Rebuilding the automotive chain

Demand generation is crucial to repair the broken supply chain. Steps should be taken to revive consumer confidence, create optimism

A chain is no stronger than its weakest link, goes a well-known proverb. The industry I belong to is one of the biggest exponents and demonstrators of this life-truth. The automobile is the outcome and exponent of a unique value chain. It starts with a customer at one end and goes all the way, bringing together thousands of links, of all shapes and sizes, right down to the one individual who runs a tea stall outside a tier-3 component maker that supplies “child” parts to a larger module.

Thousands of links, big and small, hold on to each other, help individuals come together and work in an orchestrated ensemble, positively impacting millions of lives and livelihoods. Some of these links in isolation are very fragile and sensitive. Only in the company of others do they gain strength and confidence to co-exist and perform.

This chain is now broken at places. While some links were getting weak due to the protracted decline in customer demand over the last 12-odd months, the Covid-19 pandemic has dealt a crippling blow to some links for the chain to break.

The Indian automotive industry supports employment of more than 37 million people and contributes to 15 per cent of the GST amounting to Rs 1.5 trillion every year. After an 18 per cent de-growth last year, Society of Indian Automobile Manufacturers (SIAM) estimates that the impact of Covid-19 could see a further demand de-growth of -22 per cent to -35 per cent in various industry segments, if the overall Indian GDP growth is at 0-1 per cent for FY21. And if the overall Indian GDP growth is negative as stated by the Reserve Bank of India (RBI) governor recently, the auto industry will de-grow in the range of -26 per cent to -45 per cent in various industry segments. We are therefore clearly looking at two consecutive years of severe production contraction, leading to low levels of capacity utilisation, lack of future investments and high risk of bankruptcy and job losses across the entire value chain.

The Aatmanirbhar Bharat package announced by the finance minister has the much-needed focus towards the micro, small and medium enterprises (MSMEs), the non-banking financial companies (NBFCs) and the agri-sector. While this may benefit the automotive sector indirectly in the medium term, what is needed is an immediate stimulus to boost demand, which has not happened.

The industry has been engaging with the government regularly on an overall revival and is still keenly looking forward to some direct fiscal measures that could boost demand and stop job losses. The RBI governor has also recently spoken of the importance of demand generation in the economy.

Three of the broken links that need immediate attention and repair are the supply chain, the worker and the network or channel partners. Demand generation is crucial for this repair. Specific initiatives should be undertaken to revive consumer confidence and create an optimistic sentiment.

If the customer does not feel optimistic, no other intervention, however robust, will help. To revive demand, the industry has recommended three specific policy interventions by the government and we are still looking forward to these interventions:

[1] Reduction in GST rate across all vehicle categories from the current 28 per cent to 18 per cent to improve affordability;

[2] An incentive-based vehicle scrappage scheme that provides monetary incentives to the customer to buy a new vehicle, after scrapping an old vehicle, in the form of 50 per cent rebate on GST, road tax and registration charges. This would help in proactively mitigating pollution, improving road safety, conserving fuel and more importantly, in the current context, kick-starting demand;

[3] Announcing a major procurement programme backed by adequate funding for diesel/CNG buses by state transport undertakings, similar to EV buses under the FAME II scheme.

Supporting the network: The government should include wholesale and retail trade and repair of motor vehicles and motorcycles in MSME Development Act, 2006. The subsidies and incentives received under this Act would provide the much-needed relief to the thousands of our network partners. This will have long-term positive impact.

Rebuilding the workforce: There is need for high-level government intervention to motivate and incentivise the migrant workforce to come back to their jobs. Considering the likely de-growth in the Indian automotive industry, a 150 per cent weighted deduction in income tax for personnel cost is required for a period of one year to reduce the tax burden while retaining employees during this difficult period.

The automobile ecosystem is a unique one in the sense it is robust and a juggernaut when well-oiled and rolling, but extremely fragile and sensitive when even its smallest link gets damaged. As the philosopher William James had commented, “A chain is not stronger than its weakest link, and life is after all a chain.”

We shall continue to be engaged with the government on each of the above recommendations and look forward to a proactive and progressive response. To minimise the impact of the pandemic, these measures need to be immediately taken as the very foundation of the revival.

We are committed to our mission of building the nation responsibly. Right now, the nation needs large-scale re-building to achieve self-reliance. Self-reliance will build greater resilience.

The author is president, Society of Indian Automobile Manufacturers (SIAM)