The Indian automobile industry became the 4th largest in the world with sales increasing 9.5% year-on-year to 4.02 million units (excluding two-wheelers) in 2017. However, this golden period did not last long in the auto industry, with the oncoming of FY 2018-19. In 2018-19, the two-wheeler segment could only muster a single-digit growth, 4.86%. While the passenger vehicle sales in 2018-19 registered a growth of 2.7%, slowest in four years, owing to tepid dispatches in March 2019.

As far as FY 2019-20 is concerned, major automobile makers like Hyundai, Maruti Suzuki, Mahindra and Mahindra, Tata Motors reported double-digit declines in domestic PV sales in September 2019, which signifies that the onset of the festive season failed to lift the ongoing slump in the Indian auto industry.

Reasons?: Many causes have been reported for this slump. One of them is the upfront premium that needs to be paid at the time of sale of insurance but would be recognized on a yearly basis. The premium for the year shall be recognized as premium and the remaining shall be considered as Advance Premium.  This rise in the cost of insurance led to uncertainty and deferred purchases in the auto industry.

Automakers in Quarter 4 of FY 2018, were hit by the liquidity crisis among NBFCs (Non-Banking Financial Corporations). According to the Society of Automobile Manufacturers (SIAM), 70% of the two-wheeler sales and 85% of the passenger vehicle sales were financed by NBFCs. In addition, the liquidity crunch at NBFCs has made both public and private sector banks, including State Bank of India and HDFC Bank, more cautious while extending credit to automobile dealers, who are already reeling under the precipitous fall in vehicle sales over some months.

In addition to this, the government has also introduced the new regulation of BS-VI emissions (Bharat Stage Emission Standards), with which all vehicles have to comply with from April 1, 2020. The current BS-IV contains 50 parts per million (PPM) Sulphur, while BS-VI shall contain only 10 PPM. The new norms will bring down nitrogen oxides from diesel vehicles by 70 percent and in petrol vehicles by 25 percent. Compliance with BS-VI norms requires a higher investment in technology to upgrade vehicles in stock and making new vehicles. This also means fewer launches until the deadline. Due to this technology upgrade, the price of petrol cars is expected to go up by Rs 20,000- 30,000 while diesel passenger vehicles’ prices may go up substantially by Rs 75,000-1,00,000. This will further reduce the attractiveness of buying diesel cars (more polluting than petrol cars), with diesel fuel prices moving closer to petrol in recent times. OEMs (Original Equipment Manufacturers) with a strong market share in diesel cars and auto suppliers with a strong dependence on diesel car OEMs are likely to be impacted badly.

The addition of an ABS (Auto-Lock Braking system) to two-wheelers above 125cc has led to a considerable price hike. For this reason, many manufacturers in India offer a single-channel ABS with the vehicle as it costs cheaper than a dual-channel unit. To address the issue of over speeding and the consequences of the same, the Union Road Transport Ministry of India has approved the installation of compulsory airbags and speed limit reminders in all cars from July 1, 2019. This has pushed prices up by 8-10 percent.

According to Credit Suisse, the raw material index for two-wheelers has reached the highest level since 2011. Steel (2/3rds of the total raw material cost) prices have risen about 12% since February 2019. Some of the two-wheeler companies like Honda Motors Corp. and Maruti have increased their prices 1-4% in the past few months to reduce the impact of rising input costs. While this has further led to a price rise of about 0.6% to 1.6% of passenger vehicles depending on different categories.

Apart from this, there have been certain indirect factors like rising car leasing and rising second-hand car market. Due to problems such as traffic congestion, rising commute times and hassle in parking, people have started to show a unanimous preference towards public transport and ubiquity of cab-hailing and ride-pooling options. According to a report by SBI Capital Securities, cab aggregators like Ola and Uber have caused a downfall in demand by one-third in the previous two years, i.e. FY 2018 and FY 2019.

How many jobs have been lost?: The automobile sector is one of the largest employers in India, employing around 37 million people. According to SIAM, Original Equipment Manufacturers (OEMs), have removed about 15,000 temporary workers in the past two or three months. A lack of working capital among tepid demand has led to the closure of nearly 300 dealerships across the country. This has led to over 2,00,000 people losing their jobs, according to the Federation of Automobile Dealers (FADA), the apex body of the automobile retail industry.

Measures were taken?: In July 2019, our Finance Minister proposed that tax on EVs and chargers would be cut to 5% from 12 and 18% respectively. The government had also reduced the corporate tax to 25.1%, along with providing a complete exemption from Minimum Alternate Tax (MAT). The minister also announced a tax holiday for manufacturing companies in India from October 1, 2019. During this period, the corporate tax rate would be 17.16% as compared to the earlier 21.55%.

Apparently, these positive steps had little or no impact on on-demand creation. Buyers continue to face a major problem of financing, which has deeply impacted the Passenger Vehicles industry. However, these measures definitely opened upmarket for Electric Vehicles (EVs).

The government must accelerate the process of bringing impactful reforms with due diligence, which can yield immediate results in spurring demand, resolving the liquidity crunch and creating new jobs. The industry, which has reaped massive growth in the last decade, can emerge out of this crisis victoriously, provided it is backed by the required reforms.

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