30 years ago when my family bought a car, it was one of the proudest moments then as owning a car at that time was a luxury. People used to visit the automobile dealers to see the 4 wheeler contraption. But now the situation is the opposite. Car dealers are empty-handed suffering huge losses. It is not because owning a car has become an ordinary thing. It is because of the crisis that the automobile sector in our country is facing right now.
Talking about the automobile sector we need to understand that it comprises of the entire industry, including organizations involved in designing, manufacturing, development, marketing and selling of motor vehicles. Talking about revenue it is one of the largest economic sectors of India.
The Indian automobile sector reached the top in 2017, when it became the 4th largest in the world with sales growing at 9.5 percent year-on-year. The two-wheeler market also prospered at that time. The young generation was quite inclined towards using motorcycles and since these two-wheelers were cheap and gave a very high mileage as compared to the four-wheelers, their market had grown at a whopping rate in the past few decades. Coming to the present, various foreign car companies have also materialized in the Indian automobile industry as the Government of India encourages foreign investment in the automobile sector and allows 100 percent FDI*(1) under the automatic route. This along with the ever-growing demand, induced various big automakers like Ashok Leyland, Hyundai, Honda, Mercedes Benz, and Mahindra Electric to invest huge amounts in various segments of the industry.
Wait! Did, I say something wrong here? Is it really a period of ever growing demand?
For all those who have a habit of reading newspapers, they would have started laughing. For all those who don’t, don’t worry! I will explain why has this become an anecdote for the current generation. The current scenario is that the automobile sector in our country is facing the worst downfall for decades due to which the demand for the vehicles has become negligible as compared to what was some years back. A real-life incident happened when a friend of mine went to the Maruti showroom a few days back to ask for the costs of a CNG vehicle, owing to the skyrocketing fuel prices. It was as if the store employees were waiting for him only. As soon as he entered, he felt like a king who was being served with whatever he wanted. Coffee, tea, biscuits, sandwiches! You ask them, they get it for you!
This is the current situation of all the automobile dealers. There are no customers! Stocks are lying and dying. No customers mean no sales. No sales mean negligible revenue. But the costs for these firms are still high because of cost of production and various fixed costs. Due to this, firms tend to cut their costs by retrenching their employees. People are being rendered jobless. It has been estimated that if the situation persists, job loss can be equal to around 1 million. This is indeed a worry some figure.
To know exactly what led up to this crisis in the auto sector we need to understand the following things about of our country;
- Falling CIBIL( Credit Information Bureau of India Limited ) Scores: These scores are the credibility tests of a loan taker. Lower the score, lesser is the credibility. Since the banks have been facing a lot of loan defaulters who default millions of rupees of banks, these banks become strict about giving out loans and they give loans based on this score. This reduces the number of people applying for loans and so reduces the number of car buyers in the industry. The NPA (Non Performing Assets) Crises is not unheard of which further reduces the chances of banks giving out loans on riskier terms as they already find themselves under a burden of millions of rupees due to previous bad debts.
- Government Norms: The government has been introducing stringent norms such as the compulsion of using BS-VI engines from April 2020 and prohibiting the use of BS-IV engines which is equipped in the current vehicles. This move has been initiated to control pollution in the environment. Due to this, people have been discouraged to buy vehicles right now and they are waiting for the new norms to be implemented and only then buy a new car. Also, there are rumors that diesel cars might stop functioning in the coming future and have also affected the decision of the people to buy vehicles. This can give us an impression that perhaps the slowdown is temporary.
- Coming up of mobile apps like Uber and Ola: In the words of our finance minister, the coming up of such apps has affected the decisions of the millennials in buying new cars as they prefer to traverse in taxis which they believe are cheaper as compared to the costs of one’s car. While, this may not be the sole factor in the crises, it could definitely have an impact on the Auto-Sector both in principle and reality.
- Increasing prices of crude oil and steel have also played their part in the crisis faced by the automobile sector. These have increased the cost of servicing and the cost of production respectively making it expensive for the consumers to have their own cars.
- A high rate of GST, as high as 28%: Such a high rate of tax also discourages the people from buying new vehicles.
How have the sellers dealt with the situation?
Most of the big car manufacturers in the market have rebounded by giving huge discounts on their vehicles. Tata has offered discounts up to 1.5 lakhs on its vehicles and other manufacturers like Honda, Hyundai, Mahindra have also put huge discounts on their vehicles.
Now, what is the current situation?
The finance minister Nirmala Sitharaman announced a lifting ban on the purchase of vehicles by government departments and allowing an additional 15 percent depreciation on vehicles acquired from now till March 2020.
Also, the government clarified that BS-IV vehicles purchased up to March 2020 will remain operational for the entire period of registration while it will also consider various measures including scrappage policy to boost demand. The scrappage policy is basically a government budget programme to replace old vehicles with new ones. This serves as a twin trigger of boosting demand as well as removing the old polluting rivers from the road. Steps have also been taken to enable the NBFCs to increase disbursements and lower the cost of borrowings. The repo rate has been reduced to 5.4% to create demand for loans which shall be undertaken to buy cars and other assets. The government shall also undertake measures to reduce the rate of GST to encourage people so that they can buy new vehicles.
Now the only thing we can do is to wait and watch and to hope that the measures turn out on a positive note, bringing India back to where it had always been.