What higher truck sales and weak rentals say about the economy
Truck rentals and sales, which are indicators of economic activity, have sent contradictory and confusing signals in the last few months. On the one hand, truck rentals have been trending down after the festive season, reflecting weak demand for freight. On the other hand, truck sales have been skyrocketing, beating all other auto segments, which shows the economy is doing well. Which view is the correct one?
December rentals fell by 3-4% from the previous month. Surprisingly, this is in spite of a hike in domestic diesel price that followed higher international crude oil prices. Clearly, the movement of goods fell after the festive season and lower demand for trucks from the small and medium enterprise segment.
The Indian Foundation of Transport Research and Training said that a full round-trip period has increased by about 25% as trucks have to wait for two-four days for getting a return load. This is true of medium and long distance transport, indicating sluggish demand compared to capacity of trucks.
Further, rentals have been erratic in the earlier months due to macroeconomic disruptions like the goods and services tax (GST).
Why then are truck sales rising? December quarter sales for two leading truck manufacturers—Ashok Leyland Ltd and Tata Motors Ltd—that account for about two-thirds of the total domestic sales, jumped by roughly 40% year-on-year, with others not far behind in growth rates. The two companies’ sales grew by 42% and 29%, respectively, for the December quarter too.
A key reason could be the low base of the year-ago period that was severely impacted by the currency ban that hit economic activity. Truck sales during the December 2016 quarter, therefore, were low.
Thereafter, the need to comply with the new emission norms forced a gradual buying of trucks by fleet operators. Dovetailing with this is the stricter enforcement of overloading rules. More relevant to explain high December quarter sales are the heavy discounts offered by the manufacturers to push inventory before the new regulation for commercial vehicles sold after 1 January 2018 to have truck driver cabins with air conditioners or blowers in some categories . Besides, dealers say that the game to garner higher market share also saw higher discounts during the quarter.
That said, one cannot rule out the contribution of a pickup in infrastructure activity that has led to demand for higher tonnage trucks and multi-axle carriers.
The Street is more optimistic too. According to Bharat Gianani, an analyst at Sharekhan Ltd, “Business cycles are getting normalized after the initial GST related glitches. Further, with introduction of GST, the run time for trucks has increased (several states have dismantled check points after GST) which has led to less stopovers and better profitability for truck operators. Another trend gaining traction is optimising warehousing facilities due to unified GST that may fuel demand for high tonnage trucks.”
But that doesn’t explain the declining rentals. Clearly, we must take the notion that rising truck sales reflect a stronger economy, with a dose of salt.
Finally, higher budgetary sops for infrastructure and rural growth along with lower interest rates on truck finance could support truck sales even if rentals continue to be erratic in the near term.
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