Economics

The Auto Sector of India is facing a deep crisis

Background
The Automobile Industry in India, the 4th largest in the world, is facing a slowdown. The month of July 2019 saw sharpest decline in 19 years in the sale of vehicles across all categories in the country which slumped 18.71% to 18.25 lakh units down from 22.4 lakh units last year in the same month. The said data by the Society of Indian Automobile Manufacturers (SIAM) shows wholesale figures which represent the number of vehicles despatched to dealers by the manufacturers.

The overall domestic automobile sales declined last in December 2000 when the sales fell 21.81%. Even the Passenger Vehicle segment sales saw the biggest fall since December 2000, slumping by 30.98 percent from July 2018 (nearly 2.91 lakh units) to July 2019 (a little more than 2 lakh units). Passenger vehicle sales fell for the 9th consecutive month this July.

Reasons for Slowdown
A possibility that buyers are awaiting BS-VI compliant vehicles or maybe awaiting more incentives from the manufacturers to buy BS-IV compliant vehicles before the April 2020 deadline. Demand may also have been slowed down due to government promotion and incentivizing of electric automobiles. The buyers' mindset might have changed which resulted in the lesser sales of petrol and diesel fuel fitted engines. Moreover, the BS-VI norms apply to both fuel and engines. The availability of such fuel across the country is also uncertain to the public right now.

Slow down can also be attributed to a global phenomenon that is right now true for every country. Banks have also become strict in lending, favoring only those individuals with a good CIBIL score. The finance has also become stringent even for dealers to capitalize their inventory.

Fall in rural income coupled with severe floods in many parts of the country can also be said to decrease in demand. Other factors that have been attributed to the slowdown are higher and not standardized road taxes and rising GST in automotive parts.

Consequences of Slowdown
The most important consequences are job cuts and a rise in unemployment due to slow down in the automotive sector which is one of the largest employers in the country. Due to this, the broader economy is also getting affected. The slowdown in this sector has also affected the steel and rubber industry.

Current Slowdown Different
Edelweiss Research has pointed out that the current slowdown in the sector is very different from the ones that the industry has gone through earlier. First, the slowdown is driven by domestic factors, including the NBFC crisis, while the earlier ones were triggered by global events. It also pointed out that over FY19-21, vehicle prices are estimated to jump 13-30% due to safety, insurance, and emission-related compliance costs. For end consumers, such a steep price hike can prove a hurdle in growth recovery. Meanwhile, growing competition from the pre-owned car market is also pulling down sales of new vehicles.

Measures announced by Government so far to Revive the Sector
To help revive the industry the Finance Minister announced a stimulus package. Some of the moves may help banks/NBFCs to increase disbursements and lower borrowing costs to consumers/ auto dealers to an extent.

The clarification on BS-IV vehicles purchased until March 31, 2020, to be allowed to be operational for the entire period of registration.

Other moves like higher depreciation rate for cars bought until March 31, 2020, which is not applicable for the salaried class or personal car buyers or the lifting of the ban for government procurement of cars may not make a significant impact, given the limited volumes involved.

Way Forward
•Reducing GST from the current 28% to 18% in the sector.

•Improving liquidity in the market and its transmission to the end customers.

•Rationalising road tax by state governments.

•Improvement in saving rates as a long term measure that raises purchasing power.


Source: The Hindu, Hindu business line



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