India’s auto sector has been experiencing prolonged negative growth since last year with low sales and pile-up of inventory. COVID-19’s unprecedented impact has further hurt the auto sector and sectors that majorly rely on auto demand including the steel and metal producers. From the last week of March, up until mid-May, production at most automobile and auto ancillary companies were suspended following the imposition of lockdowns to control the pandemic. India’s auto sector is facing disruptions both on the supply as well as demand side, indicating a bleak future for atleast 6 months, said Nirali Shah, Senior Analyst at Samco Securities in an interview to Davis Index.
What challenges would the auto and auto component sectors face post COVID-19?
The Indian auto industry has been reeling under intense pressure for over a year now and COVID-19 has worsened the situation. Most of the expectations of the auto sector in the Budget 2020 remained unmet coupled with extended lockdowns that have had a significant impact on disposable incomes and business affairs. People are expected to shift to a lower range of vehicles, however, financing remains a major constraint as the percentage of automobile buyers opting for a moratorium has been the highest. GDP is likely to witness a decline in FY21 which will further reduce the purchasing power of customers, forcing them to delay their purchases. Production ramp-up is likely to be slow due to social distancing norms and supply chain issues. With migrant workers having fled Indian cities shortage of labour could be another major challenge.
Which regions in India would witness auto sector growth in the next six months?
With COVID-19 cases showing no signs of slowing down and several restrictions still hurting the economy, the Indian auto sector is likely to grapple for at least 1 to 2 quarters. Demand as of May is hovering around 10-20pc of normal levels mainly led by a relatively faster recovery in the rural areas. We expect the farming segment and tractors to recover the fastest followed by two-wheelers which are adding to the confidence. Overall, the sector is facing challenges on both the supply and demand side which projects a bleak picture for another 6 months. Although people are expected to shift to personal mobility from shared mobility, the challenges are expected to outweigh the opportunities by a huge margin.
Has the government done enough to uplift the struggling auto sector?
The government’s stimulus package would not suffice to uplift the struggling auto sector. The sector needs an immediate stimulus to boost demand. The industry is looking for various measures to help revive demand such as a reduction in GST, lower taxes — taxation in the industry is one of the highest in the world — and an incentive-based scrappage policy. The industry has been raising these demands even before the pandemic had crippled the sector.
Several sectors rely on auto and auto component industry, how would they be affected?
Automobile sector currently contributes to about 50pc of the manufacturing GDP in India, 26pc of industry GDP and 7.1pc of overall GDP. A lot of other sectors such as steel, iron, rubber, oil, glass, etc. rely on the automobile and the auto component sector for growth, which would be affected too, given the circumstances. The automotive sector accounts for about 15pc of the country’s total tax collections and employs 3.2 crore people, directly and indirectly. This shows why the automobile sector is important for the health of the economy and how other sectors are dependent on it for their growth and stability.