What’s Driving India's Auto Market Slowdown and Why a 'Revival Package' Must be Top Govt Priority
India’s famed automobile sector has been hit by a severe slowdown for many months now and its unprecedented sales decline has ceased to surprise. The latest numbers have instead begun raising severe concerns.
In July, the combined vehicle dispatches across all categories, from factories to dealers, fell by about a fifth. Dispatches of passenger vehicles fell by almost a third with passenger cars declining by a steep 36% or by more than a third compared to the same month last year. Dispatches of motorcycles fell by almost a fifth and scooters by more than 12% while dispatches of trucks, buses and light commercial vehicles were down by more than 37%
It is pertinent to note here that these dispatch numbers do not reflect actual sales to customers, but merely track how many vehicles moved out of factory gates to dealerships. Retail sales also continued to slide in July and inventories pile up further across dealerships. The decline in dispatches and actual sales spans all vehicle categories – passenger cars, SUVs, scooters, motorcycles, vans, pickup trucks, large tractor trailers and buses.
Such a sales slump is naturally forcing automobile factories to cut production, with July alone witnessing a production decline of around 3 lakh vehicles compared to the same month last year. This, in turn, means a loss of jobs for contract workers initially but if this slowdown deepens, then permanent workers too may be let go. The automobile industry employs close to forty million people.
While such a widespread and progressive decline is a cause for concern on its own, the unravelling of India’s famed automobile industry should also send shockwaves across policy makers too. The sector accounts for almost half the manufacturing GDP of India.
A tweet by the Society of Indian Automobile Manufacturers (SIAM) shows that the sector also accounts for up to 14% of India’s total GST collections.
If half the manufacturing GDP of the country is in doldrums and declining sales of cars, two wheelers and trucks will result in lower GST collections, the government’s already precarious fiscal math could worsen further in 2019-20. Reviving the automobile sector should, therefore, become one of the top priorities of the government.
Growth has been slowing since the third quarter or from the beginning of the festive season last year. Typically, sales of vehicles boom during the festivals beginning with Navratri and continue through Diwali and other festivities during the third quarter every year. But during the last Navratri-Diwali period, this sales spike was absent and slowly since then, a decline has been creeping in.
There are several reasons for the famed Indian automobile sector, fourth largest in the world, to experience this unprecedented slowdown. First, the sector was impacted due to impending general elections, where uncertainty over outcome drove people to postpone vehicle purchases.
Then, a combination of factors worsened the industry’s prospects: severe liquidity crunch due to the IL&FS crisis since late last year and a simultaneous increase in ownership costs, an overall weak economy affecting demand and now, severe floods in some key vehicle buying states further hurting demand.
The impending deadline of mandatory transition to the Bharat Stage VI (BS VI) emission norms is another irritant. To top it all, the face-off between the industry and the policymakers over a proposed deadline to convert some vehicle categories to electric from the present internal combustion engine (ICE) technology obviously did not help either.
The government has been considering a proposal to ban all ICE-driven two-wheelers under 150cc in the next six years and all three-wheelers within four years. More than three in four vehicles sold in India currently would be impacted if this proposal were to be implemented and the automobile industry has mounted a quiet revolution against this proposal.
On the emission transition, the deadline is April 1, 2020 and this too is a major pain point for vehicle makers. Bajaj Auto, the second largest two wheeler maker in the country, has described this mandatory transition to BS VI from next fiscal as the “joker in the pack” while providing a positive outlook for its business in the current fiscal.
“For the industry as a whole, we believe that the joker in the pack will be the tough BS VI emission norms that will come into play from 1 April 2020. According to the Supreme Court of India, from that date onwards, no motor vehicle following the currently existing BS IV norms will be allowed to be sold across the country. As far as Bajaj Auto is concerned, each of our motorcycles, three-wheelers and quadricycles will be fully BS VI compliant not just on 1 April 2020 but some months earlier.”
“However, it is difficult to anticipate the state of BS VI readiness of our competitors. If some, or most, of them have a large stock of unsold BS IV vehicles in the second half of FY2020, they will perforce have to dump these in the market before the advent of 1 April 2020. That could trigger an unwarranted price war, to the detriment of all. We cannot claim that such a scenario will definitely play out; equally we cannot ignore a distinct risk overhang on that account.”
This scenario will likely play out for other vehicle categories too, making the industry even more competitive than it already is and skewing price points.
R C Bhargava, the chairman of Maruti Suzuki India, has already said that his company’s decision to stop producing vehicles with up to 1.3 litre diesel engine capacity was taken keeping in mind the rising cost of compliance with newer emission norms. SIAM has already sought a GST relief coinciding with the implementation of the new emission norms to prevent a further slide in vehicle sales.
On the tight deadline for transition to EVs too, the industry appears up in arms and a solution to this prickly issue seems difficult at the moment.
The government has mitigated some concerns by lowering GST on EVs and on the other nagging issue – lack of liquidity too – it seems to be making some moves. But the industry expects a comprehensive “revival” package to emerge from the present slowdown.
This includes lowering insurance costs, putting in place a scrappage policy for phasing out older vehicles and slashing GST rates across vehicle categories. Will the government listen to the industry’s woes, given its own fiscal troubles? This remains to be seen.
(Author is a senior journalist. Views are personal)