Indian Automobile Sector Crisis: Explained

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Automobile sales in India saw a steep decline in July this year. The automobile sector is currently facing prolonged demand slowdown for the past 12 months. This had cost at least 15, 000 job losses within 2-3 months, during the period when India is facing an unemployment crisis and overall economic slowdown.

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What is the issue?

  • India’s automobile sector is currently facing a demand crisis.
  • The domestic sales of all the vehicle categories had declined 19% year-on-year in July 2019.
  • This is the steepest fall in almost 19 years.
  • The two-wheelers sales have contracted to 17% and the commercial vehicles shipments have slumped to 24%.
  • This issue is refusing to abate as the major carmakers are reporting negative sales in August 2019.
  • India’s largest carmaker Maruti Suzuki India’s total domestic passenger vehicles sales have plunged to 36.1% to 93, 173 units in August 2019. On August last year, this company was able to sell 1, 45,895 units.
  • Honda Cars India also saw domestic sales plunging to 51.3% in August 2019.
  • These figures, in essence, show the crisis in the automobile sector of the country.

Why is there a decline in the demand for automobiles in India?

Based on the above data, it is evident that the demand for automobiles is declining in all the key consumer segments – urban, semi-urban, rural, personal and institutional sales. The following reasons may have caused the fall in the automobile sector:

  • Poor Consumer Sentiments: There is confusion amongst the buyers on the new rules on the emission shifts and the new norms of the electric vehicles.
  • Union Budget’s increased investments on Electric Vehicles: India aims to become the global manufacturing hub for electric vehicles manufacturing. Therefore it had moved to the GST Council to reduce the rate of GST for the EVs from 12% to 5%. The government has also decided to make EVs affordable for the consumers by proving additional tax deduction of 1.5 lakh rupees on the interests paid on loans to buy EVs. On the other hand, the cars, motorcycles and scooters’ GST rate is 28%.
  • General Election: Due to the uncertainty of the 2019 General Election, the consumers decided to postpone the automobile purchases.
  • Liquidity Crunch: Due to the IL&F crisis in 2018 and the widespread liquidity crunch in the NBFCs have led to the tightening of credits to automobile purchases. This coupled with the increased upfront insurance costs has increased the financial burden for the consumers.
  • Transition to EV: The government plans to ban internal-combustion powered two-wheelers and three-wheelers by 2023 and 2025 respectively. As a result of this decision, the two-wheelers and three-wheelers stocks plunged. This sudden transition, when the situation of the automobile sector is already dire as the sales have slumped to a two-decade low, have worsened the situation of job cuts and market disruption. NITI Aayog is also going to propose a framework to phase out the sale of diesel and petrol vehicles by 2030.
  • Mandatory transition to BS-VI emission norms: The Supreme Court has passed the judgement that bans BS-IV vehicle sales across the country by 2020. According to this judgement, Bharat Stage VI must come to force by April 2020. The Centre has decided to skip the BS V norms to jump directly to the BS-VI norms by 2020. This has led to a loss in the investments in the automobile sector as many companies still have unsold stock of BS-IV vehicles.
  • The decline in the rural income generation: In the year 2014, the price of the Global agricultural commodities had crashed. As a consequence, demand for India’s exports of farm produce had declined while simultaneously increasing the liability to imports. As a result, consumer food inflation during the past 34-months stood below general retail inflation and was at an average of just 1.3% year-on-year. These incidents have adversely affected the demand in the automobile sector.
  • The decrease in the demand for commercial vehicles: The freight carrying capacity of the new model trucks have increased. Due to this, there has been a decline in the demand for new trucks as the consumer can carry freight in their own trucks.

The combination of these has resulted in the fall in demand for automobiles in the Indian economy.

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What are the problems faced by the Indian automobile sector due to the demand slowdown?

  • The 10 months of continuous contraction of the passenger vehicles sales have led to various negative implications such as closing down of various showroom across the country, increase in the lay-offs at the dealerships, component suppliers and vehicle manufacturers.
  • Increased Unemployment rate: India is currently facing increased unemployment rate. This is due to the limitation of the skilled labour force, deficiency of the skills that are currently in demand, etc. Automobile sector is also indirectly impacting the unemployment rate by laying-off its employees to cut down the cost of the manufacturing process. The Society of Indian Automobile Manufacturers has admitted that at least 15,000 contract workers had been laid off in three months. India is already facing an unemployment crisis. The crisis in the automobile sector is worsening the situation.
  • The decrease in the demand: There have been increased lay-offs leading to a decrease in the overall demand of the economy. This led to the liquidity crunch and adverse impacts on various other sectors of the economy.

What are the measures taken by the Indian Government to resolve this issue?

The government has taken several temporary measures to resolve the crisis in the automobile sector. This includes the following:

  • Increase in the depreciation: The government had stated that an additional 15% depreciation will be provided on vehicles acquired now till March 2020. The total depreciation is 30%.
  • Scrapping Policy: The automobile industry, for a long time, has been advocating for pulling out the unfit vehicles off the roads to increase the demand for the automobile sector. The government is opting to take measures to establish scrapping infrastructures so that the scrapping policy can be implemented in the future.
  • Postponement of one-time registration fee: The increase in the one-time registration fee will be put off until June 2020 to boost the demand for automobiles by reducing the financial burden on the consumers.

Way Forward:

  • While the temporary measures have been taken by the government, the GST reduction for automobiles was not mentioned by the government.
  • The high rate of GST on automotive parts and vehicles are increasing the cost of production in the automobile sector.
  • From this, it is evident that the Indian government is betting on the industrial revolution 4.0 – that one that is dominated by clean energy
  • Though promotion of EVs and clean fuel technology is a step in the right direction as it reduces the environmental pollution, the government must take necessary steps to reduce the impact of the negative implication caused by this shift.
  • Currently, we are at an era that demands constant change and faster adaptation to these new changes.
  • Policies by the government to adapt to these changes like promotion of eco-friendly technologies are dynamic and a need of the hour.
  • However, due to these changes, many sectors are facing negative impacts.
  • From this, it shows that India’s manufacturing sector is not prepared for the Fourth Industrial Revolution.
  • The government to address the sectoral crisis faced by the economy due to these changes and take the necessary steps to resolve it to become a $5 trillion economy in 5 years.
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