Excise duty cut extension, is it helping?

The recent announcement from the government extending the period for the excise duty cuts has been received warmly by the automotive industry. Several voices have risen commending the decision and appreciating what it could do to consumer sentiment and to the business. But in reality the excise duty cut is like a terminally ill patient being fed only a paracetamol to take away fever though the body simultaneously racked by organ failure and cancers of various kind is still slowly deteriorating away. The apparent gloom and weakness spreading through the industry isn't going to be eradicated by just a simple extension of an excise duty cut. It needs a lot more support, it needs a lot more medication!

The extension nonetheless can and probably did terminate the downward slump. The business of making, selling and buying vehicles will not continue to show degeneration but at the same time it's not going to increase. So the sigh of relief you hear from the industry is the collective sigh of a business that will hold the same shade of red, its not going to get darker, climbing up into the black currently is completely out of the question.

Having spoken to a few managing the automotive business for various manufacturers, what is apparent is that the automotive industry has been under tremendous pressure coming in from several fronts. In fact the excise duty cuts introduced in February by former finance minister P. Chidambaram haven't really spurred growth. If you carefully read the various statements issued by some of the industry captains, you will notice there is still a strong reference to an existing slowdown or sluggishness in the period where the excise duty cuts have already been in effect. Hence there are several other measures that need to be provided in addition to the excise duty cuts before we start seeing the 10-12 per cent growth that was forecast at the beginning of this decade.

One of the first fortifications will come in from improving lending rates. This affects both the manufacturer and the consumer. Manufacturers however weave those costs into the price of the car so directly or indirectly the consumer has to bear the brunt. So without a doubt interest rates have to improve, significantly and quickly.

At the same time the government has to find ways and means of enhancing the purchasing power of consumers. We need to be able to spend more money and for that we either need to be making more money or things need to get cheaper. Neither is happening!

Infrastructure needs to improve on a war footing. Public utility projects have seen remarkable development with more metros, bus services and monorail facilities cropping up everywhere. This reduces dependency on private vehicles for that commute to work and so people buy less cars. Then compounding the problem are the poor road conditions leading up to horrible traffic snarls. Due to poor planning and execution, people are slowly developing an immunity to driving. Better roads for quicker commutes helps consumers not worry about the task of driving as much as they now do every day encouraging them to drive.

Another factor debilitating growth are the disparities in fuel prices. We need some amount of stability and parity in fuel prices. Right now diesels outsell petrol vehicles but there is no proper thought and rationale behind that skew other than the fact that diesel is a cheaper fuel. In the long run, however, diesel is more expensive where ownership costs are concerned but consumers tend to ignore the big picture. Anyway reducing petrol prices while hiking diesel will improve the demand for petrol fuelled cars obviously and there are other environmental benefits to this as well.Then there are several other factors that have to be considered in order to boost demand. Freight rates have to improve, various other input costs that have steadily risen have to be stabilised. A boost to alternate fuel vehicle development and manufacturing must come into effect as there is only so long we can depend on fossil fuels. The industry is also hoping for further duty cuts (presently for two-wheelers and cars, the excise duty was cut from 12 to 8 percent and for SUVs from 30 to 24 percent) and that could be another factor contributing to an improvement in consumer interest.

With the Indian automotive industry employing more than 800,000 people and making a significant contribution to the GDP, it's imperative that the government introduces more measures to speed up its recovery. The excise duty cut extension is a very short term plan, it is a very thin veil covering the rot that is spreading through the automotive industry. There are several other areas that need attention and fast. All we can hope the government can react with more positive steps in the upcoming budget.