Context

The automobile industry is cyclical. It is also a lead indicator for economic growth. And it has been experiencing signs of a slowdown. The decline began in the last quarter of the calendar year 2018 and intensified with the passage of every month in 2019.

Background

• Though the industry goes through cycles of ups and downs the current slowdown is something to worry about seriously.

• The current downturn is like nothing that the industry has seen in a long, time in terms of depth, scale, and character.

The uniqueness of current slowdown

• Every segment of the auto industry, beginning from two-wheelers to passenger cars, light commercial vehicles and heavy commercial vehicles, and even tractors, has been hit. 

• A natural, cyclical downturn has been amplified by reforms with good intentions.

• The policy on electric vehicles has only intensified and prolonged slowdown. 

Commercial vehicles – Revision in axle-load norms

• In 2018, the government revised axle-load norms (for the first time since 1983) for cargo carriers by between 12% and 25%. It was aimed to legalize overloading and help reduce freight costs for both consignors and consignees.

• By applying the higher cargo rules to all trucks on the roads, government raised existing carrying capacity and forced per-tonne freight rates down. 

• This occurred at a time when carrying capacity was increasing due to the introduction of GST. 

BS-VI

• Vehicle manufacturer’s practice of clogging the pipeline by over-producing vehicles without care for demand, and dumping them on dealers to sell became a painful issue now.

• Because of the approaching deadline for the transition to BS-VI norms from April 1, 2020, dealers are saddled with the inventory of BS-IV vehicles that they need to clear out before the deadline. 

• Manufacturers are unable to plan their production schedules for BS-VI vehicles. 

Model fatigue

In the case of cars, it appears to be one of model fatigue. Between Maruti and Hyundai, the two big players that account for two-thirds of the industry, there have been hardly any exciting new launches in the last year. 

Way ahead

The government should reduce GST on automobiles from 28% to 18% as per the demand of the industry, but not for all vehicles. This should only be for BS-IV vehicles with manufacturers and dealers.