InvestorQ : Auto stocks have down quite badly in the last one year and most stocks are down sharply. What would the auto sector want from the Union Budget?
Dilmini Mercia made post

Auto stocks have down quite badly in the last one year and most stocks are down sharply. What would the auto sector want from the Union Budget?

2 years ago
The performance of the Auto Stocks is more or less a reflection of the slow down in Auto Sales.
The biggest reason for that is the Bharat VI emissions which are causing the manufacturers to weigh in on inventory.
Also people are thinking twice before buying a new car considering the above.

Dhwani Mehta answered.
2 years ago

You are right that the Indian auto sector is facing one of its worst periods in the last year. In fact, sales of automobiles have dropped 20% and inventories are piling up rapidly. Broadly, the auto sector will expect some basic changes in the Union Budget to put the auto sector back on track.

· Reduction of GST on vehicles will be a key demand for the auto sector. After all, auto sales happen to be high frequency data for the economy. While the GST rates are normally set in the GST Council meeting, the sector will look at the budget to give a broad direction. For example, imposing 28% GST on automobiles puts it at par with sin goods like cigarettes and items of luxury consumption. That is actually unfair to car manufacturers.

· If the auto sector needs to see revival in demand then the NBFCs that gave a chunk of the loans to buy cars, also needs to have adequate liquidity and lower cost of funds. The crisis in the NBFCs post the IL&FS defaulted has not only tightened the liquidity but also hardened interest rates. FM can make a start by creating a separate funding window for NBFCs so that they don’t have to face liquidity crunch. Of course, this may be made available only for solvent NBFCs.

· In fact, the auto industry body (SIAM) has been lobbying with finance ministry on a new scrappage policy for a long time. This budget can propose a scrappage incentive scheme which takes old and polluting vehicles off the road. This will be a boost to renewal sales of automobiles. Since the government has obliged sectors like steel and radial tyres iwht CVDs and higher duties, SIAM has also been asked for increased customs duty on imported commercial vehicles and semi-knocked down CVs by 5 to 15% to make local manufacturers more competitive.

· The auto industry will also look at clarify on introduction of electric vehicles with timelines. For example, recently, the Niti Aayog had spoken about 2023 for two wheelers and three wheelers with cars shifting to EV by 2030. Auto CEOs have complained that this was too unrealistic to be implemented. The government must provide clarity on these deadlines so that speculation is put to rest. The budget would do well to give a complete time table for EV shift.

While the market has addressed the overvaluation problem with auto stocks, the more fundamental issue of weak demand needs to be addressed. The Budget could be a good starting point.