India’s Automobile Downturn

The Indian economy is known to be one of the fastest growing economies in the world. The country has been consistently ranked as being the second fastest growing economy after China. For a very long time, it seemed like all was well with the Indian industry. However, that does not seem to be the case now.

A series of revelations are now highlighting the underlying problems which plague the Indian economy.

For instance, unemployment is at very high levels. The banks seem to be struggling with a barrage of non-performing assets. Many prominent Indian industrialists are either leaving the country or going bankrupt!

The automobile industry seems to be the latest casualty of this downturn. The sales of the Indian automobile industry have suddenly hit a 10 year low. In this article, we will have a closer look at the problems facing the Indian automobile sector as well as how they can be resolved.

The Grim Situation: India’s Automobile Industry

The automobile industry in India is huge. The country has a population of over 1.2 billion people. A lot of these people have now become affluent since India adopted globalization in 1991. The rising middle class has been a steady consumer of India’s automobile companies. This is the reason why the personal vehicle segment of these automobile companies has been showing consistent growth since the past decade.

In the second half of 2018, the situation started to change. Dealers who were stocking up inventory in anticipation of high sales suddenly realized that they couldn’t sell their products fast enough. They thought that the slowdown might be temporary because of the elections and the effect that they have on the overall economy.

For the three quarters, sales kept declining. The situation has gone from bad to worse. As a result, now, the sales of the Indian automobile industry have fallen to an 18 year low! This is because the sales of passenger vehicles are down by as much as 21%!

On the other hand, the sales of commercial vehicles are also down by 6%. These lower numbers have been achieved after taking into account that India is now becoming an export hub for vehicles. Even though the local sales have slowed down, the export numbers have risen by 8% during the same period.

Causes of the Slowdown

There is no big bang event that can be directly correlated to the slowdown, which is now being observed in the Indian industry. Instead, a slew of small and seemingly insignificant changes are the real reason that the automobile industry is reeling today. Some of these changes have been listed below.

  • Macro-economic Changes: The Indian government has been trying to downplay the issues facing the economy. However, it seems like the challenges are real. The growth rate has started rapidly decelerating. As a result, fewer jobs are being created.

    The unemployment in India is at a record high. The inflation numbers are also rising rapidly. All these numbers are scaring the consumers. Since people are no longer sure of the income that they will generate in the future, they want to save as much as possible. As a result, car purchases, which are a discretionary expense, have taken a backseat. This has wreaked havoc on the Indian auto industry which expected the consumer to continue making larger purchases.

  • Regulatory Changes: A slew of regulatory changes have also made operations difficult for automobile companies. For instance, the regulatory bodies in India have become strict about insurance.

    Most two-wheelers being sold in India now must have three to five years of insurance. As a result, the cost of vehicles and two-wheelers have increased. Also, the insurance companies themselves have increased premiums compared to the past. This has led to an increase in the price of vehicles. The increased cost is the biggest reason that customers are shying away from new purchases.

Also, other regulatory measures, such as stricter emission norms has made the production of vehicles more expensive. Indian customers are extremely cost conscious. These increased costs have not gone down well with the customers who have significantly cut down on auto purchases.

Managing the Slowdown

  • Lower Production: As of now, there is close to $7 billion worth of inventory lying down in the godowns of automobile dealers.

    Automobile companies are not very confident that they will be able to clear this inventory anytime soon. This is the reason why major Indian auto companies are cutting down on production.

    The idea is to reduce production so that steady sales lead to a decline in inventory. However, the cut in production is scaring workers, which is leading to even lower consumption. The automobile industry seems to be completely in the grips of the vicious downward economic cycle.

  • Government Assistance: Many automobile companies are also looking at the Indian government for a bailout. These companies blame the recently implemented GST regime for the slowdown. Therefore, they feel that the government must reduce the GST to cut prices and stimulate growth. This is what was done by the last government in 2001.

    Excise duties were cut down, which helped stimulate growth the last time the industry was in trouble. However, the Indian government already has its hands full with other crises. It is unlikely to pay any heed to these demands, and the auto companies will have to find a way out themselves.

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