The currently sluggish demand in the automobile market may discourage companies from making fresh investments on additional facilities, according to the Society of Indian Automobile Manufacturers (Siam).
With lending rates for vehicle finance at their highest in two years, in addition to rising fuel cost denting retail demand, auto companies are reviewing expansion plans.
Pawan Goenka, president, Siam, said, "There is a wait and watch approach seeping in. Companies have become more watchful and their approach is more cautious. There is some delay in setting up fresh capacities."
Despite several fiscal measures, the government hasn't been able to tame inflation over a number of quarters. The growth was less than nine per cent for the passenger vehicle segment during the first quarter. The car segment posted its slowest growth in 27 months this June, with growth of 1.62 per cent.
Siam is expected to make another downward revision to its sales forecast for the industry for the year, its second. "The (Reserve Bank) rate hike has come as a shock to the industry. This would only damage growth for the sector, resulting in a downward trend," added Goenka.
Siam's statement comes as Ford India and Toyota Kirloskar collectively made commitments of nearly Rs 5,000 crore in expansion activities this week. While Ford is setting up a vehicle and engine manufacturing plant in Gujarat, Toyota is nearly doubling capacity at its Bangalore plant.
Work on Maruti Suzuki's new plant in Manesar is also progressing on schedule. In fact, the car market leader, which posted a dismal three per cent growth in the first quarter, has advanced the opening date to September from November as announced earlier.
However, expansion plans of these companies were scheduled months before. Because the plans were delayed, these companies faced production constraints.
M&M’S CHAKAN REVIEW
Meanwhile, sports utility vehicle market leader Mahindra & Mahindra is understood to have revisited its investment plans for the second phase of expansion of its factory at Chakan, near Pune.
The company has expressed displeasure at the state government deciding to withdraw the value-added tax (VAT) setoff that M&M gets for vehicles sold outside the state. The Congress-led government has withdrawn the 12.5 per cent VAT benefit for the nearly 70 per cent of vehicles M&M sells outside Maharashtra.
"We have had several rounds of talks with government officials at various levels. We have been concerned for the past four months. Despite the constant dialogue, nothing has happened. It will be hard for us to look at this state for future investment. We will re-look at the second phase of investment at Chakan to see if it still is financially viable for us", added Goenka.
M&M was scheduled to make the final part of the Rs 5,000 crore investment in the second phase of expansion at Chakan, where it makes sports utility vehicles and trucks. "We haven't seen any big-ticket investment coming into Maharashtra lately. Most has gone to other states," added Goenka.
The Chakan project, inaugurated last year, is spread across 700 acres and has installed capacity of 300,000 vehicles per annum.