Automobile sector gets Pre Diwali gift from Finance Minister Sitharaman

The automobile industry is one of the main pillars of the Indian economy as it contributing 7.5 percent to the country’s GDP. This sector alone contributes 49% to total manufacturing sector.

The industry employs around 8 million people directly or indirectly.

However, the automobile industry is facing major headwinds currently not only in India but globally as global growth is expected to slow down in coming years.

This situation is further aggravated in India as industry is bracing itself towards the switch to new fuel emission standards i.e. BS6.

3 factors namely, Agrarian distress, liquidity issues faced by NBFCs which are major lending players in 2/4 wheelers and slowing consumption is hurting automobile sector.

NBFCs are yet to recover from crisis like situation formed after IL&FS fiasco. Banks has tighten lending to NBFC and in turn NBFC are facing liquidity crunch for funding 2/4 wheelers loan. As per SIAM (The Society for Indian Automobile Manufacturers) to the finance ministry, 70 percent of two-wheeler sales and 60 percent of commercial vehicles sales are financed by NBFCs. Therefore NBFC crisis has hit automobile sector hard.

All this reflects in numbers: passenger vehicles sales registered a declining growth rate consecutively for nine months. Passenger vehicles sales has declined by 31 % on YoY basis in July 2019.

Domestic car sales were down by 36% YoY in July 2019, whereas the two-wheeler sales were down by 17 % YoY during the same period.

This will directly lead to increase in unemployment. Considering the size and the contribution of the automobile industry, the revival of the sector is important for the economy as a whole. 

Measures taken by Finance Minister

Accelerated depreciation of 15% (making it a total of 30 percent) for vehicles acquired till March 2020 and deferment of proposed increase in registration fees is give much needed relief for buyers.

All the BS-IV vehicles purchased until March 2020 will be allowed to ply on road for entire period of registration. Usually registration is valid from 15 years from purchase / date of issue. This has removed ambiguity otherwise buyers were in dual mind whether their newly purchased car will have limited life on road.

Public Sector Banks (PSBs) will get an upfront funding of Rs 70,000 crore through recapitalisation. This will ensure better transmission to NBFC and then to end users. With repo rate at 5.4 percent, a nine-year low, such a move would ensure cheaper credit to consumers. In Budget FM announced that partial credit guarantee of Rs 1 lakh crore will be given for to PSBs for the purchase of high-rated pooled assets of financially sound NBFCs, is expected to bring in further liquidity to the market, and the auto industry would be natural beneficiary.

With the upcoming festive season, it is expected that the above measures will bring in more consumer confidence and a positive sentiment in the market, which could spur demand.

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