Mint Explainer: Why the auto sector is not out of the woods

While the Reserve Bank of India (RBI) and the finance ministry suggest the slowdown has bottomed out, data from the automobile industry offers a more complex narrative. 

Festival demand gave a temporary lift in October, with compact cars and two-wheelers seeing a spike thanks to the bunching of festivals, according to the Society of Indian Automobile Manufacturers (SIAM) and the Ministry of Road Transport and Highways’ Vaahan dashboard. But by November, most vehicle categories—except two-wheelers—had slipped back to pre-October levels.

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Amid this uncertainty, there is cautious optimism. Rising rural incomes after a good kharif harvest and increased government capital expenditure are expected to lift demand in the coming months. However, data from the Controller General of Accounts reveals that capex spending was 15% lower at the end of the first half of the fiscal year, with this trend continuing through October. Delayed spending, particularly during the general elections and government formation in May, June, and August, was cited by companies as a key factor behind weaker financial results for the second quarter.

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Mint breaks down the challenges, trends, and signals emerging from India’s automobile sector and what they reveal about the state of the economy.

How did the auto sector perform in the second quarter?

Regional festivals such as Ganesh Chaturthi and Onam in early September failed to spark consumer enthusiasm. Passenger car sales plummeted nearly 20% year-on-year in the July-September quarter, according to data from SIAM, while utility vehicles registered a 9% growth. A shift in consumer preference toward utility vehicles played a key role in this divergence. The ratio of utility vehicles to passenger car sales climbed from 1.6 in Q2 of the previous fiscal year to 2.2 this year.

Compact cars, which account for over 80% of passenger car volumes, saw a significant 17% drop in sales during the first half of FY25. Interestingly, the decline in compact car sales almost mirrored the rise in sales of compact utility vehicles (less than 4,400 mm in length) during the April-September period, highlighting changing consumer preferences.

Read this | Indian automakers shift gears: Affordable, not premium cars in focus

Two-wheelers were a bright spot, posting double-digit growth during the quarter as demand for scooters and motorcycles remained robust. However, registrations slowed in September, as observed in the Ministry of Road Transport and Highways’ Vaahan data. This decline coincided with the observance of shraadh, a period during which many households defer major purchases.

Commercial vehicles faced a tougher quarter, with sales dropping 11% due to reduced government capital expenditure and sluggish market conditions. Goods carriers bore the brunt of this decline. Additionally, companies reliant on government purchases were severely impacted as departments and agencies delayed procurement.

Why did sales slow down?

The timing of the general elections emerged as a key factor. While government capital expenditure was anticipated to dip in the first quarter and recover in the second, spending remained muted. 

This slowdown impacted the movement of goods, particularly construction materials. Reflecting on the September commercial vehicle sales data, the Federation of Automobile Dealers Association (FADA) noted, “While there was positive sentiment and marginal growth in regions supported by infrastructure projects, overall demand remained weak due to low government spending, extended monsoon delays, and seasonal challenges."

Read this | Are the growth wheels coming off in the cars segment?

Consumer sentiment also deteriorated during the second quarter, as highlighted by the RBI’s July consumer confidence survey. Concerns over inflation and increased spending on essentials weighed heavily on households, particularly in urban areas, where worries about slowing income growth further dampened demand.

Additionally, the RBI’s crackdown on unsecured loans and rising borrowing costs posed significant barriers, as a large proportion of vehicle purchases in India rely on financing. These combined pressures created a challenging environment for automobile sales in the quarter.

How did earnings reflect the slowdown?

Two-wheeler manufacturers outperformed their peers during the slowdown. 

Hero MotoCorp, India’s largest two-wheeler manufacturer, posted a 10.8% rise in turnover from operations and a 14.6% increase in pre-tax profits. Bajaj Auto, the largest three-wheeler manufacturer and a close competitor, reported even stronger results, with turnover and pre-tax profits growing by 21-22% year-on-year.

Maruti Suzuki, the country’s largest passenger car maker, experienced flat operational revenues but managed a 6.3% rise in pre-tax profits, supported by an increase in other income.

Tata Motors, India’s largest commercial vehicle manufacturer, saw its consolidated revenues decline by 3.5%, while profit before tax dropped 4.4% in the second quarter of FY25. The company’s passenger vehicle segment, including its Jaguar Land Rover business, also reported weaker earnings.

Ashok Leyland, another major player in the commercial vehicle space, reported a 9% decline in operating income but achieved a 15% increase in pre-tax profits, showcasing resilience amid challenging market conditions.

What is the outlook?

A pick-up in government capital expenditure is anticipated to drive growth in the third and fourth quarters. These quarters also tend to benefit from seasonal factors like festival and wedding-related consumer spending. October brought a surge in automobile sales, supported by promotional offers and substantial dealer discounts. 

However, November’s performance was mixed: while two-wheeler, three-wheeler, and tractor sales rose, passenger and commercial vehicle sales declined.

Two-wheelers continued to benefit from rural demand and a spillover of festive buying from October. In contrast, passenger vehicles faced weak consumer sentiment and limited new product launches. Commercial vehicles struggled due to restricted model availability, challenges with older vehicles, and inadequate financier support.

FADA has offered a tempered outlook, saying that “the near-term outlook for December is not overwhelmingly strong across segments" but noted a "cautiously optimistic" mood. 

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Heavy discounting and improved product availability may help passenger vehicle sales offset a typical year-end lull. Meanwhile, commercial vehicle sales are likely to stay subdued due to muted infrastructure activity, with year-end promotions providing only modest relief.