Covid-19: How the Indian auto sector got impacted

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Government can support the sector by taking steps towards helping reduce the cost of raw materials required for production and cutting tax rate

The used car market is currently working on a phygital model, as touch and feel is still an integral part of the purchase.Image used for representational purposes

The Indian auto sector received a major thrust after the introduction of the New Industrial Policy in 1991. This led to delicensing and 100% FDI to build modern plants. A new automobile policy was initiated in 1993, which strengthened the sector’s growth by facilitating the entry of global assemblers. Big companies such as Tata Motors, Ashok Leyland, Bajaj Auto, Maruti Suzuki, Hyundai and many others contributed to bringing dynamism and competition in the sector. In 2017-18, India became the sixth largest producer of automobiles in the world with an average annual production of 29 million vehicles, of which 4 million were exported. The sector is an essential pillar of the Indian economy, contributing significantly to GDP.

Government intervention supported the growth of the sector. In addition to the direct impact through fiscal policy instruments, the industrial policy facilitated ‘firm-level learning processes’ and helped shape technological development. During the first phase of the Automotive Mission Plan (2006-2016), the sector set targets for employment generation, contribution to GDP, and production of two- and three-wheelers. In 2016, it contributed 7.2% to India’s GDP and generated employment for about 32 million people. In 2017, its growth got impacted due to constructive changes like GST, the leapfrogging to BS6 emission norms (effective April 1, 2020, onwards) from BS4, and so on. But these were not the last of the roadblocks. The Covid-19 pandemic amplified the impact, which is still going on.

The impact of Covid-19

The pandemic-induced lockdown resulted in the shutting down of production at original equipment manufacturers (OEM). It also led to disruption of the entire value chain of major industries in India, and therefore negatively affected production of auto spare parts in micro, small and medium-sized industries. In addition, the reduction in consumer demand for passenger vehicles contributed to a loss in revenue and a severe liquidity crisis in the sector.

According to the Society of Indian Automobile Manufacturers, the sector registered negative growth in sales of all vehicle categories in FY21 (2.24% decline in sales of passenger vehicles, 13.19% fall in sales of two-wheelers, 20.77% fall in sales of commercial vehicles, and 66.06% fall in sales of three-wheelers).

Also, production cuts due to slump in demand negatively impacted employment growth. According to the Parliamentary Panel report submitted to Rajya Sabha chairman M Venkaiah Naidu, the estimated job loss in the Indian automobile sector stood at 3.45 lakh. The largest carmaker Maruti Suzuki cut temporary workforce by 6%, following the drop in car sales. The auto sector, which contributed more than 7% to India’s GDP, is now facing a severe contraction, with some automakers facing year-on-year decline of more than 30% in recent months.

The role of the government

In the midst of the second wave, the sector must continue to strive and increase production and sales, while taking necessary steps to ensure safety of its employees, partners and customers. In this regard, the government’s nationwide vaccination drive and the effort to create conditions such that employees can be vaccinated in the factory premises are notable.

As social and physical distancing will be the norm for some time, a section of commuters may not use public transportation, and this will lead to higher demand for personal vehicles, especially of two-wheelers and affordable four-wheelers.

The introduction of the farm Bill is an indirect public intervention for the Indian automobile sector. For instance, the demand for tractors is expected to increase as farmers would get access to more sources of income.

Going forward, the sector can be supported by government policies, such as reducing the cost of raw materials required for production and cutting down tax rates imposed on the automobile sector. Such measures can help the automobile industry recover faster and stronger.

Author: Prof Joyita Roy Chowdhury (Assistant Professor of Economics, FLAME University) and co-authored by Manav Kela (BBA, Finance Major, FLAME University). Views are personal.

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