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    India's passenger vehicle market going through the worst slowdown

    Synopsis

    Barring flattish sales witnessed in October last year, sales have fallen every month in almost a year now.

    Auto sales in doldrums, industry seeks govt intervention
    MUMBAI: India’s passenger vehicle market, once seen as the brightest spot in the global automobile space, is in the middle of a prolonged downturn never seen in about a quarter of a century. With projections of no immediate recovery, the industry is seeking a tax cut to revive demand.

    Barring flattish sales witnessed in October last year, sales have fallen every month in almost a year now. In June, nine out of the 11 main passenger vehicle makers posted double-digit fall in sales. In the first quarter of 2019-20, the volume is estimated to have dropped 15-20%.

    “The industry is facing a problem like I haven't seen in the last 20 years that I have been in the sector," said Ashok Khanna, who manages Rs 1.5 lakh crore as the group head of vehicle loans at HDFC Bank.

    Automobile and financing industry executives blamed a host of factors from increased insurance cost and tightened money supply following the IL&FS debt crisis to weak farm income and an uncertain job market for the fall in demand.

    Many likely buyers are waiting also for potential discounts close to the start of the next fiscal year, when India will move to new emission standards and automakers will have to dispose of their existing inventory, they said. "Crash in fleet buying, spike in insurance cost (and) tightening of liquidity post the IL&FS crisis have slowed down demand,” Khanna said. In two-wheelers, he said, weak farm income affected sales.

    Demand from shared mobility providers, which had helped offset weak sales to other segments earlier, too has now slowed down, he said. There is a deferral in buying in the market, with enquiries failing to convert into actual sales, Khanna said. People have not forgotten the massive discounts given by vehicle maker during the Bharat Stage-IV transition and they are waiting for the last two quarters of this fiscal year, expecting companies to liquidate their stock before the transition to BS-VI emission standards at steep discounts, he added.

    To be sure, it is not just India. Even the world’s largest market, China, has seen double-digit fall in sales in recent months.

    Prior to the current phase, the industry witnessed a prolonged slowdown towards the fag end of the UPA-2 regime and before that during the 2008 Lehman crisis. In 2012-13, sales had slowed but still grew in a low single digit. In 2008, following an excise cut, the market bounced back within three-four months. The current situation calls for an encore of 2008, said industry executives.

    “For the auto industry, some interim GST rate reduction can be done that will help spur demand and be a stimulus to the economy,” said Pawan Goenka, the managing director at SUV and tractor manufacturer Mahindra & Mahindra.

    The Society of Indian Automobile Manufacturers too had earlier demanded a cut in GST rates. Khanna of HDFC Bank said there was a strong case for two-wheelers up to 150 cc to be taxed at 18%. Charging these at 28% looks a little unfair to the rural folks, who account for 50% of the purchase in this category, he said.

    The auto loan market is also witnessing a slowdown. While disbursals were flat at around Rs 1.9 lakh crore in fiscal 2019 ended on March 31, these are estimated to have dropped 10-12% in the past quarter.

    However, Vyomesh Kapasi, the chief executive at non-banking finance company Kotak Mahindra Prime, said this wasn’t due to stringent lending rules alone. Lenders have tightened their rules, but that has not impeded the retail lending claims, he said, adding that borrowers with a decent credit history were still getting loans in 30 minutes.

    Experts said tepid returns from the financial market and real estate too have impacted the overall sentiment. There is a strong co-relation between Sensex returns and passenger car sales.

    SLOWING RURAL ECONOMY, AND FALLING INCREMENTS
    Kotak Institutional Equities expects industry conditions to remain challenging over the next two years, due to increase in costs owing to tighter regulations and a slowdown in urban areas due to infrastructure constraints. It predicts the passenger vehicle market to grow at a CAGR of 5% during fiscal years 2019 to 2022. What has compounded the problem is slowing agriculture income growth for over two years. A thriving agri economy had cushioned the urban slowdown between 2014 and 2017.

    The agri nominal GDP growth was at a 15-year low at a mid-single digit in the last fiscal year. Buying by government employees, which has played a big part in driving growth in the past, too has been normalising. The income impact from incremental salary to government employees from the Seventh Pay Commission had supported growth in 2017. The impact of the salary boost is now reducing.The spending growth of the Centre and states on salary and pension is expected to come down to around 7.7% of GDP in fiscal 2020 from 8.2% in FY19, according to budget projections.


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    ( Originally published on Jul 10, 2019 )
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