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The pandemic has infused India’s economy with tension. A sudden halt in the manufacturing sector already was a shock to the automobile industry last year. Then the lengthy lockdowns were imposed that caused job loss and pay cuts for many. So, due to the pandemic people were keen to save more for their future, either for healthcare or for other necessary purposes. This directly impacted the automobile sector and it witnessed a sudden drop in buyers than the 2019 figures.

Available data by Society of Indian Automobile Manufacturers (SIAM) the passenger vehicle segment experienced a decline of 22% in April-November, 2020 and the two-wheeler segment dropped by 25% in the same time. According to a recent ‘Nomura Research Institute Consulting & Solutions India’ the sales of personal vehicles, ‘reached in 2018-19 would be reached only in 2022-23’. So, stressing on marketing and sales growth is a necessary lookout for the auto sector this year. 

Industry insiders and analysts thought 2021 will be a year for the auto sector to bounce back. But the second wave of the pandemic has poured water in that indication. In this scenario, major auto companies, both two wheelers and four wheelers have increased prices. Major auto makers like Nissan, Mahindra & Mahindra (M&M), Datsun, Renault and Ford are in the list. Experts are skeptical, thinking was it a correct step for the time being? Or the auto sector should have focussed on higher sales rather than price hike - keeping in mind sluggish demand growth.

Commodity prices play an important role to indicate the price wave of the automobiles. According to a report by research and rating agency ICRA, “Prices of steel, aluminium, copper, lead, and rubber have inched up higher in the past month and will add to commodity price pressure for ancillaries.” This has been identified by the automakers in India as the key reason for price hike. Additionally, rising fuel prices led to an increase in freight cost that abetted decision of increasing prices.

This will be the second price rise in the Indian auto sector in 2021 after the January period. Gopal Mahadevan, CFO and Director, Ashok Leyland told news house India today, "We have already taken a hike last October and another in January. But there have been significant increases in steel prices and specialised metals. If this continues, we will have no option but to increase prices. With India slated to be one of the highest growth markets, we are hopeful that the price increases will be absorbed by the market."

In a regulatory filing, India's largest auto brand Maruti Suzuki India states, "Over the past year the cost of company's vehicles has been impacted adversely due to increase in various input costs. Hence, it has become imperative for the company to pass on some impact of the above additional cost to customers through a price increase in April 2021.” Price hike for the company ranged from `5,000 to `34,000. Kia Motors that has been another good performing auto company in 2020 has also announced price hike for their popular models.

During April 2020, the sector had seen a spike in prices due to the industry’s step towards stricter BS-VI emission norms. After one year, this April 2021 price hike is being analysed with doubts as the second wave affected the country widely. Few states have already imposed lockdowns or restrictions in few places for time being. If the situation worsens, the government might think to extend the lockdowns there and impose in other states too. This will again degrade the market of automobiles.

American credit ratings agency, Fitch Ratings thinks that the decision to pass on higher commodity prices on the customers “could dim the chances of a demand recovery post-December 2020”. Vinkesh Gulati, President, Federation of Automobile Dealers Associations (FADA) - which is the apex national body of automobile retailers, also thinks that it would have been better for customers without the price hike, but they will slowly adapt to the new prices.

Backdrop

Passenger vehicle sales in India which is a major segment for the auto sector plunged 78.43% in the April-June period during 2020 due to the pandemic. This figure declined for the ninth straight quarter and got marked as the longest slowdown in 20 years. It is estimated that during the lockdowns, the sector witnessed losses around `2,300 crore in turnover for every single day of closure.

Conversely, the Indian luxury car market has been valued at more than $1 billion in 2020, and it is expected to reach around $2 billion by 2026. It is also expected to register a CAGR of more than 6%. In 2019, the sales of pre-owned luxury vehicles have seen growth above 16%. Earlier in 2019, the union government reduced the GST from 28% to 18% to lift sales of pre-owned vehicles. This impacted positively. The super luxury car segment declined approximately 30% in 2020. Sharad Agarwal, Head, Lamborghini India commented, “We anticipate the segment to rebound in 2021 to the 2019 levels,” he added.

However, Naveen Soni, Senior Vice President, Sales and Service of Toyota Kirloskar Motor seems to be quite hopeful about the domestic auto market. He earlier stated, “We strongly believe that the current economic revival is likely to help sustain the sales momentum in 2021 and we are hopeful that 2021 will see a V-shaped recovery of the economy thereby helping the industry to bounce back.” Only the time can confirm if the price hike has been a correct decision for the sector or not.