Many are clamouring over a supposed revival in the Indian automobile industry, which posted its best passenger car growth figures in two years. As GM and Chrysler appear to be imploding in the US, this might be an opportunity to fill a vacuum in the global auto industry.
While optimism should be tempered, the auto industry figures demonstrate how targeted policy can boost demand, at least in the short-term. The growth—partially spurred on by government policy—can provide useful lessons for other industries.
The industry’s sales of passenger cars rose 22% on last year, which is the first sales growth since September and a high since February 2007.
State Bank of India, and other lenders, crucially cut auto loan rates to 10% in January. The demand for passenger cars is very sensitive to interest rates. At least 80% of cars purchased in India are on credit. In these credit-tight times, some industries—such as automobiles—simply cannot function without available credit. A similar move could be initiated for other rate-sensitive industries, such as construction or real estate.
At the same time, growth has been encouraged by a targeted cut in excise taxes. This is a welcome move. Ailing industries such as the auto sector need to keep costs low and products competitive in this climate, as consumers are particularly responsive to lower price tags. Excise taxation should be evaluated—and perhaps re-adjusted—especially for industries facing a dearth of demand.
It remains to be seen if this will signal a long-term turnaround in auto demand, or the extent to which interest rate and tax cuts can truly sustain the industry’s growth. In particular, commercial auto sales are simultaneously down, despite the rate and tax cuts: domestic sales by 51.3% and exports by 36.1%.
Industry experts point out that passenger sales were particularly low in February 2008, making growth figures—over last year—seem more impressive than they might be. Despite the mixed bag of sales figures, the jump in passenger car sales shows how targeted policy can encourage demand in the short term at least. Such a lesson could be applied to other industries, particularly those that respond to the availability of credit.
What are the lessons of the auto industry’s sales growth? Tell us at email@example.com