Car sales dip in India on tighter credit, economic slowdown

Visitors at a car launch in Amritsar, India. The sale of passenger vehicles in India declined by 18.42 per cent in the April-to-June quarter this year, compared with the same period last year. It was the sharpest decline since a 23.1 per cent drop in
Visitors at a car launch in Amritsar, India. The sale of passenger vehicles in India declined by 18.42 per cent in the April-to-June quarter this year, compared with the same period last year. It was the sharpest decline since a 23.1 per cent drop in the third quarter of 2000-2001.PHOTO: AGENCE FRANCE-PRESSE

The red and white balloons taped to the ceiling at this Renault showroom in Delhi belie the subdued mood that has set in here in the last few months.

Sales of new cars at this showroom have fallen by around a quarter.

"People do not want to let go of their savings to buy a car. It could be because of pollution concerns or the terrible traffic situation that makes them unwilling to drive," says Mr Amarjeet Kumar Mandal, a finance manager at the showroom.

His concern mirrors a larger worrying trend in the world's fourth-largest car market where sales have been plummeting for around a year now.

Fresh data released last week by the Society of Indian Automobile Manufacturers (Siam) shows the sale of passenger vehicles declined by 18.42 per cent in the April-to-June quarter this year, compared with the same period last year.

It was the sharpest decline since a 23.1 per cent drop in the third quarter of financial year 2000-2001.

Passenger cars fared even worse, with a 23.32 per cent drop in sales. Other segments, including commercial vehicles, three-wheelers like auto rickshaws and tuktuks, and two-wheelers like scooters, motorcycles and e-bikes, also registered declines in the last quarter.

The fall in sales has been caused by an overall slowdown in the economy as well as the tightening of credit by financial institutions, squeezing funds for the industry.

India's gross domestic product growth rate fell from 7.2 per cent for 2017-2018 to 6.8 per cent in 2018-2019. On the other hand, rising bad loans in the car sector, particularly from dealers forced to shut, have made banks unwilling to fund new businesses in the sector.

Other factors, too, have led to the subdued demand. These include rising fuel costs and the price of vehicles as manufacturers pass on the costs of complying with new safety and other regulatory rules.

"We have possibly complied with more safety norms in the last two years than in the last 15 years. While improving safety and emissions of vehicles is very important, the bunching up of many regulations in a short time has led to a much higher cost of ownership," says Mr Vishnu Mathur, the Siam director-general.

Ms Hetal Gandhi, the director of Crisil Research, an analytics firm, says: "The average cost of owning a car went up by 7 per cent in the 2018-2019 financial year compared with the preceding one. For two-wheelers, this figure went up by as much as 13 per cent in the same period."

The downturn has caused job losses in the sector, with fears of more to follow.

The Economic Times newspaper reported in May this year that an estimated 300 car retail outlets had shut down in the preceding two years, which led to around 3,000 people losing their jobs.

Saddled with sluggish sales and unsold inventory, firms have begun cutting down on production as well as opting for block closures at factories. "If this situation continues for some time, companies will have to take some hard decisions to reduce their costs, including downsizing," says Mr Mathur.

An ongoing weak monsoon season, which is expected to do little to alleviate the current agrarian crisis, could further prolong the slowdown.

In an effort to revive the market, the industry has been asking for a cut in the goods and services tax on vehicles from 28 per cent to 18 per cent and a "cash for clunkers" policy that incentivises voluntary scrapping of old vehicles. But these did not figure in the government's budget, announced on July 5.

Mr Mathur, however, hopes that the budget move to infuse additional capital into banks as well as non-banking financial companies will help support better availability of credit.

With an annual per capita income of around $2,500, India currently has around 50 motor vehicles per 1,000 people. Experts have long maintained that this low penetration rate, coupled with rising income levels, offers enormous growth potential for the global car industry.

Some estimates claim India could even surpass Japan to become the world's third-largest car market, behind China and the US, by 2021.

Mr Mathur believes the current downturn is a temporary blip.

"It is just that certain factors came together to cause this, the effects of which will last for some more time. I certainly don't think the demand for mobility in this country is going down," he said.

A version of this article appeared in the print edition of The Straits Times on July 29, 2019, with the headline 'Car sales dip in India on tighter credit, economic slowdown'. Print Edition | Subscribe