Worst not yet over for carmakers, says Mahindra and Mahindra’s Pawan Goenka

The complete collapse in automobile sales has left many perplexed, with volumes expected to clock a modest 3-5% growth in the new fiscal. In the first three months of the financial year, passenger vehicle sales declined by 18.42%.

While several factors have come together to contribute to the sharp decline in sales, Mahindra & Mahindra managing director Pawan Goenka is of the view that it is hard to point to any one reason that can possibly explain the industry’s worst show in 18 years. “Even if I add up all the reasons for the slowdown, it doesn’t explain the kind we are seeing. There is something about this animal called ‘sentiment’ that is causing the slowdown. The concern is that the worst is not over yet,” he said.

In October this year, the new safety norms kick in for the auto sector, which will further ratchet up prices of the base variant of small cars by nearly Rs 20,000. Higher costs have already affected purchase decisions of consumers over the last one year, leading to a pile-up of inventory of 500,000 passenger vehicles. While consumers are deferring their purchase decisions, the cost of ownership is expected to rise even further by 2020, when the new BS VI emission norms kick in. The cost of a diesel car is likely to increase from Rs 10 lakh to over Rs 11 lakh.

Auto sales have suffered over the last one year due to rise in cost of ownership and tight liquidity conditions. While Goenka believes that the finance minister’s decision to infuse Rs 70,000 crore into public sector banks and the credit guarantee scheme for NBFCs is a great move, they may not be enough to revive demand, he said.

According to Goenka, the industry’s growth is not determined by people who can easily finance their purchases. It is the people on the margin who could get loans earlier but now are not getting loans very easily that determine industry’s growth. He believes that the measures announced in the Budget would help resolve the issue of financing, but it may not be enough to revive sales.

While Goenka understands that it would be unreasonable to expect the government to cut the GST rate at this stage, he is of the view that the industry needs a shot in the arm. “The thing that has always worked in the past is a one-time reduction for a short period. I am suggesting that the government remove the cess on small cars and keep a single rate of cess of 17% for the large cars for the next four-six months. It won’t be a major loss of revenue. And if this revives the auto industry, the returns will be much more than the cost”.

“Scrappage policy, setting aside TDS for above Rs 10 lakh cars, deferring non-critical regulations that add to cost may be other measures that could help without any revenue loss to the government,” he added. In any case, Goenka is optimistic that the industry has weathered many slowdowns and this one, too, will come to pass.