Chips down in auto sector, take a relook at tax cut demands

Indian automakers are literally surviving from one fatal hour to another. If the 2018-19 economic slowdown drove the industry close to the boneyard, the Covid-19 pandemic struck another death blow just when the sector was barely recovering. Now, the global chip shortage and supply chain issues that knocked down festive sales are threatening to whipsaw the sector’s revival. Of the 130-odd industries that were hit by the chip shortage, the auto sector, which accounts for 10-12% of the global chip demand, is the worst hit. Society of Indian Automobile Manufacturers (SIAM) data shows auto sales of six companies fell by 26% in October over last year and dealers are sitting on an order book of over 5 lakh units and counting. Chip shortages may persist in 2022, though not as acute as 2021, and CRISIL Ratings pegs India’s passenger vehicle sales to moderate by 11-13% this fiscal over last year. 

Automakers have gone back to production cuts, with market leaders like Maruti reducing output by 60% in September. Some companies are diverting chips to high-demand segments like utility vehicles and prioritising production of premium passenger vehicles, while others are removing features to conserve chip usage and are optimising and innovating to bring down the number of chips used in one component by half. Measures like these along with some smart inventory planning could rescue the industry to an extent, but the brutal fact is that some amount of business is lost forever. 

Chances are, if the economic momentum continues, demand will likely bounce back, but then, the industry could be courting another trouble via higher metal prices that could dent profits by an estimated 1–1.5%. This brings us back to tax cut demands of automakers, with GST rates hovering between 29% and 50% (including cesses and excluding road taxes) making vehicle ownership costs steep. In August, the government dismissed demands of tax cuts as it was unclear if a reduction will spur sales. But with GST collections stabilising at over Rs 1.15 lakh crore a month, perhaps it’s time the GST Council takes a relook.