A Cautious Optimism Pradip R Kamdar, President The financial year 2007-08 that promised a lot but did not deliver to the expectations of industry has come to an end. While experts and analysts are busy analysing the results, one thing clearing emerging from the sales data is that we had perhaps gone overboard in our forecasts for the year. The lesson for all of us is that forecasts can go astray and that we have always to be geared for riding the trough. A minor dip in the graph of vehicle sales during the year should prepare us for standing up to the downside effectively. As Mr R Gopalakrishnan, Executive Director, Tata Sons had said at the Auto Summit in 2006, disruption is sometimes necessary in that it stirs us out of complacency. Of the four major segments, only passenger cars have shown somewhat healthy growth rising by 12% over the previous year. The sales numbers of all other segments, namely commercial vehicles, 2-wheelers and 3-wheelers are not something to rave about. While commercial vehicles staged a recovery somewhat to end up with a marginal growth of 3% in the domestic market, aided largely by vehicles in the sub 1-tonne category, the two-wheeler and the three-wheeler segments have been badly hit due mainly to the credit crunch and the higher interest rates. On my part, I have also been trying to figure out the reasons for moderation in the growth last year. While the credit crunch and hardening of interest rates is the key factor slowing down the growth, there are other unforeseen developments with global dimensions that seem to have also contributed to the slowdown. There sub-prime crisis in the US, the surge in prices of food and primary items in India and across the world, and the volatility in international crude prices have been the other major factors putting brakes on the growth momentum of industry in general and the manufacturing sector in particular. With its integration with the global economy, India cannot remain isolated from the developments elsewhere in the world. That is precisely the reason that the Government has very limited options available to it for curbing the inflation that has gone past 7% of late - highest in the last 3 years. Having taken a series of fiscal measures for facilitating the import of essential items, the next logical step for the Government was to take recourse to the monetary measures if the inflation did not subside to the comfort zone of less than 5%. The air was already thick with the anticipation of likely increase in CRR. The apex bank's move to raise CRR by 50 bps, therefore, came as no surprise. With that the possibility of interest rates softening in the near future looks remore. We have to live with the high interest regime for some time now. Another major cause of worry is uncertainty in oil prices. Although the crude oil prices have risen to $115 barrel, we have been spared the agony of hefty increase in petroleum product prices. The Government is keeping the fuel prices artificially low, lest it should stoke inflation. As the inflation is assuming serious proportion, we may not see a big hike in petroleum prices, barring an unexpected major oil shock, even though the oil marketing companies are bleeding. The measure is expedient for the Government in the immediate horizon. However, suppressing the prices may not be in the interest of sustainable growth in the long run. It remains to be seen how long the Government is able to keep the lid on the petroleum product prices. All said and done, we are down but not out. In spite of heightened turbulence and uncertainty in the global scene, India has been able to hold its own. The GDP during the year 2007-08 is expected to be 8.7%. There is growing interest from all over the world in India and its growth story. FDI during the year 2007-08 has crossed $20 billion in the first 11 months of the fiscal. Domestic savings and investments are on the rise. Moderation in growth has not dampened the spirit of Indian industry and, for that matter, global investors. I attended the SIAM Conclave on 2nd April 2008 that discussed the growth prospects of passenger cars and commercial vehicles during the financial year 2008-09, to put forth the perspective of automobile dealers on the short-term and the long-term market scenario. The industry representatives, the experts and the analysts present at the Conclave sounded positive on the automotive scenario in India. The optimism was a bit guarded, though, with participants expressing the view that growth numbers for the current year may not be as impressive as the performance in the years 2004-05, 2005-06 and 2006-07. I am also sanguine that the Indian auto industry offers a lot of promise if the Governments at the centre and at the state levels make concerted effort directed at its sustained growth. Recent levies by the Gujarat and the Kerala Governments over and above VAT undo the gains arising from the rationalisation of excise duty announced in the Union Budget 2008. It is ultimately the customer who has to bear the burden of additional taxes. The bane of problem is that while the Central Government has been rationalising the taxes, the State Governments have been raising taxes from time to time in one form or the other. The Central and the State Governments pulling in diametrically opposite directions is a cause of concern, which I had shared in the previous issue also while reacting to the Union Budget 2008. The additional levies proposed by the Gujarat and the Kerala Governments run counter to the spirit of VAT. The idea of constitution of an Empowered Committee of State Finance Ministers on VAT was that there would be a semblance of uniformity in taxes across States. Such measures on the part of State Governments give rise to unhealthy practices and lead to undue diversion of trade from one State to another in the highly price sensitive market. We urge these States to withdraw the additional levies forthwith for sustained growth of auto industry and trade. Regarding the activities of FADA, two delegations from France and Netherlands visited India in the first half of April and met FADA representatives. They also visited few automobile dealerships in Delhi and Mumbai. This shows the keen interest the Indian automobile industry is generating across the world. The meetings also provided an opportunity for FADA to know about the auto retail scenario and practices in other parts of the globe. While the report on visits of these two delegations from abroad is published elsewhere in this issue, what came out loud and clear from these meetings was that the sales margins in India are very low compared to the 10-15% margins in other countries. The other thing that is strikingly different in auto retail in India and developed countries is that the used car business is an integral part of the auto retail and constitutes a major component of the revenue model of dealerships in Europe and North America. This is a big business opportunity for all of us in auto retail. With the new vehicle sale margins falling due to intense competition in the market place, the used car business can be handy in shoring up the bottomlines of automobile dealerships. I am sure, my fellow dealers are already paying due attention to tap this huge opportunity awaiting us. Please feel free to send your suggestions and inputs. With best wishes, Yours sincerely, Pradip R Kamdar