October started on a positive note for auto industry with news of September 2019 retail sales jumping to 10-month high trickling in. According to Bloomberg-Quint news portal, as per the data from 1,171 regional transport offices in 31 states and union territories, vehicle registrations – a measure of sales at dealerships – rose 24.2 per cent month-on-month and 23.5 per cent on a yearly basis to 19.89 lakh units in September 2019, the highest monthly retail registrations since November 2018. The portal attributed the jump in sales to heavy discounts announced by auto makers ahead of the festive season.

This is a good news for auto sector which has been struggling due to nearly a year-long slowdown. To give a boost to auto industry, in August this year, the government had rolled out some measures such as allowing BS IV cars to remain operational for their registration period and asking government departments to replace old vehicles to boost demand for auto industry. This was followed by announcement of reduction in corporate tax rate for domestic companies from 30 per cent to 22 per cent (without exemptions) on September 20, 2019.

According to ICRA, the reduction of tax rates to globally competitive levels will incentivise OEMs and their vendors to increase localisation, which augurs well for the industry. India imported auto components worth $17.6 billion during FY20 (so far) and this is likely to increase further in FY21, given the transitionary phase towards stricter safety and emission norms that the industry is currently in the midst of. Tax cut is likely to be more beneficial to auto component manufacturers, which bear higher tax burden, compared to auto makers (who already have lower effective tax rates).

Weak demand conditions prompted automakers to pass on some benefits of tax revision to the end consumer with lower product prices. For example, Maruti Suzuki India Ltd reduced the price of 10 models by Rs 5,000 (on ex-showroom price) besides announcing other discounts to lure buyers.

While jump in retail auto sales in September (driven by drop in auto prices, discounts and festive mood) brings temporary cheers to the auto industry, it may not be an early indication of a permanent upswing in sales.

The auto sector is still in the middle of a down-cycle, which typically lasts for an average of 7-11 quarters (based on historical records). Reasons for sluggish sales are poor product quality (at the entry level), over-production, liquidity issues due NBFCs crisis, rising auto prices due to transition to BS VI emission norms & higher insurance cost, etc.

Experts expect a sharper recovery in petrol passenger vehicles (where BS VI risk is low and down-cycle is more advanced) and tractors (due to good monsoon and non-applicability of BS VI). For two-wheelers and medium & heavy commercial vehicles wait will be bit long.