ECONOMICS ASSIGNMENT

(Decline in sales in Automobile Sector)

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ECONOMICS ASSIGNMNENT:

Why the Automobile Sector suddenly

experienced a more than 30% drop in
the sales this year?
The Indian automobile sector is going through a rough patch at the
moment. Month after month, the companies are reporting decline in
their sales numbers.
Maruti Suzuki India reported a sixth consecutive monthly sales
decline with the numbers falling 33.5 per cent 1, 09,264 units in July
2019. Hyundai Motor India sales fell 3.8 per cent to 57,310 units
during the month, while the domestic sales of Honda Cars India
dived 48.67 per cent to 10,250 units. In July 2019, Mahindra &
Mahindra registered a plunge of 15 per cent in total sales to 40,142
units and Tata Motors saw its sales going down by 34 per cent to
32,938 units.

The two-wheeler manufacturers are facing a difficult situation as

well. During July 2019, the sales of TVS Motor Company fell 13 per
cent to 2, 79,465 units and Royal Enfield sales dropped 22 per cent to
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54,185 units. Hero MotoCorp sales dived 21.18 per cent to 5,35,810
units and Honda Motorcycle and Scooter India numbers plunged
10.77 per cent to 4,89,631 units.

Here are few of the reasons why the automobile industry is

experiencing the decline in sales:
1) Liquidity crunch post the IL&FS situation
2) weak economic health
3) tighter financing conditions
4) uncertain regulatory landscape
5) abnormal monsoon pattern
6) rural distress and poor consumer sentiments
7) Freak policy/regulatory announcements made matters worse

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 ● Infrastructure Leasing & Financial Services Limited is an
Indian infrastructure development and finance company.
It operates through more than 250 subsidiaries including
IL & FS Investment managers, IL & FS financial services
and IL & FS Transportation networks India Limited. Non-
banking finance companies (NBFCs) in India are going
through a rough phase following defaults by once a
bluechip infrastructure lender, Infrastructure Leasing and

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 Financial Services (IL&FS), on short-term debt obligations.
The liquidity crunch in the sector has created tensions
between the Reserve Bank of India and the government.
More than half the vehicles sold in rural markets is
financed by NBFCs. With falling auto sales, dealers have
been left with more inventory which means they need
more working capital from NBFCs—which is either not
available or comes with demands for more collateral. The
liquidity crisis in NBFCs is likely to have an impact on auto
industry and in some quarters, we have already seen this.
There are certain segments like passenger vehicles where
customers have other alternatives but in commercial
vehicles this will play out differently. 70% of two-wheeler
sales and 60% of commercial vehicles sales are financed
by NBFCs. NBFCs have exposure to vehicle financing in
every category especially in the semi-urban and rural
markets and the lack of credit has hit every stakeholder in
the value chain. The industry lobby also pointed out that
with the upfront payment of the goods and services tax
dealers are facing a crunch for working capital loans.
According to retail sales data released by FADA, passenger
vehicle sales during the first three quarters of the current
fiscal (April to December) declined 2% year-on-year to
1,917,750 units, while sales of two-wheelers increased by
only 5% y-o-y to 11,071,352 units.

● India’s passenger vehicle industry suffered its worst sales

performance in nearly 19 years in July as a slowing
economy, higher ownership costs and floods in some
states deterred buyers. It was the worst sales
performance since a 35% decline in December 2000.

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 Maruti Suzuki India Ltd reduced wholesales of its Vitara
Brezza compact sport utility vehicle because of weak
demand, emerging competition and its recently
announced plans to phase out diesel vehicles from next
April. Weak domestic economic activity and escalating
global trade tensions led the Reserve Bank of India to cut
India’s growth projection for 2019-20 to 6.9% last week
from its June forecast of 7%. Severe floods in key states
such as Maharashtra, Kerala and Karnataka before the
onset of Onam and Ganesh Chaturthi are also impacting
the fortunes of the automobile industry.

● The Indian economy isn’t in the pink of health. The

growth figure for the third quarter of FY19 was merely
6.6% — the lowest in five quarters. Other indicators like
two-wheeler sales and air-traffic growth are also flashing
amber. If the slump in car sales is part of this larger story,
it presents a worrying picture for the incoming
government because private consumption has been a
strong pillar of India’s growth story even as investment,
government spending and exports have remained volatile.

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 ● The first month of the calendar year 2019 took off in a
slow lane, marred by tough market conditions like high-
interest rate, vehicle price hike and low consumer
sentiment. The tightening of vehicle financing availability
has also added to the challenges in the market. Passenger
vehicle sales remained under pressure in January, with
top five car makers reporting negative or flat sales
growth, hit by continued challenges of higher insurance
cost and poor finance availability.

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 ● The automobile industry has particularly suffered from
regulatory and policy uncertainties. With growing levels of
pollution, India had decided to skip the BS-V emission
norms entirely. And then the Supreme Court decided to
ban the sale of vehicles conforming to BS-IV standards
from April 1, 2020. Now car companies will have to
comply with BS-VI standards from 2020 — four years
earlier than the original plan. It is no surprise that Maruti
has decided to not manufacture diesel vehicles from April
2020. The shift to electric vehicles presents another area
of uncertainty. While the government has rolled back its
initial unrealistic goal of moving to a 100% electric fleet by
2030, the emphasis on electric vehicles doesn’t square
with high-cost batteries and price-sensitive consumers. In
effect, both the industry and the consumers have a lot to
figure out.

● For example, last year, West Bengal restricted two-

wheeler registration only to people with driving licence,
hitting sales. With multiple ministries interfering, policy
flip-flops have been aplenty. “A dedicated ministry for
such an important industry will help in effective
policymaking,” says Sumit Sawhney, former managing
director, Renault India.

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