Tax Relief

Our automotive trade wants a hearty dose of tax breaks

Ford Motor’s exit from India – joining the ranks of General Motors, Harley Davidson and Man Trucks in the Volkswagen Group – has put our troubled auto industry in the spotlight. The troubles of this $ 70 billion industry are emblematic of India’s declining growth history. In view of falling vehicle demand and often increasing inventories, most of the country’s car production runs are below their capacity. The Covid pandemic and related lockdowns have only made the industry’s problems worse. With the outlook uncertain despite signs of recovery in the car market, most players are reluctant to make new investments.

It is this that afflicts a demand-constrained economy as well. Private consumer demand – the most important growth engine that accounts for more than half of our gross domestic product (GDP) – does not come from all cylinders. Adjusted for inflation, per capita private consumption expenditure in the period 2020-21 was below the level of 2017-18. Although there was some recovery in the first quarter of 2021-22, it is still down 12% from the same quarter of 2019-20. Investments have also decreased by 17% compared to the first quarter of 2019-20. Declining consumption and the lack of animal spirits among entrepreneurs are responsible for our steady decline in overall growth since 2016-17.

The automotive industry reflects these trends as it contributes 7.5% of GDP. It accounts for 49% of manufacturing output and directly and indirectly employs around 35 million people. According to the International Organization for Motor Vehicle Manufacturers, India is the fifth largest passenger car manufacturer in the world with 2.9 million vehicles produced in 2020. It is also the world’s largest market for two-wheelers and the largest manufacturer of tractors. The industry thus has a critical mass to be a driver of overall growth. It is now a ray of hope that vehicle manufacturing has reached maturity in most of the advanced countries.

For these reasons, a sustained slump in vehicle registrations (a reliable indicator of retail sales) – as in September this year compared to the same month of 2019 – is having an impact on the entire economy. Of course, recent trends in the industry paint a picture of the variation: car registrations have rallied intelligently, showing robust growth across their Covid lows, while the volume of two-wheelers remains declining, according to the Department of Transportation’s Vahan dashboard . If automobile and two-wheeler sales are viewed as proxies for consumption by high- and low-income households, respectively, their diverging trends point to a K-shaped recovery, according to JP Morgan’s Sajjid Chinoy.

This holiday season may liven up those numbers, but the outlook for demand is still worrying. Urban consumers postpone purchases as new mobility solutions emerge that revolutionize the global auto industry. The value of car ownership itself is being challenged with ride-hailing options from apps like Uber and Ola.

Electromobility is also on the rise. India has an expanded goal that all new vehicles will be electric on the road by 2030. Although digitally networked cars and autonomous vehicles are still a long way off, the emerging mobility opportunities will inevitably lead to a break for car buyers, who are increasingly seeing vehicles with internal combustion engines as a thing of the past.

In this environment, Ford Motor’s decision to close down is bad news for the greenfield investments needed to fuel growth not only in the automotive industry but also in the wider economy. Ford invested $ 2.5 billion in its India foray that began with its Chennai plant. In 2011 she set up another one in Gujarat. Greenfield investments are a long-term bet by investors. Like other global corporations attracted by India’s huge market opening in the early 1990s, Ford introduced products that enjoyed widespread international acceptance, such as its Escort model. It soon found, however, that the market was tight on the high end; that it had to develop affordable products. The Ikon and Figo have been rolled out. But the bet didn’t pay off. Despite some success with its EcoSport, Ford made huge losses as demand for its vehicles was not strong enough to keep its two factories running.

As a growth engine, the auto industry needs political attention. The industry is dismayed that vehicles are still considered a luxury that only the rich can afford. A goods and service tax of 28% is also levied for two-wheelers. Lowering operating costs helps increase demand. However, instead of helping old manufacturers of fossil fuel vehicles, the government is pushing electric mobility; It announced a package to promote electric and hydrogen fuel cell vehicles. This strategy will not work with political flip-flops. Tesla boss Elon Musk, for example, spoke of ‚Äúchallenging government regulations‚ÄĚ on Twitter in connection with the establishment of a store in India. A charging infrastructure for cars is not yet in place. If EVs don’t become affordable, they will face the pressures of other automakers too. Perhaps India could learn from the example of Norway, which made electromobility possible through really generous tax subsidies.

N. Chandra Mohan is a business and business commentator based in New Delhi. These are the author’s personal views.

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