OUT OF GEAR
The auto industry is in the midst of a severe slump. Policy interventions to revive the sector and the economy at large are necessary to stave off a protracted crisis
The automotive sector is battling its sharpest slowdown ever. The government needs to offer a revival plan—and fast
Virendra Singh, 49, is a concerned man. As the owner of Win Win Group, which operates a chain of Mahindra & Mahindra (M&M) dealerships in Madhya Pradesh, he has had to close eight of his 31 showrooms and lay off 300 people in the past few months. He estimates that his sales have dropped by 10 per cent, with customer footfall plunging an alarming 30 per cent. “Demonetisation and the Goods and Services Tax (GST) took the first toll,” he says. Then came a regulatory shock. “The registration rates of both petrol and diesel
vehicles in MP have been increased substantially. For diesel vehicles below Rs 10 lakh, rates have increased from 8 to 10 per cent. For vehicles between Rs 10-20 lakh, the rate has increased from 8 to 12 per cent, and for vehicles over Rs 20 lakh, the rate has doubled from 8 to 16 per cent. There is a similar hike in petrol vehicles too. This is not going to help the already stressed market.” Underlying these is the distress in the rural economy.
The slump in the Rs 8.3 lakh crore automotive industry, which employs around 32 million people (directly and indirectly), is evident in the falling quarterly sales numbers and the closure of nearly 300 dealerships across India. For this to happen in an industry that was seen as a success story—with consultancy McKinsey & Co projecting just last year that India’s passenger-vehicle market would become the world’s third largest by 2021—has been a body blow to the Indian economy.
The entire automotive ecosystem—from original equipment manufacturers (OEMs, industry parlance for car manufacturers) to component suppliers to dealerships and aftermarket service providers—is saddled with idle production capacity and unsold inventories. And since this industry accounts for 22-25 per cent of India’s manufacturing GDP, the slowdown threatens to destabilise the country’s already-tottering economy. Underlining this, on July 24, Ram Venkataramani, president of the Automotive Component Manufacturers Association (ACMA), said that if improvements do not materialise, around 1 million jobs could be lost—20 per cent of the total employment in that sector.
It’s no surprise then that this development has put the Narendra Modi-led government—which recently stated
its aim of growing India’s economy to $5 trillion by 2022 by investing in major industries like manufacturing—on the back foot. The prime minister, who made job growth a cornerstone of his first-term campaign and has frequently reiterated that promise, could also find job losses becoming a considerable political issue. Critical states like Maharashtra and Haryana, which are also major manufacturing hubs, are slated to go to the polls in the next few months.
THE NEWS IS BAD
Data from the Society of Indian Automobile Manufacturers (SIAM) illustrates how the slowdown has impacted every sector of the industry. In the past year, overall sales have fallen by almost 8 per cent, from 18.2 lakh vehicles in 201718 to 16.8 lakh vehicles in 2018-19. The growth rates for both private and commercial vehicle sales are in the red, the former falling since the second quarter of 2018-19 and the latter contracting since the third quarter of 2017-18. Even two-wheeler sales have been sliding for over a year, falling 17 per cent in 2018-19 compared to the previous year. And the data for June 2019, the latest released by SIAM, shows that the problem continues—vehicle sales contracted by about 22 per cent year-on-year in June, falling from 1.8 lakh units to 1.4 lakh units, with two-wheeler sales falling almost 12 per cent in that time, from 18.7 lakh to 16.5 lakh units.
Aggravating the pain is idle capacity. Car companies, in anticipation of high growth and demand, expanded their manufacturing—producing 7.21 million units per quarter in 2019, up from 5.66 million units per quarter in 2014. Meanwhile, new vehicle registrations fell by 0.32 million in June this year compared to the same month a year ago. This excess inventory further exacerbates the slowdown—per reports, at the beginning of June 2019, company dealerships were left with about half a million unsold vehicles worth Rs 35,000 crore and about 3 million unsold two-wheelers, valued at Rs 17,000 crore. “The industry expected big sales in the October-November festive season last year, leading to inventory numbers being ramped up. But sales were way below expectations,” says Nikunj Sanghi, former president of the Federation of Automotive Dealers Associations (FADA). Worse, exports, which might have compensated for flagging domestic sales, have also been falling.
“There are no clear signs of a revival and the result is that capacity is lying idle. The prime minister’s vision of making India a manufacturing hub by 2022 cannot be achieved without the auto sector” R.C. BHARGAVA, chairman, Maruti Suzuki