Automobile Sector – Indicating Doom?
The Indian automobile sector is in dire stress and is facing a crisis not seen in the past 2 decades. The crisis has led to a loss of around 2.30 lakh jobs while the sale of passenger cars in July 2019 fell 35% compared to the same month last year. Data was released by the Society of Indian Automobile Manufacturers (SIAM). SIAM data also shows that recently 300 dealerships have shut down and that 1 million jobs have been hit in the auto component manufacturing industry.
The industry kicked off 2018-19 on a good note with vehicle sales across categories growing 18% to nearly 70 lakh units in the April-June 2018 quarter. During the same quarter, passenger vehicle sales were up to nearly 20%, commercial vehicle sales went up to 51.55%, and that of two-wheelers grew 16%. Domestic passenger vehicle sales declined for the first time after nine months in July 2018. In July 2017, vehicle sales jumped due to the benefits extended by the rollout of the Goods and Services Tax (GST) but the demand failed to pick up in August and September, after the floods in Kerala and heavy rainfall in several other States.
Piling up of Inventory
Consumer sentiment has remained subdued in the ensuing months as the total cost of vehicles went up majorly due to an increase in fuel prices, rising interest rates and a hike in vehicle third-party insurance costs. The festive season of Rakhshabandhan and Onam too failed to boost demand, leading to a huge inventory pile-up with dealers. Adding to the woes of the sector, the IL&FS crisis of 2018 led to a severe liquidity crunch, thereby leading to drying up of credit for dealers and customers. Nearly half the vehicles sold in rural markets, a segment that has been witnessing a higher growth rate in comparison to urban markets, are financed by non-banking financial companies (NBFCs). Being stuck with higher inventory due to a lacklustre festive season, dealers too need more working capital. While bank credit to the sector rose during the previous year, bank loans to buy vehicles have fallen drastically in FY20 so far.
The culmination of all these factors has resulted in all vehicle categories, including commercial vehicles and two-wheelers, experiencing negative growth since December 2018 setting the alarms ringing. The automobile sector found some solace in the fact that as per the historical patterns, vehicle sales decline in the months preceding elections and expressed the hope that demand following the elections would pick up. However, this did not happen and the downturn still continues.
Bharat Stage (BS) VI Standards: Are people holding off purchases?
People are holding off their purchases of automobiles since they are waiting to buy the latest Bharat Stage (BS)-VI emission standard compliant vehicles or are hopeful for more incentives from manufacturers who will be looking to sell off their BS-IV compliant stocks before the April 1, 2020 deadline. Industry players believe that the government’s announcement and agenda to focus on electric vehicles (EVs) is encouraging buyers to defer their decision to purchase petrol and diesel vehicles.
Loss of Jobs
Being one of the largest employers in the country, the automobile sector employs around 37 million people across the nation. The prolonged demand slump has triggered production as well as job cuts in the sector. Original equipment manufacturers (OEMs) have ousted about 15,000 temporary workers in the past two to three months. This has resulted in over 2 lakh people losing their jobs, according to the Federation of Automobile Dealers Associations (FADA) engaged in the sale, service, and spares of 2 and 3-wheelers, passenger cars, utility vehicles, commercial vehicles (including buses and trucks) and tractors.
How is the current slowdown different?
As per Edelweiss Research, the current slowdown in the sector is very different from the ones that the industry has seen earlier. Primarily, the current slowdown is driven by domestic factors, including the NBFC and NPA crisis whereas the earlier ones were triggered by large-scale global events. They also pointed out that over FY19-21 due to safety, insurance, and emission-related compliance costs, vehicle prices are estimated to jump 13-30%. For the consumers, such a steep price hike can prove a hurdle in growth recovery. Also, the growing competition from the pre-owned car market is also affecting the sales of new vehicles.
Demands of the Automobile Industry
The auto industry has been unable to arrest plunging sales in spite of new launches and offers and has been demanding immediate government intervention. Industry’s turnover is somewhat close to half of the manufacturing sector’s GDP and accounts for about 11% of the GST revenues of the nation, the automobile industry remains hopeful that the government will introduce a revival package before the festive season to yield benefits.
The industry players demand a reduction of GST from 28% to 18% that would instead help in a price reduction of vehicles. It could kick-start demand in the short term, particularly ahead of the coming festive season. Besides, it has sought measures to handle the NBFC crisis to infuse liquidity into the system, and clarity on policy for electric vehicles and the introduction of vehicle scrappage policy, which will also boost demand for new vehicles.
5 Trillion Dollar Economy: Realistic or Impracticable?
Amidst the slowdown in the Indian economy, Prime Minister Narendra Modi painted a pretty picture post the budget announcement on July 5, 2019, of how he aims the nation to be a $5 trillion economy by the year 2025. This surely gave a ray of hope to the citizens of India regarding the economy’s revival from the downturn but the question remains as to whether the course set for the next 5-6 years is realistic or just a blow in the air?
India entered 2019 as the world’s 6th biggest economy and was then poised to become the 5th largest. Instead, it has slipped to the 7th position since then as the consumption slowdown led to Gross Domestic Product (GDP) falling to the weakest in the past 5 years. Unemployment has reached 45-year high and has hurt demand for everything from soaps to cookies whereas the car sales have slumped the most and newer investments have seen a sluggish growth in addition to Foreign Portfolio Investors (FPIs) drawing out their funds due to a looming banking crisis and NBFC defaults. This has caused the growth to decelerate for 5 straight quarters to 5% in the three months to June, the weakest since March 2013. As per the EY report, the country will need to grow by 9% every year for five years straight and raise aggregate investment rate to 38% of GDP to achieve Prime Minister Narendra Modi's target of turning India into a $5 trillion economy.
The Road Ahead
Finance Minister, Nirmala Sitharaman made an unprecedented announcement regarding corporate tax rate cut from 30% to 22% which is set to boost the economy in the coming months. B
ut how will this benefit the auto sector?
The reduction in tax rates would surely improve the profitability of companies in the auto sector and may also help companies pass on the benefits to the customers in terms of discounts and freebies ahead of the festive season, which may further boost demand. Additionally, the move would make more liquidity available to the companies for further investment.
Automobile companies seeking opportunities to manufacture in India will have to pay an even lower tax rate of 15% fulfilling the condition that they start their production by March 31, 2023. The move will also help companies planning to invest in India to develop and manufacture electric vehicles. The effective tax rates on these companies will be 17.5%.
The upcoming festive season is a very critical event that is eagerly awaited and all the stakeholders are pinning their hopes on it. If we look at the historical patterns, it can be seen that the sales do peak during the festive season and help automakers recover from any lull months previously. The festive season sales help inject margins to all players in the value chain.
The government recently stated that BS-IV vehicles that are purchased till March 21, 2020, will remain in operation for the entire registration period. The government has also deferred the implementation of a one-time registration fee until June 2020. The vehicles which are acquired till March 31, 2020, will have a 30% depreciation. Any ban which was previously imposed on the purchase of new vehicles by the various government departments has been removed. The government is also under consideration of a scrappage policy. All these considerations and actions by the government make carmakers hopeful that the recent measures will spur the growth in the automobile sector.
Though the recent steps by the government are in the right direction, it may not provide immediate relief to the falling sales figures. There is a storm of poor consumer sentiment, delay in purchases, liquidity crunch and the negative momentum which has crept into the economy in the previous 8-9 months. But if the government is willing to prolong the measures, then the economy would certainly benefit in the long run and the downturn would be overcome.