The automotive industry of India has been badgered, bruised and continues to suffer great losses. The unprecedented sales decline in India’s famed automobile sector has ceased to surprise. The latest numbers are raising severe concerns after a near-decade of high growth. Car sales are down for the tenth consecutive month, according to the Society of Indian Automobile Manufacturers (SIAM). The uncertainties following elections have added to the slowdown along with a long time correction that has been pending in the sector. The phenomenal growth story, discounting 2008-09, has now become a distant memory. This article is a must-read to understand the chain of reactions that the auto sector crisis has caused.
Big Decline in Auto Sales
This slowdown adds to the overall gloom in the economy and poses fresh challenges to Modi government 2.0 that took oath at the Centre. The worst fall in 8 years was seen in April, when car sales dipped by 16%. Total retail sales have accounted for 16, 82,656 units as compared to the 18, 21,538 vehicles sold. ‘De-growth’ has been seen in all categories. Closure of around 300 auto dealerships has been observed across the nation. There has also been a sharp 17% fall in the sales of two-wheelers.
Rural Distress and Short Supply for Money
Due to sustained rural distress, the purchasing power of people has exponentially reduced. The president of the Automotive Skill Development Council and past president of the Federation of Automotive Dealers Associations (FADA), Nikunj Sanghi, purchasing an automobile is a discretionary purchase decision. Even if a person needs a vehicle, he/she is ready to wait. This clearly indicates the terrible shape of people’s purchasing power. As long as stagnation in rural wages exists, rural distress will continue. Farmers are unable to even recover the cost of their produce due to failing food prices. Nielsen, renowned market research firm, lowered its growth projection for India's FMCG market to 11-12% in 2019, down from 13.8% in 2018.
Demonetisation, along with slowing economic growth, implemented in November 2016, also took a tall. Demonetisation was a deep phenomenon that effected people’s psyche and hence, has had a very long-term effect. People are going for second-hand cars and postponing purchases due to this.
Big Technology Disruption
In the form of new regulations from 2020, the automobile industry is facing a big technological disruption. By April 2020, vehicles will have to be compliant with Bharat Stage VI. Bharat Stage IV norms will be replaced by its emission control standards. This is a step to bring India at par with advanced countries of Europe as well as United States of America. In order to meet the safety norms and well as the standards of BS VI, the cost will be way higher. Maruti and various other auto makers have hence, kept lower growth targets this year. They have also lowered production. Maruti will also be phasing out diesel cars from April, 2020. The chairman of Maruti Suzuki, R. C. Bhargava, explains this as a reaction to consumer behavior. Even in Europe, after the Euro VI norms were established, sales of diesel vehicles shrunk, Moreover, diesel prices are almost at par with petrol now. They have become more expensive and there are no greater gains by going with diesel cars.
The NBFC Crisis
Shadow banks or Non-Banking financial companies dramatically slashed lending the collapse of one of the biggest, IL&FS, in late 2018. Infrastructure Leasing & Financial Services Ltd, (IL&FS), acted as a behemoth in shadow banking. Its defaults and unraveling, amid fraud allegations, have dried the funding up for rivals. This has lead to a surge in their borrowing costs. Credit outside traditional lenders is generated by non-bank or shadow banking firms. This occurs by various means such as broker-dealers or funds that invest in bonds and money markets, collective investment vehicles, etc. In the recent years, NBFCs have helped in funding 55-60% of commercial vehicles, 30% of passenger cars and nearly 65% of the two-wheelers in the country. Banks have begun trimming their exposure to the sector which aggravates the matter as well as multiplies the stress in the auto market. The cars are not selling and neither is the finance.
Unlikely Early Recovery
More than 35 million people, directly and indirectly, are employed by the auto sector. It contributes to 7% of India’s GDP along with 49% of its manufacturing GDP. From vehicle manufacturers to component makers, the entire supply chain is bleeding amidst the slump. This is a bug challenge in front of the Modi Government in its second term. Manufacturers are offering a number of discounts and new launches to help instigate demand. They are also shutting their factories down to adjust inventory, due to less demand and a need to cut down the cost of production. Automakers still seem to be a little hopeful of recovery in the coming months. This is mostly because the September-December festive season offers a traditional surge in consumer spending.
If vehicle financing doesn’t become easier and cheaper, analysts believe chances of recovery will remain low. They also fear that bad debts could mount in the auto sector. With no silver lining in sight, this will only force banks to further reduce their exposure.
In Conclusion
The decline of Indian Automotive Industry has been catastrophic. In front of our eyes is the beginning of a major recession in the world’s fourth largest automotive market. The industry is banking upon new launches and festive seasons but that is not enough. It also keenly eyeing every move made by the government. SIAM has also been seeking GST relief to prevent further slide in vehicle sales. The government has lowered GST on EVs making moves to improve liquidity too. However, Modi Sarkar 2.0 needs to do way more. Given its own fiscal troubles, will the Modi Government listen to the automotive industry’s woes?
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Hi. My name is Apoorva Vardhan. I am an undergraduate student of economics at the University of Delhi. I am very interested in writing as well as debating. I am also very passionate about numbers and how markets work. As an economics major, I plan to pursue an advanced degree and become an economic consultant to conduct research and build strategies to solve economic issues and to interpret markets. Lastly, I am a firm believer of personal accountability as well as commitment and I enjoy creating and managing original compelling work
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