The Supreme Court, in a landmark judgement, ruled that sale of BS-III vehicles will not be permitted effective from April 01st 2017. The date of April 01st is critical because it is on this date that the BS-IV norms will take effect, entailing more rigorous standards of pollution control and environmental sustenance. It is essential to understand the background to this Supreme Court ruling. The Ministry of Roadways and Highways had in 2015 issued a notification making it mandatory for all auto companies to switch to BS-IV (Bharat Stage IV) standards by April 01st 2017.
The Environment Pollution Control Authority (EPCA) appointed by the Supreme Court had insisted on the implementation of the notification of the Ministry of Roadways and Highways. Back in October 2016, the auto manufacturers had objected to the EPCA order and had asked for an extension. The argument of the auto manufacturers was that it will be impossible to offload the accumulated inventory at such short notice and it may force companies to offer huge discounts and take massive losses, which they could ill-afford.
Confusion over no-manufacture versus no-sales…
One of the big points of contention in the aftermath of this Supreme Court order is on the subject of whether the SC order pertains to manufacture or sales of BS-III vehicles. The confusion becomes pronounced because the original notification by the Ministry of Roadways and Highways speaks about ban on manufacture of BS-III vehicles after April 01st 2017, whereas the Supreme Court order will bar any sales of BS-III vehicles effective April 01st 2017. Therefore, the question is; what happens to the inventory. According to estimates put out by the Society of Indian Automobile Manufacturers (SIAM), there is an approximate inventory of 8.24 lakh vehicles which are BS-III category and technically all these vehicles will remain unsold after April 01st 2017. In fact, the SIAM has also raised questions over whether the order pertains to sales or registrations. The process of registration takes about 20 days after the sale of the vehicle. That means BS-III vehicles sold after 10th March 2017 will be null and void as per the SC ruling.
A massive problem of BS-III vehicles inventory…
The crux of the objection that auto makers are raising over the SC ruling is that there is a massive backlog of nearly 8.24 lakh vehicles that are still unsold. The largest inventory pertains to two-wheelers where there are nearly 6 lakh vehicles lying unsold. Hero Motocorp alone has an unsold inventory of 50% of the total inventory of two-wheelers. The problem is also acute with respect to commercial vehicles where there is an inventory of nearly 1 lakh vehicles. Relatively, passenger cars have much smaller inventories and hence companies manufacturing passenger cars may not be overly impacted by the Supreme Court ruling. The real hit may be on companies like Hero Motocorp where the inventory is huge, which explains the sharp drop in price for Hero Motocorp after the SC ruling came in. Even in monetary terms, the total value of this inventory is estimated to be over Rs.12,000 crore and there is no way the auto industry will be in a position to take a loss of nearly $2 billion at a time when these companies are fighting tough competition and dwindling margins.
Supreme Court has a point; but auto makers have a point too…
The SC ruling is more on a matter of logic and principle. The SC contends that the implementation date for BS-IV was known almost two years back and therefore auto companies had enough time to prepare for the new norms and adjust production accordingly. While the SC has acknowledged the possibility of commercial losses, its contention is that commercial loss cannot be a justification for delaying a regulatory measure that is meant to protect the health and well-being of the citizens. As a result, SC has insisted on a ban on sales of BS-III vehicles post April 01st 2017, even if it means a commercial loss for the auto companies.
However, the auto companies may have a point considering the special circumstances under which these companies had to operate post demonetization. Two of the sectors that were worst hit by the demonetization exercise were the two-wheelers space and the entry-level cars. In both cases, there was a spurt in manufacturing post December to make up for the production shortfall post December. The bet, obviously, was that remonetization will help these auto companies to make up for the losses of demonetization. That possibly explains the spurt in production of BS-III vehicles closer to the cut-off date. The legal counsel for the automakers has also contended that the difference to overall pollution levels by allowing the sale of unsold inventory may be just about marginal. Additionally, with the auto industry investing over $4 billion in migrating to BS-IV norms, they would be equally keen to make the transition smoothly.
So where does the BS-IV debate go from here?
Eventually, the onus may be on the government to find a middle path. Interestingly, in the past the government too had taken a stand that the cut-off must pertain to manufacturing and not to sales. If the government is able to eventually prevail on that point of view, then the auto companies will surely have something to celebrate about. That will be in the interest of the industry and the government. If there was to be a ban on sales of BS-III vehicles after April 01st 2017, then auto companies will have to either resort to fire sales or look at export markets. Either ways, it would be unfair to them after the pain of demonetization.