To recall, September 2019 was the 11th successive month when the passenger vehicle sales have declined. Sales of two wheelers and commercial vehicles have also seen consistent decline since February 2019. Double digit decline indicates the severity of de-growth. A number of reasons have been suggested for such a prolonged and sever decline including. change in the preferences of the millennial generation, high costs of vehicles, waiting for the new Bharat-VI variants, low rural income etc. Lets have a closer look look at the reasons for Auto sector slowdown and how to safe guard the Industry.
Sales decline vs demand decline
First of all, there is a large gap in the data for de-growth in wholesale and retail segments. As per the data from SIAM which captures the wholesale sales (i.e. sales from manufacturers to dealers) there was an average decline of 20% in the passenger vehicle (PV) segment during March-August 2019 period. While the retails sales data (based on car registration) published by FADA shows a decline of around 6%-7% only during this period. So, clearly a larger part of the decline for the manufacturers (OEM) are coming from the inventory clearance which they had pushed to the dealers to project a better financial performance for themselves.
Fight against back money: collateral damage
Let me reflect on the RBI data RBI data which shows that the growth in ‘personal vehicle loans’ was 0.3% during March 2019 to August 2019 period as compared to 3% growth during the same period last year. Therefore, there is not such a large decline in the PV financing. Considering that around 60%-70% of retail sales in PV segment is based on loan financing while the remaining purchases are from own sources, clearly the major reason for decline in retail PV sales is due to a steep fall in the purchase of vehicles from own sources. A back of the envelop calculation indicate this fall in the range of 15%-20%.
Slow Down in Demand
So, what could be the possible reasons for such a steep fall in purchase from own sources? It is very easy to understand that one would buy a car from own sources only if he/she has enough disposable funds in hand. In many cases this could be unaccounted money as well. So, what has changed during past couple of years.
As per the data from Income Tax Department during FY2017 and FY2018 (post demonetization) the annual growth in personal income tax collections doubled to around 17% from ~ 8% during preceding two years (i.e. in FY2015 and FY2016). Also, total number of individual tax filers have increased from 37.41 million in FY2015 to 64.39 million in FY2018 (a growth of 72%). Not only that, introduction of GST (from July 2017) has ensured a better tax compliance for indirect tax payments as well. Clearly, many people who were not subject to tax till recently are within the tax ambit. It has reduced the disposable funds in their hand.
They are now well aware that their transactions are under greater surveillance than before. Its impact is also visible in slowdown in the demand for real estate (more particularly in the luxury segment). Though, this has created a slowdown in demand in the short term, better tax compliance is definitely good for overall economy in a long run.
Shift in priority
Some of the other factor for lower disposable funds is the greater emphasis on the affordable housing segment under Pradhan Mantri Awas Yojana (PMAY). Under PMAY-Urban, the government has plans to construct 20.0 million houses till March 31, 2022. Of this, construction for 8.8 million houses in the urban area has already been approved till August 2019 with a total capital outlay of INR 5.49 trillion. As per the scheme 20% of the cost of house is the self-contribution of the households. Considering average cost of house in urban area as ` 4.0-5.0 million, the self-contribution amount comes to INR 8.0-10.0 million. Obviously, for such large investments the households have to cut other big expenditure, such as, buying a car. Given the importance of a house is the social security, such a shift in the expenditure is good for the society.
Commercial vehicle – case of improved productivity
In case of commercial vehicles (CV), apart from overall lower economic activity, the major contributor to slowdown is the increase in industry capacity. The key factors for this is GST implementation and revision in the axle norms by the government. Post GST implementation, the state entry barriers (Jakat Naka) have been removed leading to overall improvement in logistic efficiency. The travel time of trucks for large distances have reduced by around 30-40%. In July 2018, the Central Government increased the permissible gross vehicle weight of over 16 tonne heavy trucks by 12-25% (under new axle norms). The above factors, together, have improved the overall capacity of the existing fleet by around 50-60%. Considering the fact that a good year sees billion kilometer (BTKM) growth of 7%-8%. This increased capacity is sufficient to take care of the incremental freight demand for 6-7 years
Logistic Cost in India
The proposed shift to Electronic Toll Collection system from December 1, 2019 will further reduce the travel time for truck and improve efficiency. This hurts CV manufacturers sentiments, however, it’s good news for the broader economy in a long run. Logistic cost in India is 13% of GDP as against 8.2% in USA and 9.2% in Europe. As we observe, the logistic efficiency in India will help the economy in the long run and improve the export competiveness.
Road ahead – Boosting demand
We can see that the continued slowdown in the auto sector is a matter of concern as it provides large employments and contributes ~7% to the GDP. De-growth and production cuts has claimed around 2.5 lakh jobs in the sector. This also has a cascading effect on other sectors as well. So, immediate plan should be to boost auto sector growth as well as improve overall manufacturing and demand scenario. One of the challenge is that we have lagged behind in attracting the units shifting their bases from China post the trade war with the USA. We are also aware of the fact that India is already a large market (Indian imports from China itself is USD 70 billion). Reduction in corporate tax, especially for new manufacturing units, is a big step towards India’s competiveness in attracting investments.
Shifting from China to USA
However, this alone is not sufficient. We need more focus towards improvement in infrastructure, streamlining the approval processes, enhancing the skill-set for the worker etc. The impact of tax cut will come in a long run and will address more of the supply side issues. For improving the demand, the Government needs to put money into the hands of the people. We can meet the target by increasing spending on infrastructure, clearing the dues of the contractors/suppliers (of government) in time, reduction in the personal tax (time to reward people for improved tax compliance) etc. Also, the GST rates for the smaller units have to be reduced. These are the units which provide jobs to lakhs of people.
Suddenly putting them in the same bucket as the large units has taken away their competitive advantage. Therefore, the need of the hour is lower tax and compliance burden. We believe, an early implementation of scrappage policy would help in generating demand and bring clarity towards purchasing decisions for buyers.
(The views expressed here are personal and do not represent those of my employer.)