The going will get tougher for the Indian automobile sector; here's why

In the long run, more solid reforms might be needed to help auto sector be able to walk without the crutches that government might be able to give it.

Gaurav Garg

The COVID-19 pandemic made the entire world take a 360 degree turn and revisit life in a time when ‘going out’ was not that preferable an option as compared to ‘staying home’. Amidst the extremities of how the lockdown unfolded for the nation – with migrant workers trying to get home while the urban class spending time at home with family, the economy took a big hit with no signs of a quick revival in sight.

Support flooded in from every corner for the Rs 20 lakh crore relief package that was announced, but it just might not be enough to assist the ailing auto industry.

The sector went through turmoil as it saw a decline in sales with companies reporting zero revenue for the month of April 2020. It was the first ever time where the sector had reported such a figure. While many were taken by disbelief, it showed how dire the condition of the sector was.

Several factors could be held responsible for bringing things to the current state. To begin with, things were not looking bright, right from the start. The increase in excise duty, the implementation of BS VI norms and the absence of a scrappage policy were already corroding the once iron-solid roots of auto sector in the country.

With migrant workers going back to their villages, and the fixed costs still getting incurred, the industry was put on a ventilator. Even with factories and showrooms opening up in certain cities, the employee and labour strength is not that high. The workers who have gone back to their villages, might not be interested in coming back so soon and the employees might not be willing to come and work when the chances of a customer coming by are very little but the risk of getting infected seems high.

The current stock present with the showrooms may only suffice for a few weeks if the logistics from factories are not put in place soon. The industry has also witnessed a decline in orders along with the cancellation of a few pre-existing ones. It only seems a fair assumption that this situation regarding orders may not improve in the recent times as the fear of travelling coupled with having to allocate monetary resources towards essential commodities would be bigger factors that people would keep in mind.

However, if India follows the trend which was followed by countries like China, people can actually look for buying automobiles as they will tend to avoid usage of public transport. However, it will be interesting to see, whether the rise in demand would be able to bring the sector out of its toughest phase in the history.

The industry has been urging the government to consider the sector amongst essential commodities and to come up with a booster dose to help getting the sector back on track, but these might just help in times like these, where the industry seems to be crawling. In the long run, more solid reforms might be needed to help auto sector be able to walk without the crutches that government might be able to give it.

The author is Head of Research at CapitalVia Global Research Limited- Investment Advisor.

Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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