Betting on Stimulus Package S P Shah, President Dear friends, At the outset, my heartfelt sympathies with those who lost their near and dear ones and were injured in the dastardly terror attacks in Mumbai recently. I am sure, we the people of India, will give a resolute and befitting reply to the nefarious designs of those indulging in terror activities to weaken our economy and social fabric. Contours of deepening slowdown of Indian economy, weighed down by the global economic turmoil, are visible for all of us to see. Various research and multilateral agencies, including IMF and Goldman Sachs, have already slashed growth estimates of Indian economy. Even the Government and RBI see moderation in the economic growth, which has averaged 9% in the last 3 years. The GDP grew by 7.6% in 02 vis-à-vis 7.9% in Q1 - a decent performance compared to acute recessionary conditions prevailing in other parts of the world, more so in the US and Europe that are witnessing stagnation or contraction of their economies. However, the Q1 & Q2 numbers may not be true indicator of the pain we are going through, as the demand has witnessed a sharp downturn from October onwards with global financial meltdown aggravating the situation. The outlook for the year 2009-10 is not encouraging either, with Governor RBI saying that ‘2009-10 will perhaps be a more difficult year'. Direct tax collections for the month of November 2008 dropped by 36.09 per cent to Rs. 10,346 crore from Rs. 16,189 crare in November 2007, following the decline in excise and custom duty collections in October and November 2008. Exports during October 2008 fell by 12.1 % in dollar terms. The decline in exports and tax collections are any early indicator of sharp deceleration in the Indian economy. The economic downturn has taken its toll on the Indian automobile market, as the sales numbers for the month of November 2008 suggest, with credit crunch and high interest rates rubbing it in. While the US has already come up with its $ 700 billion bailout package and is in the midst of finalizing another bailout specifically for the auto industry, China, European Union and other countries impacted by the financial turmoil have drawn up their own revival packages. The much-awaited Indian stimulus package has been announced by the RBI and the Government of India recently to pump-prime the economy and spur demand. We welcome these monetary & fiscal measures. Across-the-board 4% cut in Cenvat, provision of additional plan expenditure of Rs. 20,000 crores in the current financial year, fast-track clearance of infrastructure projects worth Rs. 100,000 under PPP, reduction in Repo rate, easing of prudential norms for classification of NPAs and incentives for housing & export sectors are expected to boost, over a period of time, the sagging demand for motor vehicles witnessed since August 2008. We, in FADA, feel that the desired impact of these measures would be felt only if the banks ease the lending norms for vehicle finance and reduce the interest rates on vehicle loans immediately. Manufacturers have, by and large, announced to pass on the benefit of CENVAT reduction to the customers. However, the automobile dealers, saddled with huge inventories for 30 to 60 days, find themselves in a bind. Unless manufacturers come forward with their own packages, compensating automobile dealers for the inventories already lying at their dealerships, the automobile dealers collectively may have to take a hit of Rs. 500 to Rs. 600 crores in clearing the existing stocks at the revised prices announced by the manufacturers. We hope that the manufacturers would come forward to fully compensate the automobile dealers for the inventories already held by them. Downward spiral of inflation, crude oil and commodity prices in the international market is, however, a cause of comfort for the Indian economy and automobile sector. Southward movement of inflation to 7% and crude oil prices to $40/barrel has prompted the Government to reduce petrol & diesel prices and the RBI to cut Repo rate and CRR. The reduction in Repo rate and CRR is somehow not finding a reflection in the interest rates being charged by banks for working capital & retail finance. With the RBI and the Government initiating various measures, we can expect the softening of interest rates and the relaxation of lending norms soon. We are also initiating dialogue with various banks separately at the level of FADA and are scheduled to meet senior managers of ICICI Bank, HDFC Bank, SBI and other banks during the month of December to discuss credit availability for inventory funding and vehicle finance, as also the lending rates. Adverting to the activities of FADA since my last message, FADA organized its 243rd Council meeting at Kolkata on 24th November 2008. The members expressed concern over the deteriorating health of automobile dealerships especially in the context of huge inventory build-up at dealerships in spite of major festive season that normally witnesses feverish sales activity. In the interest of sustainable growth of automobile market, it is imperative that manufacturers find ways and means of avoiding inventory pile-up at dealer points. One of the solutions to tackle this problem is to set up stockyards in major cities. Automobile dealers will be willing to pitch in with their support that could include making available the land for the purpose and even managing these stockyards. We also held a regional meeting the next day at Patna. Two major matters that came to the fore during our interaction at the Patna meeting were: Cumbersome registration procedure & the need for introduction of registration of vehicles at dealerships on the lines of schemes prevailing in Delhi, Rajasthan and MP; and complexities of service tax and VAT laws. I would like to assure my fellow dealers across the country that FADA is more than willing to lend its support by sharing the legal position, procedures and practices obtaining in different parts of the country. The action, however, has to be initiated essentially at the local or State level. While on the subject, I would also urge my fellow dealers that they should keep FADA posted with any legal action initiated by them and the outcome thereof so that automobile dealer fraternity (i) knows what is going on in various States; (ii) benefits from the case studies; and (iii) initiates collective action in other states or regions. The case in point is the recent order of CESTAT, Kolkata Bench, which says that where provision of free services is built into the dealer's margin and no reimbursement is received from the manufacturers, the free services provided by the dealer cannot be subject to service tax. The case is published elsewhere in this issue for members' reference. We shall be happy to publish cases of interest to automobile dealers decided from time to time in FADA Journal for the benefit of automobile dealer fraternity as a whole. Another major issue bugging the automobile dealers is the shortage of trained manpower suiting the needs of auto retail. This issue has figured prominently in our discussion whenever I have had a meeting with our members across the country. FADA is making efforts to fast-pace and expand its Academy Programme. We seek the support of our esteemed members in this programme, details of which are given elsewhere in this issue. Please feel free to send your suggestions and inputs. Merry Christmas and A Very Happy & Prosperous 2009. Yours sincerely, S P Shah