall borrowing has reduced leading to reduced liquidity. This in turn has impacted the overall investments, consumer expenditure and sentiment. Hence, a more robust banking system and its support will be very critical for the next leg of growth, as NBFCs also depend on funds from the banks.”