Indian businesses typically enter September full of optimism about the spending boost that celebrations including Navratri and Diwali will bring as the country embarks on its biggest annual festive season.
But this year, car manufacturers, suppliers and dealers are facing the festivities with something closer to dread. India’s vehicle market, until recently projected to be on track to become the world’s third largest, is facing its worst crisis since records began more than two decades ago.
Car sales in August fell 41 per cent from a year earlier, according to the Society of Indian Automobile Manufacturers (Siam), extending a dismal run in which sales have fallen more than 20 per cent each month since April.
“We have never seen a crisis as painful as this one,” said Puneet Gupta, an automotive analyst at IHS Markit. “When the market is flat we see people getting worried. This time it’s minus 40 per cent, which is unimaginable . . . We are moving backwards rather than moving forwards.”
The auto industry has borne the brunt of a year-long liquidity squeeze. Its woes are the most severe symptom of a broad slowdown in the economy, with growth in gross domestic product slowing to a six-year low of 5 per cent in the latest quarter.
Sales of motorcycles and scooters — a key gauge of rural economic health — fell 22 per cent in August, while those of commercial vehicles such as trucks dropped 39 per cent.
Lured by the promise of fast growth and unbridled demand from a growing middle class for new goods such as cars, foreign companies including Hyundai, Toyota and Honda established a sizeable presence in India. They competed alongside domestic players such as Maruti Suzuki — the largest — and Tata Motors.
Many are now feeling the pain. Carmakers collectively cut production almost 30 per cent in August from a year earlier, according to Siam, while Maruti Suzuki and Mahindra & Mahindra have acknowledged letting go thousands of contract workers.
Since the start of the year, India’s Nifty auto index has fallen more than 20 per cent, compared with a flat performance by the Nifty 50 benchmark index.
“The fear is whether 20 per cent becomes 30 per cent or 40 per cent or 50 per cent over the next six to eight months,” said Rajan Wadhera, president of Mahindra’s automotive business and president of SIAM, referring to sales.
Mr Wadhera said the association estimated that almost 300,000 jobs already had been lost across the sector, out of some 37m directly and indirectly employed.
Associated industries have been hit hard. Ashish Kale, an auto dealer in Nagpur and president of the country’s largest dealer association, representing 90 per cent of the market, said his members had closed hundreds of outlets and laid off around 8 per cent of their collective workforce. “It’s gone from bad to worse,” Mr Kale said.
Executives admit to having been caught off guard by the severity of the downturn. Key to the collapse is the hefty role India’s enormous shadow banking companies played in fuelling growth, providing almost half of all loans for vehicle purchases.
The high-profile bailout last year of infrastructure lender IL&FS and subsequent liquidity crunch caused much of that funding to dry up: overall lending by non-bank financial companies in the quarter that ended in June fell 30 per cent from a year ago, according to the Finance Industry Development Council.
Demand for relative luxuries such as cars was quick to evaporate. “People are unsure about the future, their jobs,” said Prabodh Agrawal, chief financial officer at IIFL, a non-bank financial lender that this year sold its auto loan business.
But the industry is also undergoing deeper structural changes as India bolsters regulations to include stricter safety norms such as new braking systems. Vehicles sold from March 2020 will have to meet tougher emission standards, and upgrading assembly lines accordingly will add as much as 15 per cent to production costs, according to Fitch.
The car industry is pressing the government to help by cutting taxes on automobiles from 28 per cent to 18 per cent. Tax authorities are expected to debate the issue next week, but economists are sceptical whether the government can afford another dent in its already sagging revenues.
Members of other industries are less sympathetic, arguing the auto sector should cut prices itself rather than seek government intervention. Sajjan Jindal, chairman of JSW Group, one of India’s largest steelmakers, said automakers should take advantage of a drop in metal prices to slash their own rates.
“The steel industry has cut prices to face the slowdown,” he said. If “the auto industry also corrected prices, I think the demand would come back.”
Executives and analysts say the festive season will be a crucial test, and many are optimistic sales will bounce back. But Mahindra’s Mr Wadhera expects any boost to prove fleeting.
“Maybe the demand will come back for these two months,” he said. “That does not mean we have turned around.”