The Downfall of the Automobile Sector in India

parked vehicles during daytime

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Indian auto sector’s contribution to the GDP in the current fiscal may come down to 7 percent from 7.5 percent in 2018-19 with overall revenue of the original equipment manufacturers (OEM) expected to dip by up to 6 percent in 2019-20, according to a study.

In the second quarter of (July-September) of the fiscal year 2019-20, the rating firm expects OEM revenues to drop by 23-25 percent to Rs 0.6 trillion as compared with 0.8 trillion in the same period previous fiscal, leading to sector’s contribution to Gross Value Addition (GVA) of the country to decline - thus affecting its overall contribution to the GDP.

The automotive industry declined for the 10th month in a row in August (2019), car sales dropped by 41% - the steepest fall in two decades. The industry is one of India's biggest, considering it employs some 35 million people, directly or indirectly, and contributes more than 7% to the country's GDP.

Similarly, the continuously weak sentiment among consumers may not provide respite even during the festive season and the overall automobile industry sales are expected to remain below similar periods in the past, the study noted. Recent trends in retail sales indicate that despite high discounts and offers, major players in the industry have failed to attract buyers for purchasing vehicles even at the onset of festival season, the report said.

Among all the categories, the sales of commercial vehicles (58,419 units) witnessed the steepest dip of 39 per cent. Within the segment, Medium & Heavy Commercial Vehicles (M&HCVs) reported the first-ever decline of 62 percent last month, with sales of 14,855 units, as compared to 39,210 units in the same month last year.

Two-wheeler sales also continued to fall, with monthly sales of 1,656,774 units in the first half of this fiscal, as compared to 2,126,445 units in September 2018, registering a dip of 22.09 percent. Within the segment, motorcycle sales nose-dived 23.29 percent, witnessing the worst fall in nearly two decades.

 

Crisis Occurring in the Sector: Job Cuts, Declining Sales and Much More

There is no denying the fact that the Indian automobile sector is going through a rough patch at the moment. Month after month, the companies are reporting a decline in their sales numbers. This, in turn, is having adverse effects on the jobs as well.

For example - 

1. Maruti Suzuki India reported sales declines 33.5 per cent 1, 09,264 units in July 2019. 

2. Hyundai Motor India reported sales fell 3.8 per cent to 57,310 units in July 2019.

3. Royal Enfield also reported sales dropped 22 per cent to 54,185 units in July 2019.

Liquidity crunch post the IL&FS situation, weak economic health, tighter financing conditions, uncertain regulatory landscape, abnormal monsoon pattern and rural distress and poor consumer sentiments are among the major reasons for declining auto sales, according to an expert.

The automobile dealerships across India has cut nearly two lakh jobs in the past three months, with the Federation of Automobile Dealers Associations (FADA) fearing that the trend may continue with more showrooms being shut soon, adding another reason for the downfall. 

Millennials are finding Ola/Uber and subscription model (self-drive cars) in fashion, hence owning a car is taking back seat. People who can easily afford a new car are not changing the existing car as sometimes they use Ola/Uber to go to congested city areas, thus they do not have a big urge to buy a new car. 

Solutions to Overcome This Downfall - 

Transport Minister Nitin Gadkari announced that only electric vehicles would be allowed to run post-2030, currently, the Government’s emphasis on electric vehicle (though there is no infrastructure and still mass-market EV cars are at least 3-5 years far) is confusing customers as to buy petrol/diesel engine cars or wait for electrical vehicles.

The government should clarify that though electric vehicles might be future still it’s at least 3-5 years away from getting into the mass car the segment in a significant way. 

The Union Government must reduce the GST slab on automobile and stage government must reduce registration tax. Currently, most of the state governments are taking registration tax on ex-factory prices as well as on GST; therefore customers are paying tax on tax.

The government needs to give confidence to banks about economic revival measures and at the same time push banks for higher lending. Banks need to pass-on RBI’s reduction in Repo rate to consumers. Lowering of interest rate will help in gaining the confidence of customers.

When private investment is down, The government needs to increase spending. Higher Government spending will help higher economic activity, thus consumers would get confidence back.

Job creation is very important. Textile, tourism, and food processing do have the potential to absorb more manpower. Credit availability to SMEs would help in job creation. Export must be given a boost. Our Special Economic Zone (SEZ) hasn’t taken-off well. It’s time to revamp the SEZ policy. Exporters’ money is stuck in a GST refund, a faster refund process would help.

Conclusion -

For every 1000 population, we have 32 cars while it’s 980 and 850 in the US and UK respectively. Last year in India, 34 lakh cars sold while in China the sales were 2.37 crore vehicles. These figures show that enough scope of growth is there. I hope the Government would act swiftly to address the challenges and in the festival season, the sales would be on a growth path.


Written by – Soham Upadhye

Edited by - Bushra Makhdoomi

 


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