Policy distortions attribute to auto industry’s decline, debunking the myth of slowdown
There is no doubt that the Indian auto industry is on a decline, perhaps worst ever in the last four decades. This is the same industry which last year recorded a turn over of Rs 8.2 lakh crores (USD 119 billion) with a huge export component. Within a year's time, the same industry is resorting to 'no production days', large scale laying off of workers, inventory clearing sales, etc. The pain is still deeper for the supply chain handlers and dealers. A modest estimate reveals more than 3,50,000 job losses in the last few months and if the present trend persists, there will be an unprecedented crisis in the sector like Detroit of 2008.
Hence, the pertinent question is how come we reached this stage in less than a year. Is it because of the general slowdown attributed to both indigenous and more exogenous factors as the official pundits would like us to believe or is there a credible story behind this? If general slowdown was the only reason, how come in the same period FMCG companies recorded a decent year on year growth with net sales of Dabur and Nestle achieving 11 per cent growth and Hindustan Lever 7 per cent. White goods like air conditioners, washing machines and refrigerators also witnessed 5 per cent, 3 per cent and 11 per cent respectively during April-May 2019. Hence, we need to demystify the myth of omnibus reason called slowdown.
A number of factors mostly owing to systemic failure have arisen in the auto sector in a very short span of time. Most vehicle purchases are being financed through banks/NBFCs. No doubt liquidity crunch coupled with the risk-averse approach of banks and high-interest rates have played a big role. But these conditions have been prevailing for quite some time. Then why there is a sudden dip? The real reasons are somewhere else. Most immediate of them probably is bunching together of several regulatory changes announced by the government in a very short span of time without realising their full implications, a classic case of 'reform for reform sake'. Let me list out a few here – regulatory changes in safety norms; leapfrogging to BS-6 putting enormous stress on the industry to achieve it in the shortest time; front-loading of third party insurance, etc. On top of it, the auto industry got no relief in the new GST regime. Last straw on camel's back was huge increase in road tax which increased by as much as 13 per cent in case of some state governments. This obviously was too much for a product which is already highly taxed. It is estimated that these so-called big-ticket reforms happening at the same time pushed up the cost of vehicle by 7 to 15 per cent depending on the size and make. Let us not forget that when the BS-6 kicks in coming April, the cost will further go up by 5 to 6 per cent. Fuel prices, which are already high over the last two years, are likely to go up further with BS-6.
Interestingly, this high-cost scenario has been further complicated by the extraordinary policy modulation by the government through its leading ' Think Tank' – NITI Ayog. The 'Tughlaqi Farman' of NITI Aayog mandating that all two-wheelers will be EV by 2023 and all three-wheelers by 2024, has really taken the cake. Even the recent reassuring statement of PM that there is sufficient space for both EVs and ICEs to coexist has not been able to douse the fire fully. NITI Aayog continues to make outlandish statements which not only demotivate both the manufacturers and consumers but also distort the market. For instance, just the other day, one of the prime movers of NITI Aayog has publicly declared that EVs will attain price parity with petrol/diesel vehicles within 3 to 4 years. I wonder whether this statement is based on hard facts/data or part of NITI's pipe dreams. Even the latest forecast of Bloomberg New Energy Finance (BNEF), which is closely followed by NITI Aayog, mentions that EV cars will constitute a mere 6 per cent of all car sales in India in 2030.
I have been constantly highlighting for the last two years through my articles in various national dailies (which are available in public domain) that this kind of whimsical flip-flop of policy will destroy a sunrise sector like auto. It is high time that India formulates a well-calibrated, consistent and long-term policy with realistic targets. I may emphatically mention that after the 'Automotive Mission Plan: 2006-2016', there has not been any comprehensive holistic auto policy in the country. We have been strategising in bits and pieces. Over the last few years, surprisingly, NITI Aayog has hijacked the sector from line ministries like DHI and Road Transport who at least had some amount of institutional memories. Fly-by-night consultants and dream merchants have emerged from nowhere who have no stake in the system but are busy selling their pipe dreams to the new policy regime. The real stakeholders like manufacturers, investors have relegated to the background as profit-seekers and backwards-looking lobby.
Let me illustrate my point with a few examples. Government formulated FAME (I) scheme and engaged a lot of resources to promote electric mobility in the country. It was announced that the government will incentivise a range of technologies which results in low emission and less fuel consumption. The government also levied lower excise duties on such clean technologies. All of a sudden, this strategy was put in the back burner and only EVs became the flavour of the day, surprisingly to the exclusion of all other technologies which have done so well in most other countries. The industry was at a loss on how to retrieve their investment plans. Rightly or wrongly, a decision was taken to leapfrog from BS-4 to BS-6 in around 4 years, primarily to address the environmental concerns. The auto industries and the refiners took up the challenge in right earnest and invested Rs 1,40,000 crores in 18 months to fulfil the government target. In April 2020, India will become the first country to use BS-6 fuel for its two and three-wheelers. Even before this program kicked in, NITI Aayog declared that all two and three-wheelers will be EVs in 4 to 5 years time. With this kind of policy flip-flop, can any industry survive? The industry has invested so much to upgrade the engines to make it BS-6 compatible. What will happen to that investment and who should be held responsible for this national waste.
Sometimes I wonder what is the real reason for such an unusual rush for EVs which has not succeeded in any country including China. Moreover, EV is not the ultimate tech. Why are we, as a forward-looking country, not investing in fuel cell technology which probably is the future of energy for mobility? If our main concern is the environment, escalating demand for electricity owing to EVs will result in generating pollution since we produce coal-based electricity. As per the government's own estimates, the carbon intensity of power generation will continue to increase till the early 2030s. If import of hydrocarbon is the concern, advanced hybrid engines offer a low-cost solution allowing industry the time to transit to EVs in a viable manner. Introduce structural reform in auto taxation by linking GST to fuel efficiency/carbon emission instead of present irrational factors like engine size, fuel type, ground clearance, etc. Also, introduce a scientific auto scrapping policy so that inefficient old engines get replaced by fuel-efficient ones.
The present unprecedented crisis which threatens the very base of an industry that accounts for Rs 1,20,000 crore GST (15 per cent of total GST collection) has been mainly precipitated by policy vacillation than any generic factor. Auto is a very complex sector and requires deeper understanding and deft handling at the policy level. No investor, foreign or domestic will be comfortable with such policy flip-flop. I only wish that pipe dreams of few and unrealistic farmans of policymakers do not distort a vital national asset so carefully built over the last two decades.
(Dr Surajit Mitra is former Secretary to Government of India & Vice-Chancellor of IIFT. The views expressed are strictly personal)