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Car sales down, what does this mean for the economy? (Relevant for GS Prelims & Mains Paper III; Economics)

Leading automobile manufacturers announced a sharp decline of up to 50 per cent in their domestic sales in July with the market leader Maruti Suzuki reporting a 36.2 per cent drop in sales during the month.

Where is the decline?
The drop in sales is happening across all segments. Even the tractor industry has seen a steady slide. Tractor sales have consistently fallen since March 2019, amidst weak farm sentiment.

Why are car sales falling?
Industry insiders feel that while the pressure on NBFCs and the liquidity squeeze in the market is a big factor, the decline in customer confidence is the other factor that is leading to a continuous slide in sales of passenger cars.

According to these sources, a third of the retail sales of Maruti Suzuki — the country’s largest carmaker — were funded by NBFCs, and a liquidity crisis for the NBFC sector has led to a drop in sales for lack of funding for customers.

Customers are also postponing their purchase decisions due to various considerations, including an expected fall in GST rates, and the hope that the transition from BS-IV to BS-VI may lead to big discounts between January and March 2020. Customers are also expecting discounts in the coming festive season. However, company officials say that they do not expect the trend to be reversed in the near future.

Why is there a decline in the sales of commercial vehicles and tractors?
The NBFC liquidity stress has been playing a part in the decline in sales of vehicles across segments, as NBFCs are significant lenders in the tier II and smaller towns.

Tractor sales have been further hurt by weak farm sentiment, the slowdown in the rural economy, and fears of a worse than average monsoon this year. This comes amid the third advance estimates of crop production indicating a slide in rabi production. Kharif sowing has remained weak so far.

Truck sales have been hurt by changes made by the government in the axle load norms. Industry officials said that a significant decline in the sales of commercial vehicles has been visible ever since the increased axle load has become effective. The industry has been calling for a scrappage policy and other policy support measures to revive demand.

What does this situation indicate?
The sharp decline in sales numbers of the leading manufacturer shows the decline in consumer sentiment and indicates an overall slowdown in the economy. The drop in sales over the last one year has led major manufacturers to cut production, and has put pressure on the overall automotive sector, including the automobile ancillaries.

And how are two-wheelers faring?
The two-wheeler segment — the more affordable form of motorised mobility and an indicator of consumption demand in the hinterland — has also seen a slowdown.

What happens in the auto segment from here on?
The outlook for the rest of the year will depend on multiple factors, including the progress of the monsoon and the festive season offtake, as well as improvement in the liquidity situation.

Like tractors, the drop in two-wheeler volumes is a key indicator of rural distress. In the two-wheeler segment, motorcycle sales are predominantly dependent on rural India; people in rural areas prefer motorcycles to scooters given their sturdier structure, better performance, and lower operational costs, especially in the economy segments.

The continued sluggishness in two-wheeler volumes is worrying, given that India, despite now being the world’s biggest two-wheeler market, still has a very low penetration level of two wheelers. Only about 102 out of every 1,000 people have two-wheelers in India — less than half the penetration levels in Indonesia (281) and Thailand (291).

(Source:https://indianexpress.com/article/explained/explained-why-july-sales-of-maruti-suzuki-cars-are-dropping-5869282/)



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