GST cut hopes dashed, automobile industry is now in self-drive mode

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With the government declining to cut GST on automobiles, experts believe the industry will have to take measures by itself to clear inventory and boost demand, which has fallen to a multi-decade low.  “The industry has to find its own balance to enhance demand,” said Rajan Wadhera, president, Society of Indian Automobile Manufacturers (SIAM), reacting to the GST Council not reducing GST rate on vehicles from 28% to 18%.

As auto sales across segments witnessed their worst-ever fall in August, the industry has been demanding a cut in taxes, which would have brought down the net price of vehicles. However, the GST Council, which met on Friday, reduced the GST compensation cess only for passenger vehicles of sub-segment 10-13 seaters with length less than 4 metres, which, as per industry estimates, accounts for less than 10% of the total sales. 

Even as discounts are at all-time high, no relief from the government also increases the possibility of customers getting higher discounts going forward, as companies need to liquidate the excess BS-IV stocks before April 1, 2020. From April 2020, the industry will move to BS-VI emission norms, which means selling vehicles fitted with BS-IV engines will not be allowed and, therefore, will become scrap. Discounts by manufacturers, including Maruti Suzuki, Honda Cars and Bajaj Auto, have been ranging from 5-15%, a desperate move adopted by manufacturers to liquidate stocks that have piled up to above normal levels owing to poor demand.

Prayesh Jain, lead analyst, institutional equities, Yes Securities, said there is room for additional discounts by auto companies. “Current discounts are already at an all-time high, which can possibly drive volumes in the ensuing festive season,” Jain said. As the reduction in GST seemed difficult, the industry asked for temporary relief so that the demand in the festive season improves and inventory gets cleared.

Moreover, CEOs stressed that more than the GST cut, it was important that the government clarifies its stand, as customers have been postponing purchases in anticipation of a better deal. Guenter Butschek CEO and managing director at Tata Motors last month said, “If it is possible let us know, because the customer expectation this time is high and booking cancellations have been happening,” Butschek said, adding that showrooms are empty because the customer is expecting a better deal post the GST cut.

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