Cleaning up the used car market

There’s an old joke about used car salesman that goes: “How can you tell when a used car salesman is lying?” Ans: “His lips are moving.” And another which asks: “What’s the difference between a used car salesman and a politician?” Ans: “The salesman knows he’s lying.”

The reason that so many jokes about used car salesman are spun around lying is that there is more than a germ of truth in them. Most non-car-savvy buyers consider themselves lucky if they walk into a used car dealership and come away with a vehicle that is not a lemon, damaged, overpriced, stolen or worse.

But that isn’t stopping any customer from buying. India’s new vehicle sales may still be suffering the after-effects of ‘long Covid’, with supply chain disruptions and rising inflation putting a dampener on recovery, but not so in the pre-owned vehicle (as the dealers like to call it) market.

India’s used car market, as the Americans say, is going gangbusters. According to a report by Indian Blue Book, an online portal for valuing second-hand cars, the Indian pre-owned cars market was valued at over ₹1.8 trillion in 2021-22. The Indian used car market is expected to have a CAGR of 19.5 per cent by value and 12.7 per cent by volume between now and FY27 and is expected to hit 8 million units by 2027.

New versus old

This is way better than what the new car market is managing. According to another study carried out by Das Welt Auto — the used car arm of Volkswagen — and consultancy Frost and Sullivan, the 8 million mark may be hit as early as 2025. In 2021-22, the ratio of new to old cars sold was 1:1.5 — that is, 15 used cars for every 10 new ones sold. Das Welt Auto expects the ratio to climb to 1:2.1 in three years’ time, that is, 21 old cars for every 10 new vehicles sold.

This sounds like a lot, but there is considerable headroom for growth. The ratio is 1:2.8 in the saturated US market and as high as 1:4.1 in the UK. China is an outlier though. The China market, which has a pronounced user preference for new cars, has a new-to-old ratio of just 1:0.6.

The trouble is that this vast market continues to be largely organised. Maruti True Value and Mahindra First Choice, the two oldest organised sector players in this market, are also the largest, with a combined dealer network of around 3,000 as of 2021-22. But an estimated 77-85 per cent of the market is unorganised. This, combined with the fact that as much as 64 per cent of used car buyers are first time car buyers, has also led to rampant ills in the industry. Malpractices are rampant. Denting and painting an old car to inflate the value is just the beginning. More than half the transactions still happen in cash. This obscures the paper trail both ways. Stolen vehicles with forged paperwork are easily passed off.

The daunting process of changing the ownership and insurance details is another factor which leads to a lack of accountability and traceability in this market.

A large part — estimates vary from around a third to as much as two-thirds of used car sales, according to trade sources — are not followed through with the requisite paperwork.

This means that vehicles tend to remain registered in the name of the original owner months or even years after changing hands. With the Supreme Court clarifying that the registered owner is legally liable for all claims arising on the vehicle, this can put the sellers in a very uncomfortable spot. Added to this is the fact that an increasing number of used car buyers come from non-metro centres and rural India.

Urgent regulation needed

According to the IBB report, non-metros will account for three out of four used cars sold by 2025. While the demand for used cars is expected to grow by 10 per cent in the top 40 cities, it is expected to grow at a CAGR of over 30 per cent outside these markets.

All this calls for urgent regulation of this market. With GST applicable on used cars ranging from 12 per cent to 18 per cent (similar to new cars, where the rate varies based on vehicle length, engine capacity and seating capacity), the government is also missing out on substantial revenues.

That’s probably why the Ministry of Road Transport and Highways came out with a draft notification last week, which seeks to put in some kind of regulatory oversight on this market.

Under the draft G.S.R. 693(E) published on September 12, the Motor Vehicles Act is to be amended to make it mandatory for used car dealers to register with the transport authority of their State, which will issue them a licence. They will be deemed ‘owners’ of the vehicles as soon as they take a vehicle over from the original seller, which protects sellers from legal trouble in case of an accident or theft. The purchase and sale of a vehicle will have to be electronically logged on the transport authority’s portal, which will provide traceability.

While these are welcome steps, more needs to be done. Consumer rights on used cars are fuzzy and “deficiency of service” difficult to prove. This can be fixed by including service quality standards — including quality standards for used vehicles — and fixing dealer liability. This will ensure that the growing number of used car buyers are not taken for a ride — literally.

The writer is a senior journalist

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