The 2014 interim budget has managed to cheer the automotive industry. However, it needs to be seen, who will benefit?
The 2014 Budget brought some cheer to the Indian automotive industry. Union Finance Minister P Chidambaram announced a reduction in central excise duty on automobiles in the interim budget 2014. The finance minister reduced the central excise on small cars and two wheelers from 12 to 8 per cent. He also reduced the central excise from 30 per cent to 24 per cent on SUVs, and on large and mid-sized cars from 27 per cent to 24 per cent, and from 24 per cent to 20 per cent respectively. Reeling under pressure for quite some time, the announcement on reduction in excise duty is expected to help the Indian auto industry to boost the sale of its products, and lift its morale. The union finance minister also announced a reduction in excise duty on capital goods from 12 per cent to 10 per cent. This should work towards stimulating the industry for higher investments in manufacturing. Under most pressure, the commercial vehicle sector saw a reduction in excise duty from 12 per cent to 8 per cent. However, it may be hard to ascertain the benefit the excise cut, lasting up to June 2014, will bring to the commercial vehicle industry.
The overall domestic sales during April-February 2014 grew marginally by 2.68 per cent over the same period last year because of growth in scooters and motorcycles sales. Commercial vehicles sales declined by 29.84 per cent in February 2014 compared to the corresponding period the year before.
Struggling to cope with the longest ever cyclical downturn that it has faced, the commercial vehicle sector may not benefit from the excise duty reduction after all. An inability to record economic growth anytime soon, coupled with the lack of industrial activity and non-availability of adequate freight is likely to plague this sector for more than the three-month span of reduction in excise duty. Subsequently, fleet owners are unlikely to buy new trucks just because duty cuts make them cheaper. Anirudh Bhuwalka, MD & CEO, AMW Motors, said that the cut in excise duties is a welcome step for the commercial vehicles industry, which is facing one of its worst crises in several years. "However, unless the overall economic situation improves, we feel this will only have a marginal impact on driving demand. As the CV industry is closely linked to economic development, there are still too many uncertainties in overall policy and implementation measures to lift the sentiments of customers," he added. In a statement issued by Daimler India Commercial Vehicles, the company expressed that the move comes at a point when the customers are facing difficult times.
At the luxury passenger vehicle end of the market, Eberhard Kern, Managing Director and CEO, Mercedes Benz India, opined that he welcomes the Indian government's interim budget announcement to reduce duty on cars and SUVs. "Mercedes-Benz shall pass on the best possible price benefit to our customers in spite of volatile foreign exchange movements," he added. Not a volume-centric market, luxury vehicles fared better than small cars and sedans in the passenger vehicle segment. In the period between April 2013 and January 2014, passenger vehicle sales declined 6.13 per cent as compared to the corresponding period the year before. Welcoming the announcements made by the finance minister in the vote on account, Vikram Kirloskar, President, SIAM, said that the reduction in excise duty would reduce the acquisition price thereby making vehicles more affordable. This would improve the consumer sentiment and hopefully revive the demand for vehicles. Kirloskar drew attention to the fact that the automotive industry is the engine of growth for the manufacturing sector, supporting key industries like auto-components, capital goods, raw materials, electronics, chemicals, plastics, software, etc. "Revived growth in the automotive industry would have significant positive impact on these key downstream and upstream manufacturing sectors that largely depend on the performance of the auto sector," he averred.
In his observation about the effect of excise duty reduction on the auto components industry, Piyush Munot, Managing Director ZF India averred that the sagging moral of the auto industry will be uplifted. "The automotive industry is the backbone of growth for the manufacturing sector, so it's revival would support key industries like auto components, capital goods, raw materials, electronics, chemicals, plastics, and software. Revived growth in the automotive industry would have a positive impact on these key downstream and upstream manufacturing sectors," he added. On the cautious side, Dr Wilfried Aulbur, Managing Partner, Roland Berger Strategy Consultants commented that it will give the automotive industry a much needed relief after many quarters of demand side challenges. "I would however reiterate the need to fix the basics of the Indian manufacturing model. We need good infrastructure (road, ports, etc.), reliable and competitively priced electricity and flexible labour laws that allow linkage between salary increases and productivity gains. Consistent policies must help to address the root causes of weak consumer sentiment such as high interest rates, stubbornly high inflation, and increasing fuel prices." An area of the auto industry, and one that is attracting increasing interest the world over, the finance minister seems to have overlooked in his interim budget is electric vehicles. At the forefront of the electric vehicle movement in India, Chetan Maini in his reaction to the interim budget expressed that the electric segment was left out.
Doing well, yet the most sensitive to factors like high interest rates, two wheelers also stand to profit from the reduction in excise duty. Expressing his opinion on the 2014 interim budget to a television news channel, Rajiv Bajaj, Managing Director, Bajaj Auto is known to have said that consumers are still struggling with high interest rates and fuel prices. As long as the future remains uncertain, reduction in excise duty may not drive demand. At 18.25 per cent per annum (State Bank of India), 8.25 per cent above base rate, two wheeler loans are the costliest when compared to car loans, which are structured at 10.95 per cent per annum, 0.95 per cent above base rate. Add to this, the fact that two wheelers are petrol powered, and Rajiv's comment draws a clear image of the two wheeler market scenario, not limiting itself to certain factors only. The best performing sub-segment in two wheelers has been the scooters for some time, a fact that could drive Bajaj Auto, which was once the uncrowned king, back into the segment. Speculation to this effect is ripe in the industry even though Rajiv Bajaj has firmly mentioned that there are no plans to launch a scooter in the near term.
Considering the comments of Rajiv Bajaj and Dr Aulbur, the need is to understand the real impact of the reduction in excise duty, and who will benefit the most from it. Expressed ASSOCHAM president Rana Kapoor that the industry would expect a much larger package from the new government to revive the manufacturing sector when the regular budget is presented sometime in July 2014. Arun Agarwal, auto industry analyst with Kotak Securities opined that the reduction in excise duty of automobiles is a positive step. Chances are however, that it could turn out to be a blip. Improvement, according to him, will continue to be linked with overall improvement in the economic environment. Except for some pre-buying leading up to June 2014, the excise duty reduction in automobiles may not make a larger impact after all. Perhaps, the most vocal comment came from an auto industry expert. He expressed that to predict beyond June 2014 was impossible. There's no clue to which party, or alliance will succeed in forming the next government. To predict if the current reduction in excise duty will prevail after June 2014, or if the new government will take giant steps towards improving the economic environment is impossible to predict at this moment in time. The most outreaching comment came from Dr Aulbur. He averred, "The current stimulus is of limited duration. It may however be enough to carry us beyond the election. Should the latter result in a pro-growth government, this could provide just enough stimulus to continue positive momentum and sales after the election."
As a downstream element of the auto industry, the automotive components industry is expected to profit from the reduction in excise duty of automobiles as well as rising exports. If the effect of the reduction in excise duty on automobiles will take time to be felt, positive shift in the European markets with signs of growth re-emerging could translate into better export performance. This is also evident from that fact that many auto components manufacturers in India are already re-aligning their export goals. Dhiraj Dhar Gupta, chairman and managing director, KSS Abhishek Safety Systems is known to have said that exports could contribute nearly 25 per cent of its total sales in the next financial year - a big shift from two years ago when exports amounted to only 5 per cent of the company's turnover. Gupta is also known to have emphasized on building a system that would help his company to weather domestic slowdown by increasing its global footprint.
Companies like Sona Okegawa are attributing 25 per cent of their sales to exports. According to Jayant Davar, Co-Chairman & Managing Director, Sandhar Group, overseas operations of the group are doing far better than the domestic units, leading to what could be described as a drive to reduce flab. If the Indian auto suppliers are better poised to reap the benefits of reduction in excise duty, it is because they are now more agile and efficient. A major factor being a range-bound increase of input costs, the auto components industry has found new ways of saving on energy consumption.