It is important to keep track of the sales figures as it gives us first-hand knowledge of the real state of the economy—not what statisticians derive through samples and theories based on subsequent extrapolations. And fresh data on vehicle sales tell us that the demand slump in the economy is worsening.
The July passenger vehicle sales figures are just out. According to the auto industry body Society of Indian Automobile Manufacturers (SIAM), vehicle sales in July dropped 18.71 percent to a nearly 19-year low and leaving almost 15,000 workers jobless over the past two-three months. This is a warning about where the economy is headed in the immediate future.
If people aren’t buying cars and two-wheelers, that is either because they have money to spend but don’ have enough confidence to take up further liabilities fearing job losses or adverse environment. Or, they simply do not have enough money. Right now, perhaps the reason could be a mix of both. The argument that people are postponing purchases in anticipation of BS-VI compliant vehicles, hence slow sales now, has been discarded by automakers themselves. None of such counter-arguments justify the biggest slowdown in the sales figures since December 2000 when the sales had plunged 39.86 percent. Just last month, the domestic car sales were down 35.95 percent at 1,22,956 units as against 1,91,979 units during the same period the previous year.
Two-wheeler sales last month declined 16.82 percent to 15,11,692 units as compared to 18,17,406 units in the year-ago month. Commercial vehicle sales were down 25.71 percent to 56,866 units in July compared with 76,545 units in July 2018. Two-wheeler, car and commercial vehicles, logically, depict different customer segments and the dip in sales across these three gives us clarity on what’s happening on the ground. Add the numbers of tractor sales and other farm equipment, the full picture of the extent of the ongoing slowdown emerges.
Almost always, the auto sector is one of the first segments to mirror the consumer trend in a slowing economy. The job losses are a natural consequence of dipping sales. The July sales figures had also rattled the shareholders with auto stocks tumbled up to 9 percent on Tuesday. Shares of Motherson Sumi Systems, Bharat Forges, M&M, Bosch, Eicher Motors, TVS Motor Company, Maruti Suzuki India, Ashok Leyland, Apollo Tyres, Hero MotoCorp, Bajaj Auto and Tata Motors fell up to 9 percent on Tuesday and the trend largely continues on Wednesday at the time of writing this piece.
Industry veterans are no longer hiding their disappointment. Recently, Rahul Bajaj, Chairman of Bajaj Auto blamed the government’s inaction for nose-diving demand. “There is no demand and no private investment, so where will growth come from? It doesn’t fall from the heavens,” Bajaj said at the company’s AGM. “The auto industry is going through a very difficult period. Cars, commercial vehicles, and two-wheelers are going through a rough patch,” Bajaj said.
In fact, one of the biggest reasons why Reserve Bank of India (RBI) chose to go for a 35 bps rate cut in the last policy review is the sliding demand scenario in the auto sector. The RBI noted that tractor and motorcycle sales—indicators of rural demand—continued to contract. Amongst indicators of urban demand, passenger vehicle sales contracted for the eighth consecutive month in June, it said, adding commercial vehicle sales slowed down even after adjusting for base effects.
In a nutshell, declining sales are impacting companies from all sides. What should be the government’s response? The government can slash the Goods and Services Tax (GST) rates to help the automakers. Presently, automobiles attract a GST rate of 28 percent with additional cess ranging from 1 percent to 15 percent, depending on the length, engine size and type.
As for the auto components, about 70 percent of the auto components are already under the 18 percent GST slab. But, around 30 percent of the components remain in the 28 percent GST bracket. The industry’s demand for lower GST rate is reasonable considering the plight they are in. The government should urgently heed their request. Doing this is also critical to avoid further job losses in the automobiles and the auto component sector.
Updated Date: Aug 14, 2019 11:47:48 IST