Possible Reasons: Stricter Lending Guidelines

Sriyam Chomal
19PGPM060
Section A
Possibly seeing its worst slowdown in decades, the Indian automotive industry has been
badgered, bruised and continues to suffer great losses. Figures released by the Society of
Indian Automobile Manufacturers have revealed that passenger vehicle sales in the month
of July plummeted a whopping 31 per cent to 200,790 vehicles compared to a year earlier.
This marks a ninth straight month of decline, and the steepest one in nearly two decades. To
further reiterate the damage this month, even, Maruti the market leader and growth
indicator for decades, has suffered a 36.7 per cent sale loss compared to the same month in
2018. Maruti struggled to even reach 1 lakh units this month, with sales totalling 96,478
units. This massive drop in sales has happened despite the introduction of recent models
like the Mahindra’s XUV300, the Hyundai Venue and the MG Hector. All products pegged to
be game changers in their own right. Thus, this has caused a chain reaction across the
industry ranging from manufacturers offering a number of discounts and offers and new
launches to help instigate demand. Due to less demand, manufacturers are also having to
cut down on production, sometimes even shutting their factories down to adjust inventory.
This sharp decline in the last year or so has even lead to dealerships slowly being shut down
due to rising inventory management costs rendering these dealership outlets unviable. In
turn, this is also leading to massive lay-offs by the auto-makers and auto-dealers across the
supply chain.
Possible Reasons
Stricter Lending Guidelines
Due to the slowdown in economic growth in the country, banks all over the country have
had to make changes to their policies as a response. Some of them, including NBFC’s as a
result of bad loans and weak retail sales have decided to enforce stricter restrictions. These
restrictions include giving out loans only to people with a high credit rating. This has majorly
affected auto dealers and customers especially from tier 2 and tier 3 cities. A combination of
other factors such as higher insurance costs and tax increases have contributed to the drop
and have resulted in a major liquidity crunch. Despite the central bank having a dovish
stance on loan rates, automotive lending continues to be stringent with much higher rates.
The BS6 Dilemma
India is set to enforce stricter BS6 emission norms on all its vehicles come 2020. This
bombshell has gotten customers worried and confused on whether they should purchase a
vehicle before it and have no idea if the switch to BS6 is worth the extra money. With the
BS6 norms, automakers are starting to phase out diesel cars due to the extra costs to
convert their BS4 inventory to BS6. The lack of clarity on the relevance of BS4-compliant
cars in the upcoming BS6 era has spooked a lot of potential buyers. Automakers like Maruti,
Honda, Renault and Nissan have already started offering huge discounts and special offers in
order to clean out their BS4 inventory before April 2020. However, this is leading to
customers waiting for further discounts, which has further delayed purchase decisions. This
in turn is not only affecting sales greatly, but also limiting production for automakers due to
a surplus of inventory but no sales.
Ride of Ride-share services
Over the past three-four years, we have seen the rapid rise of ride-share apps like OLA and
Uber in the country. These apps make travel far more convenient without the hassle of
driving through rigorous traffic and avoiding maintenance cost of owning a vehicle, all at
affordable rates. This has certainly challenged the concept of ownership and thus affected
sales. It has made customers hesitant to buy a vehicle as much of their expenses are slashed
with regular carpool use.
EV
The Indian government has envisioned a radical push for all vehicles to go fully electric by
2030. Despite EVs like the Hyundai Kona Electric SUV slowly making its way to India and EVs
getting a reduction in GST rates, it's clear that India is still unprepared for a fully-electric era.
Due to this EV roadmap, customers have fears that any vehicle that they purchase could
potentially become obsolete in the next decade or so. Thus, they are clearly looking to hold
on to their current vehicles in order to avoid an unnecessary purchase if EVs are on the way.
The Indian government’s push for EVs may be a welcome bold move, but it is affecting sales
in the short-term and is going to take a long time for successful implementation.
Overcrowding
Due to the growth in the automotive industry in the past decade, more customers were able
to purchase vehicles of their own. However, this turned out to be a double-edged sword as
more vehicle sales has led to an explosion of vehicles on the roads today. This has led to an
immense number of bottlenecks and traffic jams on our outdated roads, especially in tier 1
cities. With public transport and recent carpool apps like Uber and OLA, customers are
hesitating to buy vehicles in order to escape traffic snarls.
Miscellaneous Factors
Aside from the various factors listed above, there’s a combination of frequent changes that
led to this slump. Higher and non-standard road taxes, which have been too frequent and
inconsistent have led to auto-makers having to increase prices of vehicles. Apart from this,
the ever-rising GST on automotive parts and vehicles has also added to the woes of the
industry. This has eventually led to customers shying away from buying these vehicles and a
downturn in sales.
In the end, the Indian automotive industry’s decline has been catastrophic. If major
corrective steps are not taken, we could see the beginning of a major recession in the
world’s fourth largest automotive market. While the industry is keenly eyeing the
government’s every move, it is also banking upon more new launches and the upcoming
festive season for a glimmer of hope. However, major reforms and incentives could be
needed to drag the industry out of this slump. While the government has said it is working
on a revival plan, the free-fall might continue for some more time.

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Sriyam Chomal

Ride of Ride-share services

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