Mahindra & Mahindra’s MD delves deep into the positives of this year’s govt fiscal plan, the unanswered wish-list and offers a growth outlook for the PV and CV sectors, among other issues.
01 Feb 2021 | 3844 Views | By Mayank Dhingra
The Managing Director of Mahindra & Mahindra (M&M) is happy to see most industry expectations being met by Finance Minister Nirmala Sitharaman in her second Union Budget, and says that the overall thrust of the Budget is towards economic growth.
After the relay of the Budget speech by the Finance ...
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The Managing Director of Mahindra & Mahindra (M&M) is happy to see most industry expectations being met by Finance Minister Nirmala Sitharaman in her second Union Budget, and says that the overall thrust of the Budget is towards economic growth.
After the relay of the Budget speech by the Finance Minister earlier today, India Auto Inc has been very forthcoming with its remarks and take on the Union Budget 2021 which, from the looks of it, has brought some cheer for the industry with its biggest announcement – the implementation of the long-overdue Voluntary Vehicle Scrappage Policy.
In a conference call with journalists, Dr Pawan Goenka, Managing Director, Mahindra & Mahindra, shared his takeaways from the Union Budget that will determine the country’s roadmap of fiscal expenditure in FY2021-22.
Dr Goenka remarked, “From an industry’s viewpoint, whatever most industry leaders had expected from the Budget, has been delivered. While some specific sectoral demands have not been met, the overall thrust of the Budget is towards economic growth.”
“The biggest outlays have been towards health and infrastructure, which in itself is the biggest force multiplier for various industries. A lot of thrust is also on asset monetisation and disinvestment, and this is where the expenditure should come from, and not instead by increasing tax directly or indirectly,” he added.
While the M&M chief views the Voluntary Scrappage Policy and increase in capital expenditure as welcoming moves, India’s lack of self-reliance in R&D capabilities and overt compliances hurting businesses, were areas that could have been addressed, according to the industry veteran.
“Even though innovation and R&D was one of the six pillars of the Union Budget and was allocated Rs 50,000 crore, there wasn’t enough to drive a clear roadmap to make India self-reliant in the longer-term,” Dr Goenka pointed out.
“The second area that needs attention is to have ‘Minimum Government and Maximum Governance’. We need to simplify regulations and give more discretion to the authorities.”
Citing the constraints of ease-of-doing business in India, Dr Goenka added that “Regulation is an unnecessary burden on the industry and makes it non-competitive in many aspects.”
15% duty hike on auto components
With the Budget deterring imports of certain auto components by increasing the levied import duty from 10 percent to 15 percent, Dr Goenka said that “Different manufacturers will have different impact depending upon how much one imports. Also, there is a reduction in the duty on steel, which should compensate for any hike in the duty for fully-built components.”
As per details issued by ACMA, parts such as toughened safety glass, bullet-proof glass, gas compressors, turbochargers, parts of electrical lighting in a vehicle, ignition wiring harnesses, brakes, frames and forks, and other components pertaining to suspension and braking will now attract a 5 percent extra import duty, which can also be understood to stir some effort towards accelerated localisation of these parts by domestic suppliers.
“Companies like M&M, which import less than other MNCs, might have a smaller impact due to this duty hike,” Dr Goenka remarked.
Scrappage Policy and PLI scheme
Giving his take on the much-awaited scrappage policy, Dr Goenka said, “The scrappage policy is a step in the right direction and it is probably going to be more applicable for commercially-used vehicles rather than personally-used vehicles.”
“The MoRTH is reasonably convinced that an incentive is required for effective implementation of the policy and my take is that there certainly will be an incentive for scrappage,” he added, while awaiting specific details about the policy.
Explaining why it be better introduced in a voluntary fashion that being made mandatory, Dr Goenka said, “Practically, it is not possible to make this policy mandatorybecause people who own these old vehicles are people with lower incomes. And to force them to scrap the means of their livelihood will be very unfair. So, incentivising-to-scrap is a better option than mandating them to shred the asset they have, jeopardising their livelihoods.”
“Moreover, we may not be able to even cope with the demand for new vehicles it would generate if it were made mandatory. So, my view is that one could think about making it mandatory perhaps five years down the line, when people are reasonably comfortable with the concept of scrapping their older vehicles in India,” he said.
Commenting briefly on the Production Linked Incentive (PLI) scheme, Dr Goenka said, “With regard to the PLI scheme, the main task now will be to roll out the scheme and not make it complex.”
“The whole purpose is to spend money and give a boost to localised manufacturing in the country,” he added.
Growth outlook: FY2022
With a series of announcements in the Union Budget that have been well received by most industry experts, India Auto Inc too is looking to experience a year of joy and optimism after probably facing its worst in the ongoing fiscal.
“The uptick in capital expenditure is in relation to the revenue expenditure, and the good thing is that all expenditures are focusing towards economic growth with only a very few handouts being added to this year’s budget,” Dr Goenka said.
“Any infrastructure-related push leads to increase in demand for commercial vehicles (CVs).As of now, the passenger vehicle (PV) segment has come back to pre-Covid levels of demand. Infrastructure development will happen over the years, and so, there will be more buying in the CV segment as well. Definitely, it is a positive move for the CV segment,” he added.
“The tractor industry has grown 17 percent YTD December this fiscal, and is likely to end up at 19-20 percent by end-FY2021.Given that the entire agricultural sector still remains buoyant, I would expect to see good growth next year also, but 19-20 percent growth would be unreasonable to expect as it would be coming over a very high base," Dr Goenka dded.
Dr Goenka further mader known his segment-wise forecast for the coming fiscal year:
Passenger Vehicles: “The segment has seen positive growth in the last 4-5 months, but it will still yield to an industry de-growth for the entire FY2021. We may end with a negative 10 percent growth for this fiscal. But we will make up for it and go beyond in FY2022. I am expecting 12-14 percent growth next year to end up at slightly higher than FY2020 levels.”
Commercial Vehicles: “At the moment, the segment is significantly down and while one cannot determine the immediate impact of the Budget on the economic growth, if it indeed brings a boost to economy, expect CVs to also pick up in reasonable numbers.”
“The heavy-commercial vehicles (HCVs) are showing positive demand over the last three months, and as the economy moves towards normalcy, this demand will automatically come back. The CV industry will get back to normal on its own and the Scrappage Policy will be an added enabler,” he remarked.
Investments in products, not capacity
With regard to companies again opening up to big-ticket investments, Dr Goenka explained that many automakers have held back their new launches last year due to Covid-19, and all launches will start happening now and investments will be going towards them in the next 12-18 months.
He further added, “As far as automotive industry is concerned, almost every manufacturer barring a few, have capacity in excess compared to the present demand. So, investments are not going to bedone in new capacity, but in new products.”
“With GDP growth until Q2 FY2021 hovering at minus 10 percent, the economic activity is currently down and therefore, this will not lead to new investments. It is only once we start seeing the cycle turn around, we will see investments happening in sync with the economic revival,” he explained.
The unanswered wish-list
While Dr Goenka remarked that “We should be pleased with this Budget that would put India on a growth path, there is still an unanswered wish-list that could further boost India Auto Inc’s revival and growth momentum.
“One has to be practical – we can always wish for a lot of things for the auto sector. An area where expectations were not met were on reducing the excise duty on fuel,” he said.
“Secondly, the automotive sector is a big contributor to the government’s GST collection. While it is not practical for a GST reduction at this point in time, there could be rationalisation of the rates by still keeping it revenue-neutral for the government.”
Dr Goenka remarked, “I sincerely urge the GST Council to have a hard look at different items, and we should take an aggressive call to reduce GST on selective items.It is a leap of faith that the government has to take and it will just complete the picture.”
He further added, “The third thing that the industry asked for but is perhaps not related to the budget, is the whole idea of regulation.”
“The auto industry at the moment is ‘bruised’ if I may say so, and therefore, we need a little more time before switching to the next set of regulations as we cannot afford to increase prices at this point because it would drive down demand, and also not absorb it completely as it would make the industry unviable.”
“So, I would sincerely urge the government to put any new regulations at bay for at least the 12-18 months,” he concluded.