Demonetization and the auto industry: a temporary disruption?

Two-wheeler sales, more so in the rural market, are known to be driven by cash transactions


Photo: Ramesh Pathania/Mint
Photo: Ramesh Pathania/Mint

Automobile shares were hurt by the move to withdraw Rs500 and Rs1,000 notes, with the BSE Auto index closing with a loss of 2.5% on Wednesday.

The disclosure of PAN (Permanent Account Number) while buying vehicles had already been made mandatory except for two-wheelers, so cash deals are not so rampant in the sector. Hence, the move may not have as adverse an impact on sales as some other sectors, according to analysts.

But unaccounted for money is reportedly in circulation in the luxury car segment, which may see a slowdown due to the withdrawal.

However, two-wheeler sales, more so in the rural market, are known to be driven by cash transactions. Rural markets account for a significant portion of two-wheeler, mainly motorcycle, sales. This segment may take a temporary hit if consumers take time to move to official channels of making payments, such as credit cards or cheque payments.

Thus, there may be a near-term drop in sales volumes because of the disruption caused by the withdrawal of existing Rs500 and Rs1,000 notes. But this comes in the backdrop of reviving consumer demand that has seen sales growth improve for cars and two-wheelers. Thus, this may not be more than a small speed bump in their path.

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