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Why is the automotive sector going down in India in 2019?

Passenger car sales declined by 31% in July’19 vs July’18. In fact this was continuous 9 months of sales decline. The severity of July’19 sales decline can be understood from fact that it was sharpest in last 18 years. Decline is not only seen in passenger car but in 2 Wheeler, Commercial Vehicle as well as Tractor segment. Automobile contributes 7.5% of India’s GDP and also directly and indirectly employees approximately 3.5 Crore people therefore decline in automobile is area of concern.

Major reasons of Indian automobile slowdown:

Macro-economic reasons:

Car buyers are part of eco-system. If wealth creation is slow, its impact would be visible in car sales too.

  • Gross Non Performing Assets (NPA) was ₹ 2.25 lac crore in 2014 which jumped to ₹ 10.4 lac crore in 2018, because of high NPA, banks are going slow on lending to businessmen. NBFC failure led to shortage of working capital with SMEs. SMEs are worst hit. News of falling sales leading to job insecurity hence employee are cautious about spending. Therefore bank’s NPA problem is leading to economic slowdown and economic slowdown leading to high NPA, this is vicious circle.
  • Due to less job creation in mega cities, the migration from tier 3 and tier 4 cities decreased to mega cities resulting into oversupply of housing flats in mega cities. Unsold inventory putting pressure on real estate segment. Many industries like steel, cement, electrical equipment and furniture industry are suffering as result of ailing real estate sector.
  • Low food inflation affects farmers’ income and on top that delayed monsoon and flood in some states lead to weak rural growth. Demonetization & GST affected unorganized sector initially which eventually now affecting organized sectors, therefore rural as well as urban purchase parity has gone down leading to overall economic activity slowdown.
  • Export contributes about 1/5th of India’s GDP. Because of global economic slowdown the export growth is stagnant for last 4-5 years thus affecting overall growth of India. GST refund issue of our exporters is also currently impacting export performance.
  • There is increasing feeling of income tax notices and Government snooping on High Networth Individuals. Hence lot of businessmen are going slow on their high ticket purchase like property, gold and cars. This affects money circulation leading to slowing of economy.
  • The returns on real estate investment, Gold and share market are subdued. This also led to weaker sentiments of prospective buyers.
  • To keep fiscal deficit in control, Government had reduced investment hence economy slowed down up to some extent.

    Automobile specific reasons:

  • As per Supreme Court ruling, post 1st April 2020 only BS VI cars would be sold. Prospective car buyers of current BS IV cars are worried about resale value in future. Customers are holding decisions of buying car due to this confusion.
  • Indias’ largest car maker, Maruti Suzuki is unable to upgrade its diesel engine from BS IV to BS VI because of high cost and limited expertise hence Maruti Suzuki announced stopping diesel vehicle production. Few years back Supreme Court had banned diesel powered vehicle with more than 2 litre engine. This sort of uncertainty further confuses prospective customers.
  • Last year Minister Nitin Gadkari announced that only Electric Vehicles would be allowed to run post 2030, currently Government emphasis on Electric vehicle (though there is no infrastructure and still mass market EV cars are at least 3-5 years far) confusing customer to buy Petrol/Diesel engine cars or wait for Electrical Vehicles.
  • In India, tax on cars are exorbitantly high. If customer is buying Honda city in Bengaluru then GST is 28%+20% Cess and on top of this there is registration tax (Road tax) of 17% thus total 28%+20%+17%= 65%. On top of that 1% TCS and mandatory 2nd & 3rd year third party insurance unnecessarily increases cost of buying. This high tax also acts as deterrent to buy cars.
  • Millennials are finding Ola/Uber and subscription model (self-drive cars) in fashion hence owning car is taking back seat. People who can easily afford new car are not changing existing car as sometime they use Ola/Uber to go to congested city areas etc thus they do not have big urge to buy new car.
  • Negative automobile as well as overall economic news is pushing fence seaters to adopt wait & watch strategy.

    Solution of automobile slowdown:

  • Government should clarify that though electric vehicles might be future but still it’s at least 3-5 years away from getting into mass car segment in significant way. Similarly statement by Ministry of Road Transport department that nothing is wrong in buying BS IV car currently and even after BS VI norm implementation, there won’t be any challenge in driving Euro IV cars. This will reduce confusion among prospective car buyers.
  • Union Government must reduce GST slab on automobile and state government must reduce registration tax. Currently most of state governments are taking registration tax on ex-factory price as well as on GST, therefore customers are paying tax on tax. This should be rationalized.
  • There is provision of income tax benefit on interest paid on Housing loan. Similar scheme on interest paid on car loan should be introduced.
  • Government need to give confidence to banks about economic revival measure and at the same time push banks for higher lending. Banks need to pass-on RBI’s reduction in Repo rate to consumers. Lowering of interest rate will help in gaining confidence of customers.
  • When private investment is down, Government need to increase spending. Higher Government spending will help higher economic activity thus consumer would get confidence back.
  • Government must get away from collecting 1% TCS and mandatory 2nd and 3rd year third party insurance.
  • For more than 3 years, Government is talking about bringing scrappage vehicle policy. Government must bring the scrappage policy as soon as possible.
  • Government must address issue of tax terrorism. Tax dispute redressals should be swifter.
  • Job creation is very important. Textile and food processing do have potential to absorb more manpower. Credit availability to SMEs would help in job creation.
  • Export must be given boost. Our Special Economic Zone (SEZ) haven’t taken-off well. It’s time to revamp SEZ policy. Exporters’ money is stuck in GST refund, faster refund process would help.
  • Pending reforms like land, labour and finance should be done on priority.
  • Media can play constructive role in improving sentiment with news like paint industry is on growth path, Smart phone penetration is growing etc.

    For every 1000 population, we have 32 cars while it’s 980 and 850 in US and UK respectively.
    Last year in India, 34 lac cars sold while in China the sales was 2 Crore 37 lac! These figures shows that enough scope of growth is there.
    We hope Government would act swiftly to address the challenges and in festival season the sales would be on growth path.

    Manoj Tripathi
    (Disclaimer: Views expressed are personal, the intention is not to hurt sentiment of any person, cast or group of people)