Maruti posts steepest decline in sales in 8 years in May; what does demand slump tell us about state of Indian economy

Vehicle sale trends in the month of May is an eye-opener for Indian policymakers looking at ways to lift the sagging economy. India’s biggest carmaker Maruti posted a significant 22 percent decline in overall sales in last month. According to a Kotak report, that was the steepest decline in sales volumes in the past eight years. Maruti sold 134,641 units in May. Its domestic volumes declined by 23 percent y-o-y, while exports decline by 2 percent. One highlight of its sales performance is that the small car–entry and compact hatchback/sedan car segments—which a first-time car buyer typically goes for, declined by 25 percent y-o-y in May 2019. [caption id=“attachment_4179685” align=“alignleft” width=“380”]  Representational image. Reuters.[/caption] The story is not very different from truck makers as well. Mahindra sales volume declined by 3 percent and tractor sales volumes declined by 16 percent on a year-on-year basis, indicating the demand slump in rural India. Similarly, Escorts reported an 18 percent y-o-y decline in tractor volumes led by 20 percent y-o-y decline in domestic tractor sales. Hero Motocorp’s volumes declined by 8 percent y-o-y in May 2019. Royal Enfield’s volumes declined by 17 percent y-o-y in May 2019. Now, what is the significance of these sales figures? When GDP numbers are subjected to debate on quality, the best way to understand the health of the economy is to look at primary data pointers. One such data set is vehicle sales. It tells us a lot about how the economy is performing—if it does well, people buy more vehicles; if things aren’t looking up, sales dip. May was such a month. One can fairly assume that the overall weakness in consumer demand continues in the economy. We don’t know how the FMCG companies did in May; that data will come only when the June quarter figures are released, but the trend in FMCG and vehicle sales can’t be vastly different. But till March, data points to a disappointing picture. According to the rating agency, ICRA, the revenue growth for FMCG in the fourth quarter has hit a six-quarter low. What does the demand slump mean for the RBI policy this week? It would be a surprise if the monetary policy committee (MPC), the rate-setting panel, doesn’t cut rate by 25-50 basis points this week voicing its expectations that lower policy rates will help the economy support the consumer demand. In fact, the bond market is already expecting a rate cut. On Monday, India’s 10-year bond yield fell below 7 percent to 6.95 percent—it’s lowest since late 2017, Bloomberg reported. In the April RBI policy, when the MPC had cut the policy rates by quarter bps, it had left enough hints of a future rate cut by saying: “Should the recent slowdown in domestic economic activity accentuate, it may have a bearing on the outlook for inflation in this category.” With a fiscal stimulus still at a low probability, the monetary stimulus becomes imperative to stimulate the economy. A 25-50 basis points rate cut will likely follow a nudge from the central bank and the government (majority owner in state-run banks) to pass on the rate cut benefit to the end-consumer. How much of this will be passed on to the end-consumer is something one needs to wait and watch. Indian banks are notorious for ignoring the central bank’s calls to lower rates for end-consumers.