Why is the auto industry facing trouble?

The sale of vehicles across categories in the country in July 2019 came down by 18.71% to 18.25 lakh units from 22.45 lakh units (a year ago in the same month). The passenger vehicle segment, which comprises cars, utility vehicles and vans, has been one of the worst performing segments. This has been the steepest fall in nearly 19 years.

Background:

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.
The industry started off 2018-19 on a good note with vehicles sales across categories growing 18% to nearly 70 lakh units in the first quarter (April-June 2018).
However, domestic passenger vehicle sales declined for the first time after nine months in July 2018.
Historically, vehicle sales decline in the months preceding elections. However the hope that demand following the elections would pick up has not materialised.

Significance of the automobile industry:

The automobile sector is a technology and knowledge intensive industry because it demands high performance and quality parts.
A sound transportation system, to which the automobile industry is linked, plays a pivotal role in the country’s rapid economic and industrial development.

Backward and forward linkages to many other sectors:

The industry occupies a prominent place due to its deep forward and backward linkages with many key segments of the economy.
Many other manufacturing industries depend upon this industry including steel, rubber, glass, machine tools, robots, electronics, software and many more.

Economy:

The industry has a strong multiplier effect and is capable of being the driver of economic growth. The performance of the automobile industry can be correlated to the health of the economy.
As a major employment and export generator, GDP contributor, FDI earner, the automobile industry is instrumental in shaping the country’s economy.
It contributes around 7.5% to the country’s GDP and 49% to the manufacturing GDP.
It is one of the largest employers in the country, employing about 37 million people, directly and indirectly.

Reasons for the slowdown:

The total cost of vehicle ownership has gone up due to an increase in fuel prices, higher interest rates and a hike in vehicle insurance costs.

Drying finances:

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 need more working capital.

Consumers holding up purchase:

Some customers are waiting to buy the latest Bharat Stage (BS)-VI emission standard compliant vehicles.
While others are waiting for more incentives from vehicle makers who will be looking to sell off the BS-IV compliant stocks before the April 1, 2020 deadline.
Further, too much focus on electric vehicles (EVs) by the government may also be encouraging buyers to postpone the purchase of petrol and diesel vehicles.

Pre owned car market:

Meanwhile, growing competition from the pre-owned cars market is also pulling down sales of new vehicles.
For example, in the passenger vehicles segment, while the new vehicles market grew 2% in FY19, the pre-owned market saw double-digit growth.

Difference:

Edelweiss Research has pointed out that the current slowdown in the sector is very different from the ones that the industry has gone through earlier.
The slowdown is driven by domestic factors, including the NBFC crisis, while the earlier ones were triggered by global events.

Impact:

As OEMs are struggling with low sales, the amount of work they give to their vendors and sub-vendors has started falling.
For the industrial units, the bigger worry is repaying their bank loans and avoid being labelled as a non-performing asset.
A lack of working capital amid low demand has led to closure of nearly 300 dealerships across the country.

Loss of jobs:

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.
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.
Work is also drying up for contract labourers, who don’t enjoy the same protections in the workplace that permanent workers do.
These workers are increasingly facing the prospect of unemployment as even their contractors are finding it difficult to get work.

Suggestions to improve the sector

There are suggestions for the government to come up with a revival package ahead of the festive season to yield benefits.
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.
It has also sought measures to handle the NBFC crisis to infuse liquidity into the system, and clarity on policy for electric vehicles.
There have also been suggestions to introduce a vehicle scrappage policy, which will also boost demand for new vehicles.

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