Trouble in the Auto Industry

Details:

• This data, by the Society of Indian Automobile Manufacturers (SIAM), gives out wholesale figures, i.e. the number of vehicles despatched to dealers by vehicle manufacturers.
• This has been the steepest fall in nearly 19 years.
• The passenger vehicle segment, which comprises cars, utility vehicles and vans, has been one of the worst performing segments, registering its highest drop (31%) in sales since December 2000.
• Barring a low single digit uptick in October 2018, segment sales have been falling for the past year.
• The industry failed to arrest the downturn, despite deep discounts and new model launches.

Auto Industry in India:

• The industry’s turnover is close to half of the manufacturing GDP.
• It accounts for about 11% of the entire GST revenues of the country.
• The sector is one of the largest employers in the country, employing about 37 million people, directly and indirectly.

The Glorious Past:

• The industry started off 2018-19 on a good note with vehicles sales across categories growing 18% to nearly 70 lakh units in the first quarter (April-June 2018).
• In July 2017, vehicle sales spiked due to the benefits extended by the rollout of the Goods and Services Tax (GST).

Reasons for the Slow Down:

• Demand failed to pick up in August and September, after the floods in Kerala and heavy rainfall in several other States.
• In the ensuing months, consumer sentiment remained subdued as the total cost of vehicle ownership went up largely due to an increase in fuel prices, higher interest rates and a hike in vehicle insurance costs.
• In such an environment, the festive season too failed to boost demand, leading to a huge inventory pile-up with dealers.
• Further, the IL&FS crisis late last year led to a severe liquidity crunch, almost drying up credit for dealers and customers.
• Nearly half the vehicles sold in rural markets are financed by non-banking financial companies (NBFCs).
• Being stuck with higher inventory due to a lacklustre festive season, dealers too needed more working capital.
• There is also a possibility that some customers are waiting to buy the latest Bharat Stage (BS)-VIemission standard compliant vehicles or are waiting for more incentives from vehicle makers who will be looking to sell off their BS-IV compliant stocks before the April 1, 2020 deadline.
• Too much focus on electric vehicles (EVs) by the government may also be encouraging buyers to postpone the purchase of petrol and diesel vehicles.
• Over FY19-21, vehicle prices are estimated to jump 13-30% due to safety, insurance and emission-related compliance costs.
• Growing competition from the pre-owned cars market is also pulling down sales of new vehicles.

Consequences:

• The industry has been forced to undertake production cuts.
• The prolonged demand slowdown has triggered production as well as job cuts in the sector. According to the latest figures that are available, original equipment manufacturers (OEMs) have removed about 15,000 temporary workers in the past two to three months.
• A lack of working capital amid tepid demand has led to closure of nearly 300 dealerships across the country.
• This has led to over two lakh people losing their jobs, according to the Federation of Automobile Dealers Associations (FADA).
• Separately, the Automotive Component Manufacturers Association of India (ACMA) warned in July that 10 lakh jobs were at risk and urgent action was needed to bring the industry back on track.

Way Ahead:

• The government should come out with a revival package ahead of the festive season to yield benefits.
• The industry’s demands include a reduction in GST to 18% from the current rate of 28%, which will help in an immediate price reduction.
• Besides, it has sought measures to handle the NBFC crisis to infuse liquidity into the system, and clarity on policy for electric vehicles and introduction of vehicle scrappage policy, which will also boost demand for new vehicles.