Auto industry hits reverse gear

• Vehicle sales dropped by 12% YoY during April-June, 2019, the sharpest fall since FY 2008-09.
• Over the past year, slowing economy, uncertain monsoons, high insurance and registration costs and reduced availability of credit have impacted consumer sentiment.
• The industry is also suffering from credit constraints, advancing of the deadline for Bharat VI norms and ambiguities due to policies on EVs.
• The government must look at demands for reducing GST and engage in a consultative roadmap to decide the future of the auto industry.


India has been known as a haven for the global auto industry due to low vehicle penetration of 32 vehicles per 1,000 people (2015), young population and increasing disposable incomes. But the recent downturn in sales paints an alarmingly different picture.

For the first time over a prolonged period, all the 17 carmakers in India reported negative salesin the first quarter (April-June’19) of the current financial year, according to the latest Society of Indian Automobile Manufacturers (SIAM) data. As per the findings, this is the steepest fall (12% year-on-year) since financial year 2008-09, when sales for two wheelers slipped by 17%.Passenger vehicle sales (PV) also dipped 18% year-on-year in terms of volume during the quarter. This has been the maximum decline since the 23% y-o-y fall seen in the third quarter of 2000-01.

The declining yoy auto sales in the domestic Indian industry

The 16th General Elections and uncertainty over the next government were cited as the reason behind the slowdown by some experts. This argument, however, may not be a very convincing one. For starters, as compared to other sectors like agriculture& real estate, the automotive industry is less likely to succumb to the pressures of political vicissitude. Secondly, even after the restoration to power of a robust government, the rebound in auto-sales has not happened. This clearly implies that there are other factors responsible.

There seems to be a change in the consumption habits of the millennials. With the vast expansion of the public transportation network and the easy access to metros which criss-cross across the major nodal points of the city, there appears a decline in car ownership by young people. While studies suggest that this is a trend in the US & Europe, it could be a plausible reason for the decline in car sales in India as well.

Possibly, an erosion of purchasing power has also led to the sharp decrease in the sales of vehicles. This could be explained as the result of a string of factors –delayed and unpredictable monsoons, stagnation in wages & dwindling prices of agricultural commodities – which has resulted in agrarian distress in the rural hinterland. The Indian economy is not in the best of its health and grew 5.8% in the fourth quarter of FY19 – the lowest growth rate over the last 5 years.

The rise in vehicle prices due to higher financing costs also led to the muted growth of the sector. Sales were initially impacted as a result of demonetisation, due to a reduced propensity of consumers to make cash purchases. It got accentuated by the IL&FS imbroglio that has dried funds for NBFCs. Production costs have been driven up by the difficulty in obtaining credit owing to the high NPAs in the banking sector and the high rate of GST (28%). The cost of insurance has also increased since IRDA mandated that premium has to be collected for the entire term (3 years for cars and 5 years for 2-wheelers) at the time of getting insurance.

Going the extra mile: The road ahead

This downturn in the two wheeler and commercial vehicle sales is likely have several ripple effects. In the short run, according to Auto Component Manufacturers Association (ACMA) of India, about 1 million people could become unemployed if instant steps are not taken to stir up the sagging vehicle demand in India. The slowdown has already led to production cuts and closure of plants by major automakers to manage higher inventory costs due to weak demand.

In the long run, this situation could hamper future investments in the sector. At the same time, the industry is also a victim of uncertainties in the regulatory framework related to emission norms. Owing to the growing levels of pollution, India has leapfrogged from BS-IV to BS-VI standards from 2020 as compared to 2024 earlier. The Supreme Court has also passed a ruling banning the sale of vehicles from April 1, 2020. Consequently, car companies in India will now have to comply with BS-VI four years prior to the original plan.

The aggressive switch to electric vehicles being planned by the government is going to accentuate these ambiguities further. The industry is already feeling that the government is paying short shrift to the conventional auto industry in favour of EVs. According to them, it is a case of too much too soon in the EV space. A notification on hiking vehicle registration fees on both new and old vehicles on July 24 has further dampened sentiment and sent auto stocks into a tizzy.

The government should consider the industry demand to reduce GST rate to a uniform level of 18% from 28% currently to boost demand. Bringing an element of certainty in designing the policies related to the automobile sector would also be a desired change. At the same time, the government needs to engage in a consultative process with industry for a smooth transition to e-mobility. An injection of liquidity to the banking sectoras proposed in the budget will help the industry navigate its way through the current cash crunch. Cost increases through registration fees and one-time insurance payments need to be looked at, since they are not financed and greatly influence purchase decisions.

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