The recession in automobile industry in India has been experiencing major stagnation for the past four quarters. A new report by Dr. Soumya Kanti Ghosh, group chief economic adviser at State Bank of India, outlines five major reasons behind the slowdown in the auto sector.
Using an econometric decomposition exercise, the report has identified a decline in rural demand coupled with the liquidity crisis stemming from NBFC defaults as the key culprits behind the slowdown.
Weak consumer sentiments across all segments led to a massive decline in automobile sales in Decline 2019, with both urban and rural areas witnessing demand distress.
While the total quarterly production of the automobile segment grew 7.21 million in June 2019 from 5.6 million in June 2014, the quarterly registrations recorded a decline of 0.32 million in June 2019 on a year-on-year basis. Notably, domestic auto sales as a percentage of production dropped to 84.35 percent in 2019 from 85.27 percent in 2014.
Here are the five major reasons behind the slowdown in the auto industry:
NBFC Crisis: After the dramatic default by IL&FS last September, the NBFC sector has been faced with a major liquidity crunch. The overall exposure of mutual funds to financial sectors plummeted by approximately Rs 64,000 crore between July 2018 and June 2019. Since NBFCs are the major financers of customers who do not approach banks, the liquidity crisis of the NBFC sector has affected auto sales to a large extent. The SBI report assigns a 30 percent weightage to this factor in explaining the auto slowdown.
The decline in demand: According to the report, a significant decrease in the demand, especially in rural areas, for new automobiles is responsible for the de-growth of the auto industry. This factor, as per the report, is another reason behind the auto slowdown and has a weightage of 20 percent.
Increased acquisition costs: Vehicle prices saw an upward revision in 2019, and the trend is expected to continue in 2021 due to various safety, insurance, and emission norms related compliance costs. Higher insurance costs, coupled with the introduction of the GST, have increased acquisition costs by 2-5 percent. This factor is 10 percent responsible for the slowdown, according to the report.
New axle load norms: In July 2019, the government increased the official maximum load-carrying capacity of heavy vehicles by 20-25 percent with the aim of bringing down logistics costs. However, the decision adversely affected the sale of automobiles, particularly commercial vehicles, and is believed to have a weightage of 10 percent in explaining the decline in the auto industry sales.
Other factors in recession in automobile industry are: Slowdown in new car sales suggests that the demand is shifting towards a pre-owned car market because of significantly lower costs of second-hand vehicles as compared to the new ones. The pre-owned car market in India has been expanding considerably in the past few years, and buying and selling of second-hand cars exceeded the sale of new cars in 2018-19. Further, the increased availability of automobile rentals promotes consumers to rent vehicles instead of buying them. Finally, the lack of a clear migration policy towards Electric Vehicles (EV) creates confusion among buyers, contributing towards a reduction in auto sales.
Some of the ways to control the recession in automobile industry are:
1. Honour the cycle, but don’t aggravate the cyclical downswing
2. Never throttle consumption enablers
3. Bank on scale effects to make everyone win
4. Adopt a coherent and consistent tech-agnostic regulatory stance
5. Never waste a downturn