The Indian automobile industry, the world’s fourth-largest, has finally embraced a slowdown after a near-decade of high growth. The Society of Indian Automobile Manufacturers (SIAM) announced that in July, the sale of vehicles across categories in the country slumped 18.71% to about 18.25 lakh units, down from about 22.45 lakh units, a year ago in the same month. This has been the steepest fall in nearly 19 years.

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With the industry failing to arrest the downturn that started almost a year ago, despite deep discounts and new model launches, it has been forced to undertake production cuts.

Reasons for the slump in sales:

• Domestic passenger vehicle sales declined for the first time after nine months in July 2018.
• In July 2017, vehicle sales spiked due to the benefits extended by the rollout of the Goods and Services Tax (GST).
• However, 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.
• To add to this, 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 — a segment that has been witnessing a higher growth rate in comparison to urban 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)-VI emission 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.

Reasons for Jobs loss:

• The automobile sector is one of the largest employers in the country, employing about 37 million people, directly and indirectly.
• 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), the apex national body of automobile retail industry engaged in the sale, service and spares of two- and three-wheelers, passenger cars, utility vehicles, commercial vehicles (including buses and trucks) and tractors.
• 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.

Measures needed:

• 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. It could kick-start demand in the short term, particularly ahead of the coming festive season.
• Besides, it has sought measures to handle the NBFC crisis to infuse liquidity into the system
• clarity on policy for electric vehicles
• Introduction of vehicle scrappage policy, which will also boost demand for new vehicles.
• Limit has to be imposed on state government to levy road tax.
• Saving rate has to be improved as long term measure which raises the purchasing power.
• Nudge to improve exports.

Conclusion:

The automobile sector is one of the few success stories that India has and perhaps the only one in manufacturing. If half the manufacturing GDP of the country is in doldrums and declining sales of cars, two wheelers and trucks will result in lower GST collections, the government’s already precarious fiscal math could worsen further in 2019-20. Reviving the automobile sector should, therefore, become one of the top priorities of the government.