Symptom as cause

The auto sales slump reflectsa pervasive lack of demand
India’s automobile industry is experiencing a snowballing crisis of demand that shows no signs of abating, leave alone reversing. Domestic sales across all vehicle categories slid 19% year-on-year in July, as passenger vehicle despatches plunged 31% to register the segment’s steepest fall in almost 19 years. And with the wheels having come off both two-wheeler deliveries and commercial vehicle shipments, with the former contracting 17% and the latter slumping 26%, the picture is one of widespread gloom. The straightforward interpretation of the data is that demand has dried up in all corners and among all key consumer segments — urban, semi-urban and rural and personal and institutional. Nine straight months of contraction in passenger vehicle sales has also begun extracting a toll in terms of showroom closures and lay-offs at dealerships, component suppliers and vehicle makers themselves. While the Federation of Automobile Dealers Associations recently warned of more jobs being at risk, on top of about two lakh positions that have already been shed, the Society of Indian Automobile Manufacturers admitted that the industry had laid off at least about 15,000 contract workers in the last three months. That the broader economy is experiencing a serious slowdown has been evident for some time now and the latest data from the auto sector only bears testament to it. And as the RBI acknowledged last week “private consumption, the mainstay of aggregate demand” remains sluggish.
While some of the factors currently bedevilling demand in the auto sector are well established — the liquidity crunch in the NBFC industry and the resultant tightening of credit availability to finance vehicle purchases, an increase in up front insurance costs and the 28% GST charged on cars, motorcycles and scooters — the fact that manufacturers overestimated demand when setting up capacity, especially of fossil-fuel powered vehicles, has largely been overlooked. For example, Maruti Suzuki, India’s largest car maker, has announced plans to stop selling diesel cars from April 1 as demand has slumped. In 2012, the company decided to invest Rs. 1,700 crore in a new diesel engine plant in Gurugram, capacity that it now needs to repurpose or idle. Simultaneously, the ride-share industry has mushroomed in recent years, especially in urban areas where choked roads and lack of parking space have incentivised rapid adoption of app-based commuting. The outlook too, especially for the near term, looks far from hopeful. The RBI’s July round of its Consumer Confidence Survey, which reflected a decline in consumer confidence in July, shows 63.8% of respondents expect discretionary spending will stay the same or shrink one year ahead. In June 2018, the comparable reading was 37.3%. The onus now lies on the government to urgently formulate policy interventions to address this sectoral crisis or risk wider contagion.

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