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Indian auto: Choices galore - Views on News from Equitymaster
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  • Aug 6, 2009

    Indian auto: Choices galore

    The Indian auto industry has been posting strong results of late. The question arises, is it merely because of the consumer boom in India or are the companies doing something different? Since the advent of the auto industry, companies have used different approaches to push sales. Right at the beginning, there was Henry Ford with his famous philosophy of "Any customer can have a car painted any colour that he wants so long as it is black". Then there came Alfred P. Sloan of General Motors with his philosophy of planned obsolescence - keep introducing new models to stimulate demand. The auto industry worldwide more or less still follows this rule.

    But India has a way of tweaking most rules. New 2 wheeler and car models do not replace the older ones here. They co-exist. Blockbuster models like the Maruti 800 and Hero Honda Splendor still survive. As per a leading business daily, Maruti has 13 models with 40 variants while Hero Honda has 10 models with 25 variants.

    The key to this unusual behavior is another key Indian trait - price sensitivity. Because the Indian consumer is so price sensitive, companies have to offer a vast array of offerings covering the various price points. Ironically, so many models make the business complex and increase the cost of operations. Auto companies are countering it by using common design inputs and components. At a time when the auto industry worldwide is struggling for survival, the Indian auto industry is dealing with much more pleasant questions. No wonder the west looks upon the Indian economy with such hope.

    Direct subsidies prove difficult
    In the Union Budget 2009-2010, Finance Minister Pranab Mukherjee had announced direct delivery of subsidy to farmers instead of routing it through the fertiliser companies. That would have helped remove inefficiencies in fertiliser plants and entry barriers for investments into the sector.

    But as with most things in India, it is easier to plan than execute them. The issue is whether it can be implemented through Kisan credit cards. There are differences between the fertiliser ministry and SBI on the one hand and the finance ministry and other banks on the other. Apparently, many farmers have more than one Kisan credit card, thereby raising the possibility of abuse of the system. Moreover, some states have very poor distribution of the cards.

    Fertiliser subsidy is an important issue because it accounts for around 11% of the government's expenditure, that too excluding fertiliser bonds. There is little doubt that in principle, direct subsidies are better that indirect ones. It would be unfortunate if operational issues stall the progress of this proposal.



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