Auto sector slowdown

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Pervasive lack of demand from the consumers for small and medium cars during the past almost four months beginning from April 2019 shows that the Indian automobile industry is experiencing a snowballing crisis. The crisis does not seem to be abating, not to speak of reversing, as the economic slowdown under the second stint of the NDA-government continues to stare in the face of financial planners and the policy makers. With major industries including the richest Reliance Industries Limited and its sister concerns looking for investment from abroad, the situation on the economic front in the country does look promising in the months to come. It has to be noted down that domestic sale across all vehicle categories slid 19% year-on-year in July, as passenger vehicle despatches plunged 31% to register the segment’s steepest fall in almost two decades. And with the wheels having come off both two-wheeler deliveries and commercial vehicle shipments, with the former going down by 17% and the latter slumping 26%, the picture is one of widespread gloom in the industry. The straightforward interpretation of the data is that demand has dried up in all corners and among all key consumer segments – urban, sub-urban and rural and personal and institutional. Over the nine straight months of contraction in passenger vehicle sales has also begun extracting a toll in terms of showroom closures and lay-offs at dealerships, component suppliers and vehicle makers themselves besides the ancillary units, which appear to have been the worst hit and pushed to the wall. While the Federation of Automobile Dealers Associations recently warned of more jobs being at risk, on top of about 3.52 lakh positions that have already been shed, the Society of Indian Automobile Manufacturers admitted that the industry had laid off at least about 150,000 contract workers in the last three months alone. That the broader economy is experiencing a serious slowdown has been evident for some time now and the latest data from the auto sector only bears testament to it. And as the RBI acknowledged last week ‘private consumption, the mainstay of aggregate demand’ remains sluggish and may witness further slowdown in the months to come further deepening the crisis in the industry. Apart from this crisis that is looming large over the hemisphere of the Indian economy, the reasons are not too far to seek. Some of the factors currently bedevilling demand in the auto sector are well established – the liquidity crunch in the NBFC industry and the resultant tightening of credit availability to finance vehicle purchases, an increase in up front insurance costs and the 28% GST charged on cars, motorcycles and scooters – the fact that manufacturers overestimated demand when setting up capacity, especially of fossil-fuel powered vehicles, has largely been overlooked. For example, Maruti Suzuki, India’s largest car maker, has announced plans to stop selling diesel cars from April 1 this year as demand has slumped. In 2012, the company decided to invest Rs 1,700 crore in a new diesel engine plant in Gurugram, capacity that it now needs to repurpose or idle. Some of the other car-makers have also followed the suite as they were also foreseeing decrease in the demand for such vehicles. Simultaneously, the ride-share industry has mushroomed in recent years, especially in urban areas where choked roads and lack of parking space have incentivised rapid adoption of App-based commuting. Other than this, sharing of vehicles increased on social and locality basis increased in some parts of metropolitan cities in the country. The outlook too, especially for the near term, looks far from hopeful. The RBI’s July round of its Consumer Confidence Survey, which reflected a decline in consumer confidence in July, shows 63.8% of respondents expect discretionary spending will stay the same or shrink one year ahead. In June 2018, the comparable reading was 37.3%. The onus now lies on the government to urgently formulate policy interventions to address this sectoral crisis or risk wider contagion. What happens next will depend on the measures announced by the central government in the days to come.