The Union Budget 2020-21 is all the more critical for the Indian automotive industry that is currently passing through a prolonged phase of slowdown and bleak customer sentiment. Already a key contributor to India’s GDP, the sector is on the priority list of the Finance Ministry.
The auto industry is going through a major slowdown due to multiple factors which are well known. We think this slowdown is temporary and in a couple of years the auto industry will be back on growth trajectory. The main reason we feel so is because the two-wheeler density in India is very low, when compared to other developing countries in Asia. With a current penetration of 200 million two-wheelers in India and a population of 1.4 billion, there is one vehicle for seven people in the country. This number changes drastically in contrast to other Asian countries with Vietnam having 45 million two-wheelers in a population of 90 million, amounting to one vehicle for every two people.
In order to bring the economy back on track, the government should push increase in consumption in this budget. This could be achieved by reducing personal income tax, thereby putting more money in the hands of consumers. A different approach could be to cut GST rates with the goal that products and enterprises become marginally less expensive for the end buyers.
A decrease in government expenditure will stabilize the budget deficit situation temporarily, however, in the long haul the concern will get significantly greater if the slowdown in consumption is not addressed.
As far as helmet industry is concerned, it has been going strong despite a slowdown in the auto industry. The main reason is that the helmets have a short replacement cycle and as such the industry to an extent is insulated from the two-wheeler sales slowdown. We expect this growth to further become stronger in next few years due to better penetration of helmets in rural markets and also better enforcement of traffic rules.
According to a WHO report, India spends 3% of its GDP on treatment and recovery of road accidents patients. That works out to be near $80 billion. One of the main causes of death in road accidents is the inferior quality of helmets worn by the drivers and pillion riders of two wheelers in India. These helmets are less expensive as they evade taxes whereas the organized sector pays 18% GST. In the event that the administration was to lessen GST on protective helmets, as they are lifesaving equipment, the consumers would definitely pick better quality helmets, thereby, increasing their safety aspect while on road.
There is a lot of expectation from the upcoming Budget 2020-21 with a significant part of the emphasis is on bringing the economy back on growth track.
DISCLAIMER : Views expressed above are the author’s own.