How the BS-III versus BS-IV issue could have been handled better…

In the last week of March 2017, the Supreme Court passed an order banning the sales of BS-III vehicles effective April 01st 2017 onwards. First a brief background to this debate. Back in 2015, the Ministry of Roadways and Highways had notified that all BS-III compliance vehicles will cease production effective from April 2017. What the Supreme Court did was only reiterate what the ministry had notified. With pollution becoming a major issue in most of the cities in India, this move was seen by the Supreme Court as a necessary move to protect the interests of the citizens at large…

First the debate; manufacture versus sales…

There is a subtle difference between what the ministry originally notified and what the Supreme Court ordered in late May 2017. While the original notification had stipulated that manufacturing of BS-III vehicles must be stopped effective April 01st, the SC order has gone one step further and actually banned the sales of BS-III vehicles effective from April 01st 2017. The question, therefore, is what happens to the inventory. The original notification permitted the auto companies to sell their BS-III inventories after April 01st but barred them from manufacturing BS-III vehicles. Now, the SC order has put the auto companies in a quandary as they cannot sell their inventory of BS-III vehicles after April 01st. The Supreme Court is of the view that since auto companies know about this cut-off date nearly 2 years in advance, they must have planned their inventories accordingly. Also, when it comes to public health and public safety, the argument of commercial loss due to inventories cannot be accepted as a justification. But how big is the inventory problem for auto companies?

Well, the inventory of BS-III vehicles is actually quite big…

According to estimates put out by the Society of Indian Automobile Manufacturers (SIAM), the total inventory of BS-III vehicles towards the end of the fiscal year was estimated at nearly 8.50 lakh vehicles. Over 6 lakh vehicles are two wheelers and nearly 1 lakh vehicles are MCVs and HCV. Even within the two-wheeler space, Hero Moto accounts for nearly 50% of the outstanding BS-III inventory. In conservative terms, the BS-III inventory as at the end of the fiscal is estimated at Rs.12,000 crore. So what is the way out for this massive inventory?

Most of these inventories are currently held by the dealers. Therefore, chunk of the inventory losses will have to taken by the dealers with the auto companies compensating them partially for the losses. What we have seen in the last few days is an absolute fire-sale of BS-III vehicles across dealer outlets. Discounts are being offered at ridiculous levels. Remember, there is no ban on driving BS-III vehicles after April 01st; it is only the manufacture and sale that is banned. So we may still end up creating the same amount of pollution with the only difference being that customers must have got some salivating discounts in the process. The other option is to export this inventory to other countries, where BS-III and equivalent vehicles are still acceptable. Among the two-wheelers, only Bajaj has a robust export market and that explains why the Bajaj group has not been overly worried and has actually been supporting this shift to BS-IV norms. 

Do the auto companies really have a defence?

The Supreme Court is right in saying that the auto companies had sufficient time to adjust to the new pollution control norms. In fact, the auto industry has collectively invested billions of dollars to make the shift to BS-IV manufacture. With pressure on ROI, auto companies will themselves be keen to shift to BS-IV norms. The big difference is the demonetization that happened between October and November last year. That was a major setback for demand for two-wheelers and entry level cars. Most auto companies increased production after January to compensate for the loss of sales in the last two months of last year and that resulted in the inventories. Also, auto companies were sanguine in the belief that the notification pertained to manufacture and not to sales. The SC order has obviously taken the auto makers by surprise.

The government may have to intervene to sort out this case amicably. Remember, the government had also taken the side of the auto companies in the past. Policy making in India needs to become a little more predictable so that long term interests of business are protected.

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