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Will Sitharaman's push rejuvenate auto sector

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New Delhi, Aug 28: In a bid to boost demand in the auto sector, Finance Minister Nirmala Sitharaman announced a series of measures last week. There is, however, a scepticism among investors about the slew of measures announced by Sitharaman August 23 (Friday).

Finance Minister said that the government will put off a proposal to increase registration fees of vehicles. To dismiss speculations concerning BS-IV vehicles, Sitharaman said that the Bharat Stage IV vehicles purchased before March 2020 will remain operational for the full period of their registration.

Representational Image

Further to boost demand, Sitharaman said government departments will be actively pushed to replace old vehicles and provide a source of demand for the auto sector.

The FM's announcement came at a time when the entire automotive sector in India is grappling with a slowdown that has resulted in it touching a 19-year low in terms of sales. This is spread throughout the segments including passenger vehicles as well as commercial vehicles, with component manufacturers feeling the pinch as well. As per reports, since April 2019, there have been over 3.5 lakh layoffs across the industry with the situation only set to get worse.

[Sitharaman's action plan for auto-sector: These measures announced to boost vehicle sales]

The automobile industry is the pillar of the Indian economy, contributing 7.5 per cent to the country's GDP. The overall manufacturing sector contributes around 17 per cent, and within the sector, the share of the automobile industry stands at 49 per cent.

One of the major demands of the auto sector is the lowering of the goods and services tax (GST) which can lower the price of a vehicle for the consumer, pushing up the sale volume. This was not among the steps the Finance Minister announced on Friday and several industry experts have rued this.

The move to push government departments to buy new vehicles to replace old vehicles is unlikely to translate into big orders as this segment's contribution to overall sales is limited.

"We believe that this initial stimulus package is too little, too late to prevent a contraction in vehicle sales in FY2019 (April-March) as the decline in the automotive sector has already gained momentum, and will, therefore, be difficult to stop," Fitch Solutions Macro Research said, as per a PTI report, on Thursday.

In its outlook for India's automobile sector, it said the first stimulus package, however, indicates that the government is willing to intervene in the sector, which offers upside risk that the next stimulus package will be more targeted and more extensive. Stating that the initial stimulus package is not enough to stop the decline in the automotive market, Fitch said sales may contract by 11.8 per cent this year.

[Economic slowdown very worrisome, new reforms needed: Raghuram Rajan]

"We believe that further and stronger stimulus policies will be required, such as GST cuts and a vehicle scrappage scheme, to prevent the continued decline in India's autos market. We will wait and see what the government's next step will be, and how impactful this initial package will be for the country's automotive sector," it added.

Fitch said there are some shortcomings in the stimulus policies directly focused on the country's auto sector.

"Firstly, the government announced that it will start actively pushing government departments to purchase new vehicles, and although this is good news, when compared with India's overall consumer base, the government's contribution to the country's total automotive sales remains relatively small and will have a limited impact on the wider automotive sector," it said.

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    Further, there is no incentive to boost demand for two-wheelers, which comprise 80% of domestic auto sales.

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