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An Inquiry into Recent Downswing in Indian Automotive Industry

Updated October 7, 2021
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An Inquiry into Recent Downswing in Indian Automotive Industry essay

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Abstract

The automobile sector of India plays a pivotal role in Indian economy. India emerged as the 4th largest automobile market in 2018 with sales increasing 8.3% to 3.99 million units. It also became the 7th largest manufacturer of commercial vehicles in 2018. It contributes more than 7% to the total GDP and 49% of the manufacturing GDP and also supports almost 37 million jobs in the country. This sector is currently facing prolonged demand slowdown. In the month of August 2019, India’s automobile sale in domestic passenger vehicle fell by 31.5% and car sales fell by 41.09% compared to the same month in the previous year. Erosion of demand, Contractionary credit policy, confusion regarding emission related norms, transition to electric vehicles, hike in the prices of automobiles etc. are some of the reasons for this trough condition. However, govt. has taken several initiatives to arrest the situation but it attracts more long term initiatives by the govt. This paper focuses on the key reasons for the downswing of automotive industry, its implication on Indian economy and the corrective measures which can revivify the automotive industry and boost the economy of the country.

Key words: Automotive Industry, demand slowdown, Contractionary credit policy, emission related norms, electric vehicles.

Introduction

The Automobile Industry in India is one of the largest in the world. This sector plays an instrumental role in the growth and development of Indian economy. It can be regarded as one of the corner stones of Indian Economy and acts as a catalyzer to the macroeconomic growth and technological upliftment. It contributes more than 7% to the total GDP and 49% of the manufacturing GDP and also supports almost 37 million jobs in the country. The major players in Indian automobile sector include Maruti Udyog Ltd., General Motors India, Ford India Ltd., Hyundai Motor India Ltd., Hindustan Motors, Hero Motors, Bajaj Auto, TVS Motors, Mahindra & Mahindra Ltd., Tata Motors, Eicher Motors Ltd. Volkswagen India etc. these companies have been contributing tremendously to the Indian economy by creating huge employment opportunities, paying enormous taxes and earning an applausable amount of foreign exchange.

India emerged as the 4th largest automobile market in 2018 with sales increasing 8.3% to 3.99 million units. It also became the 7th largest manufacturer of commercial vehicles in 2018.

India was also the 4th largest exporter of automobiles in Asia in 2018 keeping behind only Japan, South Korea and Thailand. Automobile exports grew 14.5% during FY 2019. It is expected to grow at a compound annual growth rate (CAGR) of 3.05% during 2016 to 2026.

However, from the end of 2018 to mid 2019, India’s automobile sector has experienced a sudden nosedive in its domestic sales. The major car manufacturers have registered poor sales during this period. This sector is currently facing prolonged demand slowdown. In the month of August 2019, India’s automobile sale in domestic passenger vehicle fell by 31.5% and car sales fell by 41.09% compared to the same month in the previous year. This exhibits the trough situation in this sector that results in the slowdown of our economy and its GDP rate.

Literature Review

Finance minister Nirmala Sitaraman said millennials are not purchasing cars any more and this change in their mindset is one of the big reasons behind such crisis. She further said that the preference of millennials for Ola and Uber instead of preferring to commit an EMI for buying an automobile and the factor like upcoming BS6 emission norms have impacted the Indian Automobile Industry.

Rajeev Singh, partner at Deloitte India opined that a tax cut on automobiles can boost demand in the short run. He also said that GST cut would not be enough to revive demand and the govt. should increase infrastructure expenditure and also consider a vehicle scrappage policy as it will create sustained demand.

Rajan Wadhera, president of Society of Indian Automobile Manufacturers (SIAM) reiterated the demand for lowering of GST rate on automobiles from 28% to 18% and highlighted the need for a single nodal regulatory ministry for the industry. He further mentioned that a million contractual manufacturing jobs are at risk owing to the consumption slowdown.

Edelweiss Research has pointed out that the current slowdown in the sector is driven by domestic factors. It also pointed out that over FY19-21, vehicle prices are estimated to jump 13-30% due to safety, insurance and emission related compliance costs and for end consumers, such a steep hike in prices can prove a hurdle in growth recovery.

Amit Kaushik, Urban Science Managing Director (India), said that poor consumer sentiments coupled with pressures coming from financial stress at the banking sector are key reasons of buyers keeping away from showrooms in the current scenario. He also added that there is a lot of confusion amongst the buyers due to emission shift, electric vehicles and so on.

Objective of the Study

  1. To analyze the present scenario of India’s automotive industry.
  2. To comprehend the reasons for unrehearsed slowdown in the domestic sale of automobiles.
  3. To spotlight the impact of the automobile sector slowdown on the various macroeconomic variables of the economy.
  4. To understand the role that the govt. can play to revitalize the automobile sector and boost up its sale.
  5. To suggest some remedial measures to resuscitate the automobile sector of the country.

Methodology of the Study

The study is based on the data collected from the secondary sources like existing reports, newspapers, journals and websites. Analytical approach has been taken into account while dealing with various reports relating to the study.

Analysis and Interpretation

The two wheelers sales have contracted to 17% and the commercial vehicle’s sales have slumped to 24%/.

The total domestic passenger vehicle sales of the country’s largest carmaker Maruti Suzuki India reduced 36.1% to 93173 units in August 2019. In August 2018, the figure stood at 145895 units.

Hyundai Motor India’s domestic sales dropped 16.58% to 38205 units in August 2019 from 45801 units in August 2018.

Honda Cars India saw its monthly domestic sales plunging 51.3% to 8291 units in August 2019. The company had sold 17020 units in the same month last year.

The domestic passenger vehicle sales of Tata Motors have declined 58% to 7316 units in August 2019 from 17351 units in the same month last year.

Mahindra & Mahindra’s total passenger vehicle sales have dropped 32% to 13507 units in August 2019 from 19758 units in August 2018.

These data show the contraction in the demand for automobiles in Indian economy and the obvious crisis in the automobile sector of the country.

Causes Behind the Downtreand

There are various reasons which contributed to the downfall in the domestic sales in Indian Automobile Industry. These are enumerated below:

Erosion of Demand: The primary reason for this situation is the decline in the demand for car. People have delayed the purchase decision probably with the expectation of reduction in the GST rate.

Contractionary Credit Policy: The liquidity crunch in the NBFCs is another important reason for such downfall. Non-banking Financial Companies have tightened the credit policy to automobile purchases. People having low CIBIL (Credit Information Bureau India Limited) score find it difficult in getting car loan from banks.

Techno-threat: In the present scenario, app-based rent vehicle like OLA, UBER etc. are very much popular among the people. Within few minutes of booking, the car driver picks up the customer and reaches the destination. The company also provides customer friendly payment system. Sometimes they provide attractive discount in rides. These factors sometimes insist people use rent vehicle instead of purchasing car.

Revised Load Norms: The Govt. of India have increased the official maximum load carrying capacity of heavy vehicles by 20-25% in the month of July 2018. It threatened the sale of automobiles, particularly of commercial vehicles.

Sharp Rise in Prices: The prices of vehicles are estimated to increase by 13-30% over the FY19-21 due to safety, insurance and emission related compliance cost which is coupled with the introduction of GST that has led to the increase in the acquisition cost to some extent. This rise in prices of vehicles eroded the demand significantly.

Confusion regarding BS Emission Standard: Recently the Govt. of India has modified the emission related norms from Bharat Stage (BS)-IV to Bharat Stage VI following the Supreme Court judgement. BS-VI norms will come into force by April 2020 and the govt. skipped the BS-V norms to jump into BS-VI. This transition created lot of confusion among the buyers. It also led to huge loss in investment because of unsold stock of BS-IV vehicles.

Transition to Electric Vehicles: In accordance with the ‘National Electric Mobility Mission Plan (NEMMP) 2020’ The govt. has proposed a framework of phasing out the sale of petrol and diesel run vehicles by 2030 and instead plans to introduce Electric Vehicle in order to combat the issues of vehicular pollution. This also forced the buyer to delay their purchase.

Implications

The downfall in the domestic sales of India’s automobile sector has adversely affected the automobile industry in particular and the economy of the country in general. Country is already facing a serious economic crisis and this automobile sector slump has further worsened the crisis.

Unemployment: Due to crisis in the automotive sector, many players were compelled to cut the production. As an obvious consequence many employees have lost their job and the opportunity for new employment generation has also been contracted. According to the Society of Indian Automobile Manufacturers (SIAM), about 8-10 lakh contractual workers had been pink-slipped and many more are in danger.

Impact on ancillary industries: The slump in the automobile sector also adversely affected the auto-components industry as well. In FY18, the growth in revenue from the components industry was 23.9% but the figure had reduced to 17.1% in FY19.

Impact on Economy: This sector specific slowdown led to the loss in the GST collection to some extent. Due to its negative impact on various macroeconomic elements like demand, employment, revenue etc. the GDP growth rate has also been affected largely. If this downswing persists, several small industrial units will have to shut down their production and the overall economy of the country will be in jeopardy.

Government Initiatives

Govt. of India has taken several initiatives to revivify the automobile industry for strengthening the economy. Some of the important measures are listed below:

Scrapping Policy: The govt. of India has formulated its Vehicle Scrapping Policy (VSP) with a view to combat air pollution by the old car and to resolve the auto sector crisis as it will generate fresh demand for new car. The car manufacturer also can set up their own Vehicle Scrapping Units (VSU) which in turn will promote their car sales. The govt. is also expecting that the establishment of new VSUs will create new employment opportunities and thus the problem of unemployment will be curtailed to a large extent.

Removal of Confusion regarding Emission Norms: The finance minister announced that the vehicles compliant with BS-IV emission norms which are registered on or before 31st March, 2020 will be operational for the entire registration period or the life of the vehicle whichever is earlier. This will definitely flow out the confusion regarding the emission norms and boost the morale of the customers.

Other Measures: Apart from the above, govt. also has announces several other initiatives in order to arrest the decline in the growth of automobile sector. These include:

  • Increasing depreciation to 30% on new vehicles upto March 2020 for corporate and businesses;
  • Urging banks to provide soft loan for automobile purchase;
  • Improving the liquidity of NBFCs by enhancing credit availability to NBFCs;
  • The govt. also taken the Automotive Mission Plan 2026 which targets a four-fold growth in the automobile, auto components and tractor industry;
  • Under National Automotive Testing and R & D Infrastructure Project, The Govt. is planning to establish Research and Development Centers to enable the industry to compete with the global giants and to fulfill the global standards;
  • Deferring increased one time vehicle registration fee until June 2020 etc.

These initiatives taken by the Govt. will certainly boost the demand of automobiles by curtailing the financial burden on the consumers and provide immediate relief to the automobile industry.

Suggested Measures

The measures announced by the Government to revive the sales of automobiles are temporary in nature. So in order to exert long term impact, the following measures are suggested:

  • To reduce or modify Goods and Service Tax on automotive parts and two, three and four wheeler vehicles as the high GST rate increases the production cost of vehicles.
  • To liberalize the financing options for dealers and customers so that they can avail soft loans.
  • To reduce the one time registration fee that has gone up substantially.
  • To frame a stable roadmap towards the transition to Electronic vehicles and clarify the vision of FAME-II (Faster Adoption and Manufacturing of (Hybrid) and Electric Vehicles in India-II) scheme initiated by the Ministry of Heavy Industries, GOI.

Conclusion

The widespread and deep-rooted impact of the reduction in the demand in automobile industry on Indian economy can only be addressed properly if the GOI takes long term initiatives instead of focusing on short run measures. The introduction of electric vehicles and the green technology is obviously a sine qua non to reduce environmental pollution and the GOI is committed to mitigate the level of pollution. But the govt. must take necessary categorical actions to lessen the adverse impact caused by this shift. If the govt. can prolong its initiatives, the automobile sector will definite flourish which in turn will have a positive impact on the Gross Domestic Product of the country and it will add fuel to the economy to achieve its five trillion targets.

Bibliography & Reference

  1. www.indiatoday.com
  2. www.moneycontrol.com
  3. www.indianmirror.com
  4. www.iasexpress.net
  5. www.dhyeyaias.com
  6. www.livemint.com
  7. www.m.economictimes.com
  8. www.frontline.thehindu.com
  9. www.siamindia.com ( Society of Indian Automobile Manufacturers)
  10. www.acma.in ( Automotive Component Manufacturers Association of India)
  11. www.economictimes.indiatimes.com
  12. www.telegraphindia.com
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