Scheme to scrap old cars in Budget 2017 will boost auto sector: Supekar

Dinesh Supekar, partner Price Waterhouse and an automobile expert was responding during a live chat

As the automobile sector is currently witnessing a slump, the government should simplify the Goods and Services Tax (GST) structure and include not more than three rates to put the industry on the fast track, said Dinesh Supekar, partner, Price Waterhouse. and an automobile expert. 

Supekar also underlined that an incentive scheme to scrap old cars could be a "game-changer" for the sector, and emphasised the need for the government to incentivise exports and develop infrastructure to boost the sector. 

He was responding to questions on a Business Standard live chat on what is required from Budget 2017 to ensure growth in India's automobile industry. Excerpts:

What should the government's strategy be to bring growth in the automobile sector back to the pre-economic-slump period?

Various factors impact the growth of the automobile industry, many of which are macroeconomic, such as commodity prices, and multiplicity of tax rates, which have a cascading impact on the costs of the vehicle. GST is expected to subsume these taxes. What the government needs to do is to have a simplified GST structure with not more than three rates -- say a merit rate for small cars and two-wheelers, and a standard rate for most of the other vehicle categories. An appropriately structured incentive scheme for scrappage of old cars (which invariably are more environment polluting) can be a game-changer for the industry.

India is poised to become one of the world's three leading automobile manufacturers, but this growth comes mainly from passenger vehicles. For the commercial vehicles, especially in 3.5-tonne and above segments, growth has been stagnant. Despite huge investment by commercial vehicle makers, returns has been minimal. What can the government do in order to revive the growth in commercial vehicle segment?
You make a valid observation. Many of the new entrants in this space are indeed making losses for a while. However, some of the older and more established players like Tata Motors have done reasonably well in the commercial vehicle space, and are actually making losses in the passenger vehicle segment. The newer entrants seem to be making losses more on account of under-utilised capacities. The real issue at hand is, therefore, how the government pushes forward its economic growth agenda, since this is what will boost overall demand and in turn the demand for commercial vehicles. Further, some of these newer entrants are utilising their capacities for exports. So, incentives for exports would also be important. 

The auto industry was hit hard by weak consumer sentiment and a cash crunch after demonetisation. What kind of hopes do you have from the Union Budget to boost the consumer sentiment?
Reduction in personal income taxes is being spoken about and that would boost the consumer sentiment to a certain extent. Having said that, the impact of the demonetisation was more profound in the rural areas. One important area of focus over the medium to longer term should be spending on rural infrastructure since this is more likely to result in demand boost in the rural areas. The impact of demonetisation should hopefully be only temporary in nature, and there could be a catch-up effect in the subsequent quarters, especially with incentives and education regarding digital payments, internet banking etc, which the budget should facilitate by announcing appropriate policy measures. 

Indian industry has around 20 companies selling passenger vehicles but one company, Maruti, alone controls 50% of the market. In such a situation, is there really space to accommodate all 20? Will the auto industry also see a consolidation like the telecom sector?

The market is indeed dominated by Maruti which controls a significant portion of the market. Especially because of its dominance in the small car segment. However, consolidation appears a bit difficult since many of these 20 players you refer to are subsidiaries of global MNCs, and any decision on consolidation therefore obviously would be a global decision and not India driven. There could, however, be sharing of manufacturing facilities/platforms etc and specific partnerships the way we see in Tata and Fiat, Renault and Nissan, Volkswagen and Skoda. 

As pointed earlier, there seems to be a crowding out by too many players in the sector. If there isn't enough space for all, what sort of business models other smaller, weaker companies can adopt to keep their operation viable?

Many of such so-called smaller companies in the Indian auto sector are actually subsidiaries of large MNCs having a strong global presence. Many of such players, therefore, have focussed on utilising their capacities in India to serve export markets. Shutting down Indian operations does not seem to be on cards for such smaller companies since India is being viewed pretty much as a long term story ie a market where returns can be made only after 10-15 years. Consolidation in India is also not an option, given that many of these are global players unless one is talking of sharing of production platforms, manufacturing facilities etc. The business model would pretty much need to be focussed on having as much localisation as possible, and using India to cater to global market requirements, to the extent possible, and gradually make the Indian operations more profitable.

How will new regulations, such as safety norms, emission norms, and fuel efficiency norms impact the industry?

These will indeed have a significant impact given the additional investment in new technologies which will be essential to move to these new regulations. In fact, there could be certain products such as carburettors (used in two wheelers) which could end up being totally obsolete, and the companies manufacturing such products would upfront need to start planning on newer products, investments, developing newer vendors etc.

Do you also think that the price of fuels needs to be rationalised for the automobile sector to do better? Also, the expenditure to maintain the vehicles continues to be very high. Service tax also needs to be considerably slashed to make the demand for automobile attractive. What else do you think is required?

Service tax rates could actually go up in the GST regime, and it's possible that this could happen in this Budget itself. However, taxes such as excise duty, VAT, CST, NCCD, and various cesses contribute to a significant portion of the cost of a vehicle and it is important that this complex tax structure is rationalised at the earliest so as to remove the impact of a cascading effect. There are anti-profiteering measures in the proposed GST legislation which seek to pass on the benefits of such a rationalised tax structure to the end customers, which in turn would make the automobile sale attractive for the end customers. As regards the price of the fuel, your point is absolutely valid, it does have an impact on the automobile industry, but, the prices are by and large linked with the market prices, and to a large extent dependent on state taxes. 

How will the pollution debate impact auto business? India has still not woken up to electric and hybrid vehicles. How far are they from mass market in India?

We already have a few electric vehicles in India, but they have not been all that successful on account of various reasons, especially because of the absence of the necessary ecosystem to support such vehicles, for example, adequate charging stations etc. Hybrid cars are also existing, but the price point is a challenge for it to be a mass market product. 

Do you think India will be able to meet the expectation of becoming a 5-million passenger vehicle market by 2020?

The actual sales for FY 16 for the passenger vehicles industry were around 3.4 million vehicles. This would require approximately a growth of 10 percent on annualised basis for the next 4 years if the number of 5 million vehicles were to be achieved. This is not an unrealistic expectation, especially since we are anyway achieving a GDP growth rate of around 6-7 percent per annum as a country. Further, based on recently published statistics by the SIAM, the sale of passenger vehicles have grown by approximately 11 percent during the period April-August 2016 as compared to the same period last year. So the expectation which you mention is very much possible. Needless to say, infrastructure development remains a key area of concern and the government should do everything to remove all bottlenecks in the process.