‘Stimulus’ alone can’t reverse auto slump

N Madhavan | Updated on August 30, 2019

This downturn goes beyond the usual business cycle. Only a broad-based economic recovery will help

Business cycles are common in the automotive sector. Five to six good years are typically followed by a few quarters of poor demand. It happened in 1997-99 ( the longest — over two years), 2008-09 and 2013-15. So another downturn now is not surprising.

But there is a reason why the industry is in a state of panic and clamouring, with all its might, for government support. What is causing this slowdown is not just the usual down-cycle that it witnesses periodically. A combination of factors — regulatory changes, liquidity/funding issues, severe rural distress and government’s apparent inability to pump-prime demand due to limited fiscal space — are all conspiring to make this downturn both the longest and the deepest.

The pain is already severe. The 31 per cent fall in passenger vehicles sales in July is the worst in 19 years. Truck sales shrank by a quarter and two-wheelers by 17 per cent that month. Experts fear that the 14 per cent decline in overall numbers during April-July 2019 is still some distance away from bouncing off the nadir.

As BS-6 norms kick-in from April next year, auto makers are at their wits’ end (all the BS-4 vehicles have to be not only sold but registered by March 31, 2020). Unsure of liquidating their existing stock by then, they have put the brakes on production. This has had a cascading effect across the supply chain causing the economy to stall.

Under the circumstances, demand for a fiscal stimulus may appear reasonable and just. Fiscal sops by way of lower excise duty, after all, have helped in the past. But such a move is unlikely to work this time. Let us look at why it will be so, segment-wise.

Commercial vehicles

Demand for new trucks have fallen as the sector’s capacity rose due to efficiency and regulatory changes. Better road infrastructure and GST meant that the turnaround time of a truck reduced significantly and they could do more trips in a given time. That apart, increase in axle-load norms (government basically regularised overloading) pushed the capacity up by at least 20 per cent.

These developments came at a time when the economy was tanking and freight availability began to drop. Normally, fleet operators hold back purchasing decision in these conditions for more clarity on freight rates and possibly, some sops.

This time they have to consider more variables. With BS-6 norms coming into force next year, they are unsure how pricey those vehicles will be. Also, unlike the shift from BS-3 to BS-4 where vehicle efficiency and mileage improvement were apparent and promised lower cost of ownership, no such commitments are forthcoming for BS-6 vehicles. They are unable to fathom whether it will be operationally viable considering the current freight rates.

Given these circumstances, one would have expected them to rush and pre-buy BS-4 vehicles. That is not happening too as the sentiments are so bad that truckers are finding no takers for their existing vehicles.

The second-hand truck market appears to be comatose. The fact that the 9,000-odd small NBFCs, who fund single and small truck operators, are struggling post the IL&FS and DHFL crises has only worsened the situation.

In such a scenario, a GST reduction or any other fiscal sop will not force the fleet operators to change their mind and buy trucks. Only a clear revival in freight demand will.

Passenger vehicles

Many blame the ‘NBFC crisis’ and the liquidity shortage that ensued for poor car sales. But NBFCs accounted for just 25 per cent share of the financing and well-run NBFCs continue to be in the market. Even assuming they did not give car loans, banks could have easily filled in the vacuum.

After all, they are desperate to widen their retail portfolio to reduce incidence of bad debts. NBFCs are not the cause.

Some point their fingers at cab-aggregators. Their proliferation, they argue, has forced people to give up on owning cars and, instead, use Uber or Ola.

This appears far-fetched too. Of the 4,000 cities/towns in India Ola is available only in about 140 cities and Uber in 40 cities. Also, it is too early to assume that cars have lost their status symbol in India.

Regulatory requirements such as compulsory airbags, and crash-test norms have pushed up vehicle costs by about 15 per cent. Add to that the higher insurance charges and concerns of a possible lower resale value for BS-4 vehicles next year. All these coincided with a sharp fall in consumer confidence.

The RBI’s Consumer Confidence Survey done across 13 major cities in India has been on the decline since March 2019. Household confidence on the economy, employment outlook and the ability to earn and spend have declined sharply. People typically tend to save in such situations. That explains the sharp 72 per cent fall in bank consumer loans in the first quarter of this fiscal.

Until the economy recovers and confidence returns, any amount of incentives will not push consumers into buying a car or replace their existing one.


A 16 per cent increase in safety-regulation induced price rise and higher insurance costs in the backdrop of rural distress and poor consumer confidence dashed the hopes of two-wheeler manufacturers of a strong FY20.

Confusion over introduction of electric vehicles only reaffirmed consumers’ decision to postpone the purchase. A good monsoon should hopefully put the brakes on the steep decline. A growth is unlikely till consumers regain confidence about their future financially.

The government has done the right thing so far in not falling for the industry’s demand for fiscal sops. They will not help. Instead, focussing on an investment-led growth revival and sticking to fiscal prudence will work better.

Clearing the way for easier monetary policy transmission plus necessary reforms should bring the animal spirits back in the economy. It may take a while. The auto industry needs to ride this downturn patiently and use it as an opportunity to become more competitive.

Published on August 29, 2019

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