September 2019 was the 11th successive month when the passenger vehicle sales have declined. Sales of two-wheeler and commercial vehicles have also seen consistent decline since February 2019. Double digit decline in most of these months 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. While most of these factors have contributed to the slowdown, a closer look on other macro-economic data highlights other critical factors at play. So, let us get a broad understanding on the Automobile sector slowdown – Reasons and solutions for recovery.
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
RBI data 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%).
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.
More People in TAX Net
The data from Income Tax Department shows that during FY2017 and FY2018 (post demonetisation) the annual growth in personal income tax collections doubled to around 17% from around 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. Not only that, 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
Other factor for lower disposable funds in the hands of people (particularly for lower and lower-middle income groups) 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 in the social security (particularly in Indian context), such a shift in the expenditure is for overall good of the society.
Commercial vehicle – case of improved productivity
In the case of commercial vehicles (CV), apart from overall lower economic activity, the major contributor to slowdown is the increase in industry capacity post 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%. Further, 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).
These two factors, together, have improved the overall capacity of the existing fleet by around 50-60%. Considering the fact that a good year sees billion tonne kilometer (BTKM) growth of 7%-8%, this increased capacity is sufficient to take care of the incremental freight demand for 6-7 years.
Electronic Toll Collection will reduce Travel Time & improve efficiency
Proposed shift to Electronic Toll Collection system from December 1, 2019 will further reduce the travel time for truck and improve efficiency. Though, it is a bad news for CV manufacturers, it is a good news for the broader economy in a long run given the traditionally low logistic efficiency in India. Logistic cost in India is 13% of GDP as against 8.2% in USA and 9.2% in Europe. Improvement in the overall logistic efficiency in India will help the economy in the long run and improve the export competiveness.
Road ahead – boosting demand
Irrespective of the reasons, continued slowdown in the auto sector is a matter of concern as it provides large employments and contributes ~7% to the GDP. Prolonged de-growth and production cuts have already claimed around 2.5 lakh jobs in the sector and has a cascading effect on other sectors as well. Therefore, immediate steps have to be taken for not only boosting auto sector growth but also for improving overall manufacturing and demand scenario.
India, so far, has lagged behind in attracting the units shifting their bases from China post the trade war with the USA. This is despite the fact that India is already a large market (Indian imports from China itself is USD 70 billion). Reduction in corporate tax, more particularly for the new manufacturing units, is a big step in improving India’s competiveness in attracting investments. However, this alone is not sufficient. More structural reforms, improvement in infrastructure, streamlining the approval processes, enhancing the skill-set for the worker etc are urgently needed.
Another insightful blog by Mr. O P Singh on how national security and economic affair walks hand-in-hand.
Not only this, 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. This may be achieved by increased 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.
Lower Tax and Compliance burden
So far many of them were out of tax net and it was one of their USPs to compete with the large players. Suddenly putting them in the same bucket as the large units has taken away their competitive advantage. Therefore, If the Government is prodding them for better tax compliance, a support in the form of lower tax and compliance burden, at least in the medium run, is the need of the hour. Further, an early implementation of the scrappage policy for vehicle would help not only in generating the demand but also bring the much needed clarity towards purchasing decisions for the buyers.
(The views expressed here are personal and do not represent those of my employer.)