Stimulus Package ‘Too Little, Too Late’ To Address Auto Slowdown, Says Fitch Solutions
(Photographer: Prashanth Vishwanathan/Bloomberg)

Stimulus Package ‘Too Little, Too Late’ To Address Auto Slowdown, Says Fitch Solutions

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The measures announced by Union Finance Minister Nirmala Sitharaman to address the auto slowdown in India are “too little, too late”, Fitch Solutions Macro Research said on Thursday.

A GST rate cut for automobiles and a vehicle scrappage scheme are needed to prevent the decline in auto sales, the credit and macro intelligence firm said.

Sitharaman had on Aug. 23 announced several measures to boost investor sentiment and prop up the banking and auto sectors.

"We believe that initial stimulus package is too little, too late to prevent a contraction in vehicle sales in 2019-20 as the decline in the automotive sector has already gained momentum, and will, therefore, be difficult to stop," Fitch Solutions said.

The stimulus package, however, indicates the government is willing to intervene in the auto sector, which offers upside risk that the next stimulus package will be more targeted and more extensive.

"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 auto 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 Solutions also pointed shortcoming in the auto stimulus package.

"Firstly, the government announced that it will start actively pushing government departments to purchase new vehicles. 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.

Also, the increased rate of depreciation and delayed increase in registration fees will have a very marginal immediate impact on willingness to purchase new vehicles.

"This is because the delayed increase in registration fees will not support consumers' spending power and the increased depreciation will see businesses only purchase vehicles in 2020," it said.

The assurance that vehicles purchased now will not become illegal when stricter pollution standards are introduced in 2020 might have the strongest impact on consumer and business demand for vehicles, but it does not directly increase the ability of consumers to purchase new vehicles, it added.

The strongest stimulus, however, is the liquidity infusion in the financial sector, including NBFCs—the financing backbone of India’s auto sector, Fitch Solutions said.

NBFCs provide loans for 55 percent of all commercial vehicles sold, old and news. This figure stands at 30 percent for passenger cars and nearly 65 percent for two-wheelers.

"Furthermore, if successful, the government's attempt to increase the involvement of its formal banking sector in home and vehicle financing will be beneficial for consumers' access to financing and therefore the country's vehicle sales.

"However, there is a high-level of risk that banks will not increase their client loans as poor asset quality and profitability pose a significant risk to banks and the banking sector as a whole," it said.

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