India’s passenger vehicle industry, witnessed its worst performance in 19 years in July 2019. For the last 12 out of 13 months, the sector has seen fall in sales. Last year during the same time, almost 2,90,931 units had been sold . This year the sales figure has dropped by 31% to 2,00,790 vehicles. In terms of percentage fall this has been the worst performance since December 2000 when there was a 35% fall in sales.
In 2017, India was considered one of the best markets for Automobiles. India was the fourth largest market for 4 wheeler passenger vehicles and the largest market for 2 wheelers. It was seeing a healthy 9.5% growth in sales every year (excluding 2 wheelers). India had become the seventh largest exporter of 4 wheelers by 2018 and was seeing a growth of 14.5% in exports from auto industr5. This April the production of these vehicles saw a 6.26% growth when compared to last year. The way India’s progress in Manufacturing of automobiles coupled with government initiatives, it seemed like India would become a market leader in 4 wheelers and 2 wheelers Global automobile Industry (passenger vehicles) by 2020.
Through this report I wish to study why is the automobile Industry not performing to the levels that it was expected to and is seeing a downward trajectory.
1) Monsoons – This year the monsoons were heavier than last year. States like Maharashtra, Karnataka, Madhya Pradesh and Assam saw heavy flooding which led to people being evacuated. These incidents of heavy rain showers took place just before the festival of Ganapathy and Onam. Festival seasons are often considered as an auspicious time to purchase vehicles.
2) Elections- A time when people where not sure of the outcomes and how it will affect the prices of automobile, a general sentiment was that it is best to postpone the purchase of their desired vehicles.
3) The liquidity crises- the IL&FS crises which jeopardised many investors, mutual funds, banks, etc. failed to repay their debt as they still owe Rs 94000 crore. This has led to a liquidity crunch in India which has reduced consumption of many important sectors in India including Automobiles.
4) GST- The automobile sector attracts the highest tax rate which is 28% + cess. In an economy which is showing slowdown, such high tax rates will obviously affect demand and it is unsurprisingly decreasing a fast rate. Cutting the tax rate is not as easy as it has to be analysed from a revenue loss point of view as well.
5) Bharat 6 Emission Norms-
The deadline for implementing the Bharat 6 emission norms is closer than before (March31, 2020). This is becoming an issue for the producers as their stock of unsold cars (BE4 compliant) is increasing. Consumers have completely stopped buying Diesel cars and the strategy to give away discounts on BE4 compliant cars is not working well either. The policymakers demand that the companies start shifting some of their production to electrical vehicles is not getting the warmest response from the industry.
6) Millennial’s behaviour pattern – In a statement given around 2 weeks ago, the Finance minister said that Millennials are preferring services of cab aggregators over purchasing their own cars. In normal circumstances the balance should have been maintained as the loss in sales from individual consumers should have been balanced out by purchases from aggregators. But research says otherwise. The Data Intelligence Unit say that purchases from cab aggregators have also increased at a decreasing rate since 2016, thus net sales are going down.
7) Behaviour of consumer – consumers seem to have postponed their purchase of vehicles. Reasons such as waiting for newer models to come out this festive season, the rising global trend of preferring Electric Vehicle which is yet to release in India in large scale, the belief that prices may fall down and so on.
8) Weak global demand – The demand outside India is also seeing a flat of falling trend. A 2.6% falls in sales of light vehicles is expected at the end of 2019 India is dependent on the global demand in order to perform at the highest levels.
9) The Economy – After seeing years of unprecedented growth, the economy is showing signs of a slowdown. The latest quarter GDP report shows that the GDP grew only by 5%. The RBI too has slashed its previous estimate for second half of the FY growth of GDP from 7.4% to 6.8%. The consumption has gone down.
1) Increasing Depreciation – The government has allowed additional 15% depreciation on vehicles purchased from now on to March 2020. This ensures that resale value of cars comes down and people will replace their cars with newer vehicles rather than second hand. It also will bring down insurance premiums and businesses will also be able to claim higher tax benefits.
2) Corporate Tax rate cut- The government last week announced that the tax rate for companies is now 22% only. This will ensure higher profitability which in return will lead to companies investing more and reducing the prices.
3) Setting up infrastructure – The government will be setting up infrastructure for production and exponents of automobile components, especially batteries.
RBI has also slashed its Repo rate and CRR so that credit rates go down. This will bring in the much required liquidity into the formal economic system. Although these measures will have positive impact for the automobile industry, the problem of GST still exists. Because of the high rates of GST, the transaction costs are still high thus acting as a disincentive for the consumer. Although the matter has been discussed in the GST council meet, no cuts in GST have been decided for now.
Auto Industry’s revival has to now become a priority as it solely contributes to almost 7.5% of the Indian GDP and employs more than 37 million people.
Posted By: September 28, 2019
Covidonomics : A Simple Parable - By Lord Meghnad Desai
Covidonomics : A Simple Parable - By Lord Meghnad Desai Read More