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The automobile sector is in the news as it is experiencing prolonged negative growth. What are the reasons? Why are jobs being lost? And how can the government help? (Relevant for GS Prelims & Mains Paper III; Economics)

In July, the sale of vehicles across categories in the country slumped 18.71% to about 18.25 lakh units, down from about 22.45 lakh units, a year ago in the same month. This has been the steepest fall in nearly 19 years. With the industry failing to arrest the downturn that started almost a year ago, despite deep discounts and new model launches, it has been forced to undertake production cuts. This has also led to the trimming of over 2.15 lakh jobs in the sector.

Why did the sales reduce?
In the ensuing months, consumer sentiment remained subdued as the total cost of vehicle ownership went up largely due to an increase in fuel prices, higher interest rates and a hike in vehicle insurance costs. In such an environment, the festive season too failed to boost demand, leading to a huge inventory pile-up with dealers. To add to this, the IL&FS crisis late last year led to a severe liquidity crunch, almost drying up credit for dealers and customers. Nearly half the vehicles sold in rural markets — a segment that has been witnessing a higher growth rate in comparison to urban markets — are financed by non-banking financial companies (NBFCs). Being stuck with higher inventory due to a lacklustre festive season, dealers too needed more working capital.

As a result of all these factors, all vehicle categories, including commercial vehicles and two wheelers, began experiencing negative growth beginning December setting alarm bells ringing.

Are people holding off on purchases?
There is also a possibility that some customers are waiting to buy the latest Bharat Stage (BS)-VI emission standard compliant vehicles or are waiting for more incentives from vehicle makers who will be looking to sell off their BS-IV compliant stocks before the April 1, 2020 deadline. Many industry players have also expressed concern that too much focus on electric vehicles (EVs) by the government may also be encouraging buyers to postpone the purchase of petrol and diesel vehicles.

How many jobs have been lost?
The automobile sector is one of the largest employers in the country, employing about 37 million people, directly and indirectly. The prolonged demand slowdown has triggered production as well as job cuts in the sector. According to the latest figures that are available, original equipment manufacturers (OEMs) have removed about 15,000 temporary workers in the past two to three months. A lack of working capital amid tepid demand has led to closure of nearly 300 dealerships across the country. This has led to over two lakh people losing their jobs.

What does the auto industry want?
The auto industry has been unable to arrest plunging sales in spite of new launches and offers and has been demanding immediate government intervention. Pointing out that the industry’s turnover is close to half of the manufacturing GDP, accounting for about 11% of the entire GST revenues of the country, the auto sector is hoping that the government will come out with a revival package ahead of the festive season to yield benefits.

The industry’s demands include a reduction in GST to 18% from the current rate of 28%, which will help in an immediate price reduction. It could kick-start demand in the short term, particularly ahead of the coming festive season. Besides, it has sought measures to handle the NBFC crisis to infuse liquidity into the system, and clarity on policy for electric vehicles and introduction of vehicle scrappage policy, which will also boost demand for new vehicles. These demands were also placed before the Finance Minister, Nirmala Sitharaman, during a recent meeting.

How long will the slowdown last?
That is anyone’s guess. With BS-VI variants to be rolled out April 2020 onward, the prices of vehicles will go up. While the increase for petrol vehicles is likely to be in the range of ₹20,000-₹50,000, in the case of diesel vehicles it could well be between ₹ 1 lakh and ₹1.5 lakh. The transition could also trigger some demand for BS-IV compliant vehicles in the remaining part of the year, given the price difference.

(Source:https://www.thehindu.com/business/Industry/why-is-the-auto-industry-facing-trouble/article29121023.ece)



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