Video Summary

[RSTV The Big Picture] Speed Bump for Auto Sector

It is no secret that the automotive industry in India is in a bad spot right now as the production and sales numbers continue to drop month after month as it witnessed its sharpest decline in nearly 19 years in July 2019.
By IT's Video Summary Team
August 27, 2019

Contents

  • Introduction
  • Reason for decline in Automobile sector
  • Significance of automobile sector in India
  • Why some automobile companies are doing good in spite of slowdown?
  • What needs to be done to get out of this slowdown?
  • Way Ahead

[RSTV The Big Picture] Speed Bump for Auto Sector

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Introduction

  • Automobile sales in India witnessed its sharpest decline in nearly 19 years in July, dropping 18.7 per cent, rendering almost 15,000 workers jobless.
  • The previous biggest decline across overall domestic automobile sales was recorded in December 2000 when it fell 21.81 per cent.
  • Similarly, domestic passenger vehicle (PV) sales also saw the biggest fall in nearly 19 years, slumping by 31 per cent from July 2018 to 2019. The fall in PV sales in July was also the ninth consecutive month of decline.

Reason for decline in Automobile sector

  • In India, the slowdown is happening more at entry-level vehicles (i.e. Petrol based vehicles).

BS-VI norms

  • India has decided adopt Bharat Stage (BS)-VI Emission Standards by April 2020. This means that, in India, diesel will essentially be out of anybody’s use as a useful product to create a diesel car.
  • Currently, BS- IV emission norms are in effect and all car models sold today are compliant with it.
  • As by April 2020, the BS6 emission norms will come into effect, if a person buys a BS-IV car now, then he/she has to upgrade his/her car in order to become compliant with BS-VI norms. And if he/she do not upgrade, then the resell value of car will be nil.
  • As a result, certain buyers are delaying their new car purchase or has the option to buy the petrol car which is costlier that diesel car.
  • Given the fact that the Diesel cars in India accounts for the largest percentage of automobile sector, this slowdown of automobile sector is proving costly.

Global factor

  • The slowdown of automobile sector is not only in India. The slowdown is also faced by major western automobile companies.
  • However, in context of India, there are other factors that also contributes to the slowdown such as slowdown in the domestic income.

Increasing costs

  • In 2016-17, when the automobile market was good, the combined sales of Delhi, Bombay and Bangalore were declining.
  • The growth was coming from the smaller tier 2 and tier 3 cities of India. This growth from small cities got disturbed in the wake of GST, demonetization etc.
  • The GST and Demonetarization removed the unaccounted cash (black economy) from the economy, which surprisingly, created substantial growth. For example, it helped in deciding whether to buy a second car or not.
  • In 2018, Due to the high number of uninsured vehicles running on the roads, the Supreme Court made a five-year third-party motor insurance mandatory for two-wheelers and a two-year policy for cars from September 1, 2018. In other words, insurance premiums were increase nearly 3 times for new cars and bikes purchased.
  • There’s been cost hikes on account of safety norms being incorporated in the vehicle as well.
  • Also, Cars, bikes and scooters at present attract peak GST rate of 28%. Moreover, the state road tax which is nearly 10% and are keep increasing, adds to the cost.

Shared rides

  • The ride sharing mobile apps are also causing the slowdown, majorly in bigger cites. These apps even allow to book autorickshaws and motorbikes for shorter distances.
  • With the added convenience of online fare payments, the use of these apps for smaller commutes seems a more favourable prospect than buying own car.

Confusion

  • There is confusion over BS-VI norms as not all carmakers have clarified their position regarding the upcoming shift and how it will affect their product lineup that is offered to customers.
  • Moreover, there is confusion over electric vehicles which leaves many uncertainties about when EV will come, what to invest in and when to invest.

Too many rejections

  • More than 80-85% cars in India are financed by the bank, NBFC etc. But today banks have become too much cautious at looking documents and criteria for availing loans. These resulted in too many rejections, leading to decrease in sell of cars.

Significance of automobile sector in India

  • Until few years ago, the health of the economy was decided based on the what’s happening in the auto sector.
  • 50% of the manufacturing sector is automobile sector.
  • Automobile sector has distributed employment. For example, the amount of benefit the roadside shopkeepers, via the car transit, gets is humungous.
  • Moreover, the companies related to steel, rubber and glass etc. has immediate effect of automobile sector.

Why some automobile companies are doing good in spite of slowdown?

  • The automobile slowdown is not total gloom and doom scenario. The monsoon season and approaching the festive season is beneficial for selling of cars.
  • However, the volume of these high priced selled cars (9 to 10 lakhs INR) is nearly 3 to 4 thousand which won’t make any impact on the overall situation of low to medium cost entry-level vehicle market.
  • Moreover, from the overall gain, only 30 % gain is incremental gain (real gain) while the 70% gain are from the current car models.

What needs to be done to get out of this slowdown?

  • The measure of government’s effort to increase the liquidity has actually increased it but the effect of that liquidity to the market is not there. For 4-wheeller, finance is required for more than 90% while it is 60-65% for two wheelers. Hence, if the retail funding to the customers via financial institutions decreases, there will be slowdown.
  • During the festive season, earlier, retail funding was given by NBFC very aggressively, by announcing zero interest schemes, maximum finance schemes etc. These schemes used to initiate the interest of customers. However, as of today, there are no schemes like this.
  • Hence, there is need for the aggressiveness in the market and financial liquidity should reach to the end customer.
  • Moreover, in the entry level cars, there is need to reduce GST even for temporary period.

Short term measure

  • If the banks look at details of documents, there will be higher rejections. Hence, as a short term goal, automobile sales need to depend a bit on forbearance.

Long term measure

  • In the long run, if the purchasing power increase, the sales will increase, and for that to happen, raising exports and other sector of economy is the key.
  • Hence, long term measures need a holistic approach to be undertaken to kick start the economy and then take the auto sector along with it as well.

Way Ahead

  • There are expectations that this slowdown will be temporary, however, it will be take one or two year for automobile sector to regain stability. Given the good monsoon this year, the rural sales might increase.
  • In the wake of BS-VI approaching in April 2020, it will take 2-3 months for price stabilization as well BS-VI expectations for diesel cars. It is also to see how the customers react to BS-VI norms.
  • This slowdown is temporary and probably transitionally in nature and it all could change come the festive period.
  • The structural transformation that is taking place in the economy has created lots of capital and have lots of cascading impact on the ancillary services. However, there are cost and pains that are coming from the deleveraging of automobile structure.

 

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