Auto sector slowdown: Component makers are holding a mirror to the economy, reflection isn’t pretty

Much has been written about the slowdown in auto sales in India. For eight months straight, sales have been slowing across products and verticals—both passenger and commercial. Now the demand slump is beginning to show its ugly face to workers in the automobile and auto-component sector—in the form of mounting job losses.

What do we know so far? According to data from Automotive Component Manufacturers Association of India, or, ACMA, there has already been a cut of 10-15 percent of the workforce in the automobile component manufacturing sector. Naturally, when sales slow down and dealers sit on unsold inventories, component makers will lose business, which is what is happening now.

Companies, including the market leaders like Maruti, have cut production in the range of 15-20 percent in the last ten months. This has directly impacted the contract laborers in the component making industry as they are the first to get pink slips when business slows.

Not just that, ACMA expects about 10 lakh job losses going ahead if the demand slump continues. There is more bad news coming. The persistent slowdown has put even biggies like Maruti on the reverse gear. Maruti has reportedly dropped its plans to double vehicle manufacturing capacity in Gujarat which it had planned earlier. In the month of June alone, passenger vehicle sales slowed nearly 18 percent for the eighth successive month.

What can the government do immediately to give breathing space to the struggling automakers? The industry body wants a uniform GST rate of 18 percent for both automobile and component companies to lessen their financial burden. Presently, automobiles attract a GST rate of 28 percent with additional cess ranging from 1 percent to 15 percent, depending on the length, engine size and type.

 Auto sector slowdown: Component makers are holding a mirror to the economy, reflection isn’t pretty

Representational image. AFP

About 70 percent of auto components are already under the 18 percent GST slab. But, around 30 percent remain in the 28 percent bracket. The industry’s demand for lower GST rate is reasonable considering the plight they are in. The government should urgently heed their request. Doing this is also critical to avoid further job losses in the automobiles and auto-component sector.

At a larger level, what is happening in the auto sector also mirrors the current state of the economy. The economic slowdown is real, so is the problem of rising unemployment. There is no logic in wasting time debating whether the problem exists or not.

There were warning calls all over but the government was seemingly reluctant to acknowledge these calls as it was looking at it through the prism of politics. This was a mistake. In February this year, a Business Standard report citing the National Sample Survey Office (NSSO) survey that said the unemployment rate for skilled persons in the country doubled to 12.4 percent in 2017-18 from 5.9 percent in 2011-12 and the number of jobless among the educated, too, went up. Note that the literacy rate showed an upward movement at 76.9 percent in 2017-18 from 74.7 percent in 2011-12.

Similarly, in October last year, a report from Indian rating agency CARE revealed that job growth in corporate India moderated to 3.8 percent in fiscal year 2018 from 4.2 percent in the previous fiscal and the problem is most severe in small-sized companies. The report, based on an analysis of over 1,600 corporates, said small-sized companies with net sales of less than Rs 500 crore have witnessed a contraction in employment growth, while larger companies with over Rs 500 crore sales had positive employment growth in 2017-18. This report too has been pointing towards rising unemployment. The auto sector, like real estate, is one of the first segments that holds a mirror to the activity in the broader economy. Right now, its reflection isn't pleasant.

Updated Date: Jul 25, 2019 11:52:20 IST