Friday

16


August , 2019
Automobile sector slowdown in India
13:58 pm

Prithvi Jain


The automobile sector in India has been in the doldrums as passenger vehicles sales plummeted by almost 30% on a year-on-year basis in July 2019 alone. Industry giants have been facing huge inventory pile-ups and job losses in the midst of a severe slowdown in the industry.

According to the Federation of Automobile Dealers Associations (FADA), up to two lakh jobs have been cut in the industry over the past three months due to the fall in demand and 286 dealerships have faced closure in the past 18 months. Cars worth ` 35,000 crore remain tied up in unsold inventories as of June 2019. Maruti sales fell by 36% in July while other major players like Tata and Honda faced de-growth rates of 39% and 49% respectively.

Ancillary industries have also taken a hit in light of the slump. According to the Automotive Component Manufacturers Association, the auto component industry is expected to face a workforce reduction of between 15-20% - that represents between 7.5-10 lakh jobs - unless the slowdown eases soon.

One of the most significant reasons for the slowdown in the automobile industry is the current liquidity crisis in the Indian economy. In the monthly report for June 2019 released by the FADA, the organisation’s president Ashish Kale states, “Liquidity still continues to be a worry, both at the retail front as well as for Dealer Working Capital. With Non-Banking Financial Companies (NBFCs) and banks still in a cautious mode, the normalcy in lending which is required to get us back to growth cannot still be seen.”

The NBFC sector has been in crisis since the collapse of IL&FS in 2018 and the banking system has been sitting on excess liquidity due to the current Non-Performing Asset (NPA) crisis. The growth rate for retail loan disbursements have fallen to a five year low and banks are looking to reduce their exposure to the automobile industry.

The slide in the industry comes at a time when consumer demand is weak and economic growth projections have been reduced. Fitch, a rating agency revised India’s forecasted growth rate for the fiscal year from 7% to 6.6%.

Unemployment in India is at a 45-year high of 6.1% as per data from the Periodic Labour Force Survey and the situation will only worsen if the slowdown in the Indian automobile sector is not reversed.  According to FADA data, total vehicle registration in India fell by 6% year-on-year in June 2019.

According to a customer service manager in a Maruti Suzuki showroom in Kolkata who refused to be named, “We have been facing a downturn as sales have fallen. Customer enquiries are not as warm as they used to be and a higher percentage of enquires are not maturing to sales. Customers are increasingly looking to postpone their purchases until the market starts to look better.”

The Society of Indian Automobile Manufacturers (SIAM), the apex body of the automobile industry has been rallying for a cut in the Goods and Services Tax (GST) applicable on automobiles to 18% from the current rate of 28%. A rate cut could trigger an increase in demand in the industry by reducing the price.

In an effort to stimulate the automobile industry and encourage sales of electric vehicles in India, the Indian Finance Ministry has reduced the GST on electric vehicles and chargers of EVs from 12% to 5% and from 18% to 5% respectively, effective from August 1, 2019. Besides, interest paid on loans for electric vehicles have been given income tax relief of ` 1.5 lakh. The government also needs to take some pro-active measures to address the crisis in the conventional automobile sector.

The industry has also been grappling with the race to meet compliance measures as the Bharat Stage-VI (BS-VI) emissions standards are to kick in from April 2020 which will require a heavy investment in new technology by manufacturers. Prices for BS-VI compliant fuel are expected to be higher which is another potential worry.

The automobile sector along with others like the housing sector needs a restoration in consumer confidence given the deflated sentiment in the economy. A growth in private investment is a much-needed means through which India can address the issues of unemployment and the fall in consumer demand that it is currently facing. The banking system too, requires a boost in confidence in the midst of the liquidity crunch. The government aims to ease the ongoing crisis in the system with its budgetary recapitalisation proposal of injecting ` 70,000 crores into the Public Sector Banks (PSBs). The fate of the Indian automobile sector depends on the success of these measures.

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