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Why falling auto sales don’t augur well for economy

Sales of automobiles across segments in India have fallen by 16% in April to touch the lowest mark in eight years. Mint assesses the reasons for the slump in sales, the impact this has had on the auto industry and what this means for the Indian economy

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Why have wholesale dispatches declined?

Rising crude oil prices and rupee depreciation led to a decline in retail auto sales since September. This dampened customer sentiment, which was further hit by the bankruptcy of IL&FS that led to a liquidity crunch among non-banking financial companies (NBFCs). Saddled with a huge inventory due to slow sales during Diwali, auto makers started to cut production from January. Sales usually fall in the run-up to the general election as customers wait for the results before making big-ticket purchases. The delay in repayment by some mutual funds due to their exposure to leveraged firms has made buyers cautious.

How did the liquidity crunch at NBFCs dampen auto sales?

Dealers often depend on NBFCs for short-term loans to fund inventory and other operational expenses. Dealers across segments needed more funds due to rising inventories, but NBFCs and banks became more than cautious while extending loans. For consumers, the availability of finance declined as most of these shadow banks were reluctant to take risks and this impacted auto sales. In rural markets, some NBFCs used to fund customers who did not have access to bank loans. Thus, the lack of funds with NBFCs and the tightening of lending norms led to the current slowdown in sales.

What is the decline in sales for auto makers?

In FY19, overall sales of Maruti Suzuki India Ltd increased by just 6%, the lowest in five years in percentage terms. In April, sales of automobiles fell by 15.9% to an eight-year low.

How did developed markets perform?

Auto sales in most developed economies have either declined or remained flat in the last few years. Sales of vehicles in China, the world’s largest automobile market, dipped 2.8% in 2018, compared to a growth projection of 3% made at the start of the year. This was the first ever fall in the Chinese market in two-and-a-half decades. Sales of cars and light trucks in the US grew 0.6% during the same period. In the European Union, sales dipped 0.04%. Japan saw a marginal rise of 0.7% in vehicle registrations last year.

What do falling auto sales indicate about the Indian economy?

Automobiles is considered one of the big sectors in India, in terms of its contribution to direct and indirect employment generation. The continued decline in the automobile sector for the past five months had resulted in the contraction of industrial activity to -0.1% in March. The slowdown in growth of India’s gross domestic product in the second half of the last fiscal can also be attributed to declining sales of automobiles as well as fast-moving consumer goods.

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Updated: 15 May 2019, 12:32 AM IST
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