How Deep are the Wounds of Indian Auto Industry

The Indian automobile sector has been witnessing a decline in sales for the past 13 months. What factors are fueling the slowdown?

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The Indian automobile sector, which contributes more than 7 per cent to the country’s GDP, has been witnessing a decline in sales for the past 13 months. At a time when the country’s GDP is expected to have grown at lower-than-expected 5 per cent during the April-June quarter, the slowest in over six years, sluggish investment growth and weak demand have further intensified the slowdown in the capital-driven auto industry.

Why Customers Are Not Buying Vehicles?

The introduction of new safety features and an increase in insurance premiums have increased the total cost of ownership for customers. Lack of finance options has further exacerbated the situation for dealers and customers. Due to RBI’s tightened credit norms, banks have also stopped funding NBFCs which are major credit providers for customers and dealers, especially in rural and semi-urban areas.

The clamour to promote electric mobility has further added to the woes. The culture of ride-hailing apps such as Ola and Uber has hit car sales in metros such as Delhi, Mumbai and Bengaluru. Lack of parking spaces and traffic congestion has pushed potential customers against buying vehicles, resulting in stagnating sales for the last three fiscals in metro and tier-I cities.

The demand of automobiles, especially entry-level two-wheelers, has gone down in rural markets due to falling farm income and floods. The revised truck axle norms that increased freight carrying capacity of trucks by 25 per cent have reduced the need for fleet owners to buy new trucks at a time when freight availability is low from manufacturing, agriculture and infrastructure sectors.

What the Industry Thinks?

The auto industry employees nearly 37 million people through direct and indirect means, out of which 15,000 contractual manufacturing jobs have been lost and another million at risk, stated Rajan Wadhera, president, Society of Indian Automobile Manufacturers (SIAM) at the body’s annual convention recently. According to SIAM, passenger vehicle sales have declined by nearly 30 per cent in August.

In addition, Tata Motors CEO and managing director, Guenter Butschek expressed the belief that the Indian auto industry could be at the brink of collapse with no turning back. He attributed the liquidity crisis and uncertainty in the minds of consumers for severely hurting the sector but also stated optimism about recovery from the current situation in case certain measures are taken by the government.

The industry veterans have been emphasizing to reduce GST on all vehicles to revive demand. However, Uday Kotak, the managing director and CEO of Kotak Mahindra Bank believes the auto manufacturers should emphasize on exports to boost supply. “This will help to overcome the stress present in the domestic market. The rupee which is weak at present will also favour this method,” he said.

Reduction in GST could be a Relief

Considering the expected increase in cost due to the implementation of BS-VI emission norms, the auto industry has demanded government intervention. Finally paying heed to industry demands, Union transport minister Nitin Gadkari has assured that to help the sector come out of the prolonged slump, he would recommend a reduction in GST on internal combustion engine (ICE) vehicles to the finance ministry.

The minister further said his ministry would hold discussions for GST reduction on hybrid vehicles. The government has already reduced GST on electric vehicles from 12 per cent to 5 per cent. Gadkari suggested the carmakers should explore starting own financing wings to boost sales as auto financing has become a major concern at the moment.

Gadkari emphasized that the auto industry should look to adopt cleaner fuel as pollution and oil imports of INR 7 lakh crore per year remain big issues for the country. He clarified that the government doesn't plan any ban on petrol or diesel vehicles. The government has recently said all BS-IV vehicles will be allowed to run till the end of their registration period. A 20-times hike in registration fee has also been deferred till 2020.

Automakers Shutting Shops

Major automakers have witnessed a harrowing dip in domestic sales, leading to the shutdown of various assembly lines and job losses. Maruti Suzuki on Wednesday announced shutting down operations at its plants in Gurugram and Manesar in Haryana from September 7 and 9, respectively.

Following suit, commercial vehicle manufacturer Ashok Leyland on Thursday declared there will be no production during the five-day holiday at its plant in Ennore near Tamil Nadu’s capital Chennai starting September 6, excluding Sunday.

The auto slowdown in India is affecting global numbers as well. The country’s production of light vehicles--passenger and small commercial vehicles of up to 6-tonne load capacity--is estimated to decline by 11.4 per cent to 4.18 million in 2019, according to IHS Markit forecast. From 2015 to 2018, India was among the fastest-growing light vehicles markets.