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There is an opportunity to reshape the distressed Indian auto sector, which is facing structural problems

The auto sector has been facing certain structural issues since a long time

There is a flurry of news around the slowdown of the auto and the logistics sector, with a lot of inexplicability surrounding the economy. Imitating their Western counterparts, Indian analysts have been using this sector as a measure of the performance of the overall economy. They are partly correct. With a slump in this sector, some are predicting an inevitable recession, while others are terming it to be a cyclical effect of the industry. There is more to it than people are wanting to look.

The automobile industry follows a cycle, and we’ve heard it several times. Yet this time it’s different. While the auto industry seems to be shrinking, the mobility ecosystem is expanding. What are the core factors at the heart of this change?

The Indian Economy, especially the auto sector, has been facing certain structural issues since a long time. But what has acted as a catalyst to the auto sector, is the NBFC crisis.

Much to the chagrin of economists, capitalist economies exist in financial cycles. The larger financial cycle of the economy is based upon the credit growth cycle – the amount of credit available in the economy determines this cycle. After 2014, India has been shifting faster towards a capitalist style of economy, with the auto sector being highly credit-sensitive. The NBFC crisis of India has led to the bankers as well as consumers developing an aversion to risks in selling or purchasing loans. Such crises have after-effects and issues linger on – and the auto sector is credit-sensitive, which makes it difficult for the auto firms to deal with the prevailing economic conditions, that we discuss as structural issues in this article.

Let us first understand the depth of the structural issues at hand.

Traditional industries, starting from the West, have watched in near horror, how the advent of platform economies around the world have essentially changed the way business is done today. High competition has led to the commodification of technology and products, leading to services taking a front seat for the consumers. Those not fast enough to change, are either dead or on their last remaining limbs.

The automobile ecosystem in India has been disrupted. According to a recent report by The Economic Times, the Automakers have halted the production to clear off inventory worth nearly 35,000 Crore Rupees, and ET’s analysis shows that the shutdowns are likely to reduce the industry output by 20-25% in the May-June period, which in turn will ease the pressure on the cramped stockyards at factories as well as dealerships. The sector seems to have tanked, but is that all there is?

At the core of this change are multiple such structural issues, that is, if you exclude the cyclical nature of the automobile sales in India as displayed over the last decade. These factors can be clubbed under two umbrella trends – the rapid rise of Shared Mobility platforms and the radical changes in the EV policy of the Indian Government, and the industry’s snail-paced attitude regarding BS-VI and EV technology adoption in the face of a catch-22 situation.

In the face of scarcity, people tend to share resources without realising that they’re doing it – that’s basic economics. The rise of Ola and Uber have heralded a new era of mobility in India. The nation today has a burgeoning middle class, and they are more wealth savvy than their older generations. With focus on wealth creation, fixed deposits as preferred earlier, are getting been replaced by SIPs, Equity investments and insurances. In line with the same, this generation of shared mobility consumer doesn’t want to be stuck in traffic in his/her vehicle during heavy traffic during peak hours.

From personal rides to shared rides, India has only begun its journey into high-end Shared Mobility. India is expected to become a leader in Shared Mobility by 2030. Start-ups offering options of renting two-wheelers such as Rapido, electric vehicles such as Yulu, shared bus rides such as Shuttl, sharing car rental such as QuickRide among other personal driving options, in addition to shared car and personal auto, car and bike renting services from Ola and Uber across major cities in India. Ola and Uber alone operate approximately 3.65 Million daily rides, although their numbers are slowing down. Cheaper options like the now expanding Metros, and other apps like Shuttl are gaining traction among the work commuters.

Over the last two years, Delhi Metro has expanded further into Faridabad, Gurugram, Noida and Greater Noida. A lot of other Tier-1 and Tier-2 metro cities also have started their metro operations. Following in the steps of Mumbai, Hyderabad and Bengaluru, the Lucknow Metro, has been declared a success with its ridership having crossed 1 Crore in a year on a single route.

If all this is true, is it true that technology, especially platform economies, are killing jobs? Not really. Statistics suggest that every time a ground-breaking technological innovation has emerged in the world – the unemployment rates have actually gone down. But analysts are arguing that the Auto sector seems in disarray – the spillover effect seems to have caught onto the steel industry and the logistics sector.

A major chunk of the Government’s spending goes into plugging the fiscal deficit, and the subsequent interest rates. Add to this, the oil purchases from the Middle East. Some Economists argue that a fiscal deficit under a certain percentage is perhaps okay – but is debt ever really a good thing to have?

The fiscal deficit should ideally be negative – that’s how the Government balance sheet should ideally look. PSU divestments are not really helping, because the sick PSUs are getting bought by LIC – that is just hogwash on the balance sheet. The Babus are beyond clever to not letting go of their personal cash-cows – the Air India divestment deal is a glaring example of how an unaccountable bureaucracy can kill a deal. But that’s a story for another time.

This brings the issue to two sub-issues – the adoption of BS-VI norms, followed by putting EVs on the Indian roads. The switch to BS-VI isn’t a rapidly bulldozed move. The Government had intimated the industry, that they would be switching directly from BS-IV to BS-VI fuel, as early as January 2016, with the Supreme Court informed later that the sales of BS-IV vehicles would be stopped by April 1, 2020.

Even though NDA-I relinquished control over the Petroleum prices, what more must the NDA-II do to eliminate any further expenses in this area? That’s when the ingenious yet incomplete push for EVs comes in. The EVs are the future. At least the Government is planning in accordance with the same. As per the statistics, EVs adoption, and the surrounding ecosystem, is coming in at a decently fair pace, now poised to accelerate.

India plans to develop at least 6 mega Tesla-styled Battery manufacturing units, with a potential 50,000 Crore Rupees worth of investments. The Government has also slashed the GST rates on EVs and chargers to a mere 5%. As per reports, Finance Minister N. Sitharaman wants the cab operators to make a phased, and complete switch to electric by 2030, and Ola has announced that they intend to introduce 1 million electric vehicles on Indian roads by 2021 under Mission Electric. Under the FAME-2 Scheme by the Government, approximately 10,000 Crore Rupees have been sanctioned as incentives and investments to boost Hybrid models and EVs, and charging stations in India over a period of 3 years, starting 2019.

On the one hand, there is gradual growth in clarity over these new developments in EV, and on the other, the BS-VI emission standards are being enforced by an iron-willed Government. This has left the Auto-makers in a fix about the capital expenditures they have already invested in upgrading to BS-VI technology, which is the first priority for them, versus scaling up EV manufacturing at the same time, given the push by the regulators, or allow it a very clear second priority due to changing consumer preferences and government regulations.

Considering all this, at looking at the credit crisis, the Government has decided to borrow from foreign agencies, leaving room for liquidity in the already stressed domestic lending sector, while clearly more requires to be done. The consumers though are in a fix, as new consumption patterns are emerging amidst the credit crisis.

They are thus turning to Shared Mobility for the meanwhile – because, for the middle class, a car is a long-term purchase decision. These trends are clearly reducing the marginal utility of a petrol or diesel vehicle, while the resale value gearing towards an all-time low in the process. In the world of EMIs, the consumer seems to be waiting and watching than put money into something that would turn junk sooner than expected. What happens to the existing industry in the meanwhile? Well, as per the data, technology advancement always reduces unemployment while boosting productivity. We need to be assured that it is not a long-term crisis, but a reshaping of the economy, and both, the industry, and the consumers ought to keep up, instead of living or thinking as luddites.

Today, the Government is on its toes for pushing significant land, labour and capital reforms, that they have been struggling to pass because of legislative strength in the Rajya Sabha. Too many industrial regulations still exist, so does an absence of a consistent policy structure in significant areas. The Government needs to handle all of it in consultation with the stakeholders from the industry. Indeed, with Nirmala Sitharaman announcing a flurry of economic reforms to revive the economy, one sees hope, but the critical demand around the waiver of GST over cars is still pending. Considering the April 2020 deadline, one way to unclog the automobile supply chain and eliminate the 35,000 Crore Rupees worth of inventory lying with the car dealers, will be to eliminate GST to push sales on these BS-IV cars – which would essentially have low resale values anyways. Otherwise, this inventory is going to be a quagmire for the industry – and hamper the EV sales due to locked capital of the industry, which could otherwise be used to develop the EV ecosystem going forward. The struggle of the auto sector is real, but if handled deftly by the Government, will herald a new era for the auto industry in India. Nirmala Sitharaman should remember, Deepawali is around the corner.

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Vishwajeet is pursuing an MBA at SPJIMR, Mumbai. He is enthusiastic about Business, Economics, Politics, Digital Platforms and Fitness. All views published under his name must be considered his personal opinion, and none on behalf of any organization.

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