Passenger car sales headed towards a steep fall in July
According to SIAM, in the first seven months of 2019, PV sales dropped 13.2% to about 1.76 million units
The slowdown has in fact been across the automobile industry, with commercial vehicle and two-wheeler sales too taking a hit. The industry has been seeking a stimulus package, such as easier GST rates, to ride out the tough market that manufacturers claim is also hurting the government’s tax collections and costing jobs.
In the first seven months of 2019, passenger vehicle sales dropped 13.2% to about 1.76 million units, according to data from the Society of Indian Automobile Manufacturers (SIAM). The steepest annual drop so far since 2001 was 7.5%, recorded in 2013.
Sales of commercial vehicles in the past quarter dropped 9.53%, the most in five years. In the two-wheeler segment, sales fell 11.68% in the April-June period, the steepest since the third quarter of 2009.
“The (automobile) sector has been hit from all fronts,” said Hetal Gandhi, a director at ratings firm Crisil. “On one hand, acquisition price or running cost has gone up severely, (while) on the other, liquidity is also a major challenge. Even the salary growth has been muted which has further impacted the buying sentiment adversely.”
Crisil expects all segments of the market to register a decline of 2-8% in sales in fiscal 2020, he said. “Next year, too, the market is expected to remain sluggish.”
Maruti Suzuki chairman RC Bhargava blamed several factors for the slowdown. “The cost of acquiring vehicles has gone up sharply the past year. Regulations on safety have come in along with those on higher emission norms, raising vehicle prices. Insurance costs have risen, some states have levied additional taxes,” he said. Also, despite rate cuts by the Reserve Bank of India, financing costs have gone up, he added.
Crisil’s data show the cost of ownership has jumped 12-15% for cars and 20% for two-wheelers in the past year, as against the decadal average of 4-5%.
Availability of finance to the automobile sector has reduced as a credit crisis hit non-banking finance companies, a key source of loans in the auto industry. Stricter lending rules put in place by banks and other lenders made raising working capital further difficult for dealers as well.
Uncertainties in the minds of consumers over the government’s vehicle electrification drive added to the woes, said industry executives. “Although the government has not said anything about electric four-wheelers, somehow consumers are under the impression that low-cost electric cars are around the corner … (and) they can avail of income tax rebates on purchasing such cars,” said Bhargava.
The Maruti Suzuki chairman is not hopeful of any immediate revival in the market unless the government puts in place some incentives.
Anand Mahindra, the chairman of Mahindra & Mahindra, said short-term measures to kick-start demand in the auto industry “will serve a greater national purpose”.
“Think about it: according to SIAM estimates, the slowdown has resulted in an 8% loss in GST collection in the first six months of 2019. Just to catch up with the FY19 GST collections, the auto industry will need to grow at a rate of at least 7% in the remaining eight months of the FY20,” Mahindra said.
“The most obvious and welcome first aid” is a temporary relief on the GST front, “either by modifying the slabs, or, if that is not possible, by removing the cess”, Mahindra said. Another suggestion would be a re-look at the registration fees which have gone up very substantially and a roll back of the increases in road tax mandated by state governments after the introduction of GST, he said. “I’m hopeful that these few actions along with the traditional post monsoon revival will set us back on track and positively impact the economy.”
Meanwhile, many customers have chosen to hold on to purchases hoping that they would get BS-IV vehicles at heavy discounts next year, before India adopts the more stringent BS-VI emission standards in April 2020. “Automakers this time are aware of the switch-over deadline and are unlikely to build up year-end inventory triggering a distress … Maruti Suzuki is unlikely to have one,” said Bhargava.
Last time, during the transition to BS-IV standards, vehicle makers and dealers had just four days to liquidate their BS-III stock. But this time, due to a Supreme Court ruling on the matter, there is clarity on the deadline and hence the discounts maybe limited.
“Discounts are at their best currently and it is not going to get further accelerated ahead of BS-VI roll out, as the transition is planned well,” Federation of Automotive Dealers Association president Ashish Kale said.
Rajesh Goel, a senior vice-president at Honda Cars India, expects the demand to get better in the festival months. “The prevailing discounts in the market, which are at an all-time high, should help to bring the customer to the showrooms. The recent rate cut announced by RBI will also benefit the loan takers and help improve the sentiment,” said Goel.
While industry stakeholders are hopeful of the upcoming festivals and improving monsoon situation boosting business, they are also worried about the impact of floods in states like Karnataka, Maharashtra, Goa, Madhya Pradesh, Andhra Pradesh, Gujarat and Kerala.
Ashok Khanna, the group head of vehicle loans at non-state lender HDFC Bank, said they had not witnessed any increase in loan demand that many expected would shift from NBFCs to banks. While this suggests the tough situation that the auto industry is currently in, he expects some scope for recovery as well.
"It is a tough time seen by the (auto) industry for a long time. August onwards will be a testing time for the auto industry as the festival season sets in,” he said. “I am not very optimistic, but there is a slight chance of revival.”
“The automobile market has seen a downturn this year due to many factors like poor buying sentiments, high liquidity crunch across non-banking finance segment, tightening of leading norms leading to postponement of purchase decision and slack in sales”, said said N Raja, deputy managing director, Toyota Kirloskar Motor (TKM), adding, “The industry expects the GST level to be rationalized to a lower level (28% to 18%) to accommodate the downturn in sales.”