Vehicle sales during the 2018 festive season were noticeably lesser than industry

expectations and with the General Elections round the corner, it looks like the volumes are
going on a downward spiral. The slowdown in the auto industry in FY19 reflects the current
cyclical downtrend in growth led by tighter financing conditions and weaker agriculture
realisations. To top it all, buyers are delaying purchases on account of the upcoming
elections. “The election period shifts the country’s focus to the ‘Dance of Democracy’ and the
average customer is typically wary of making big ticket purchases until the results are
announced,” says Avik Chattopadhyay, founder of brand consultancy firm Expereal. “It is
widely believed that the lull should persist till May 2019, waiting for clarity post the election
results,” he adds.

Consumer sentiments are subdued due to increasing cost of ownership of passenger

vehicles (PV), those tracking the auto industry point out. “High interest rates on car loans,
increase in insurance costs, fluctuating fuel prices, etc., are a few of the reasons for the slow
growth in demand. Implementation of GST has also increased the working capital
requirement for the dealerships,” says SIAM’s Director General Vishnu Mathur. According to
Mathur, the downward trend in sales began with the Kerala floods in August 2018 and has
continued since then with no change expected in the short run. “The upcoming election has
also led to the level of uncertainty in the market, prompting consumers to delay their
discretionary purchases, including cars,” says Mathur.

Auto industry body SIAM reports that domestic PV sales comprising cars, utility vehicles and
vans grew by 3.3 per cent y-o-y for the period April 2018 to February 2019 versus 8 per cent
y-o-y growth recorded in the financial year 2018-19. In the first quarter of the current fiscal,
the PV industry overall recorded a notable growth of 20 per cent. However, since then, the
growth in sales have been muted or even negative and thus has led to overall dip in the PV
sales growth.

In fact, passenger vehicles segment witnessed fourth consecutive month of decline in sales
in February, when the sales were down by 1.11 per cent at 272,284 units compared to
275,346 units in February 2018.

Issues plaguing the sales figures of PV doesn’t stop there. The auto industry has to soon
comply with emission norms to implement BS VI standards. “The next one year will be a
testing time for the industry as it leapfrogs from BS IV emission norms to implement BS VI
emission norms across the country in a span of three years for which the developed
countries had taken 7-8 years,” points out Mathur.

Complying with the new emission norms could also mean that some vehicle models may
have to be discontinued by the companies or new variants complying the emission norms
need to be launched in the market for the newer models.

Several auto manufacturing companies are now looking to find ways to stay ahead. “As far
as the passenger vehicle industry is concerned, Maruti Suzuki will grow by 6 per cent
whereas the rest of the industry excluding Maruti may have no growth at all,” says R.C.
Bhargava, Chairman, Maruti Suzuki. It is interesting to note here that although Maruti had
targeted a double digit growth, the company later revised it downwards, according to
Bhargava.The reason behind revising the target is a reflection of the industry
performance, he adds.

“Both in 2008-2009 and 2013-14 (election years), the PV industry also had very little
growth.Substantial slowing down in those two years. After the elections in 2009-10 and
2014-15, there was a sharp increase in the growth of the industry. Whether that will happen
this year or not, nothing can be said. I don’t know why it happens but that has been the
pattern. There is a lull that happens every time the government tenure ends,” says
Bhargava.

Ravi Bhatia, President and Director, JATO Dynamics India, is of the view that the market will
remain flat for the fiscal 2019-20 or may post plus-or-minus 2.5 per cent growth. “A lot
depends on how the election results impact the segment and economic growth. The strength
of government mandate would be key. This year is even more challenging from regulatory
perspective as BS VI norms kick in on 1 April 2020,” says Bhatia. “Further the industry is
starting to feel the disruptive impact on new mobility paradigm where new millennials are
rethinking their approach. The share of trips in rented cars is going up,” adds Bhatia.

Ashish Modani, VP and co-Head, Corporate Ratings, ICRA, explains that customer
sentiments plays a crucial role in purchase of discretionary items cars, resulting in deferral of
purchase unless sentiments improve. “Increase in fuel prices and hike in interest rates in
current fiscal increased cost of car ownership, which impacted sentiments of price sensitive
first-time buyers (FTBs),” says Modani. Consumer sentiments remain cautious ahead of
upcoming general election, which will continue to weigh on discretionary purchases like cars,
he adds.

“Given election related uncertainty as well as high base of Q1 FY2019, the volume growth is
likely to remain muted in Q1 FY2020. However, in case of stable government formation at
the Centre, there could be possible recovery from Q2 FY2020 onwards. Moreover, there
could be some pre-buying witnessed in Q3 and Q4 of FY2020 ahead of BS VI rollout, which
will support volume growth,” says Prithviraj Srinivas, Chief Economist, Axis Capital.

ICRA notes that over the next two years, the PV OEMs are estimated to incur a combined
capex of ~Rs 350-400 billion on capacity addition, product development and localisation
initiatives to comply with the BS VI and safety related norms.

Modinomics: Boon Or A Bane?

The automobile sector under the Modi government has grown moderately, especially the
domestic sales due to growth in economy. The rising disposable income due to the cut down
in the prices of basic goods and services has helped people make the decision to buy the
four-wheeler of their choice. Numbers tell the story -- the overall domestic automobiles sales
increased by 7.01 per cent CAGR between FY13-18 with 24.97 million vehicles being sold in
FY18. Financial inclusion, which has helped deepen credit penetration, has been a boon to
auto sales. Apart from this0

Many industry observers are of the opinion that too many policy changes in a short span of
time is taking the toll on auto industry. “We have been seeing that global OEMs typically look
out for stable policy environment so that they can do localisation at a bigger scale and
extract advantage of their Indian operations globally. However, on certain aspects like
emission norms it is great for the public as we will have access to better quality air to breathe
if vehicles are modern and vehicles comes with stricter emission rules on road,” says Puneet
Gupta, Associate Director (vehicle sales projection) at IHS Markit.

“The basic principles have been progressive when it comes to focusing on manufacturing,
skilling and green echnology but the policies have been half-baked, inconsistent and
disconnected. Basically put together by people operating by remote control with little
understanding of the complexities and exigencies of the industry,” says Chattopadhyay. He
further points out that the auto industry looks up to whichever government is in power to be
supportive, encouraging and facilitating growth and progress.

“The Modi government is no exception. Just that some huge statements were made, which
have either been retraced from or not implemented in letter and spirit,” says Chattopadhyay.

“Modi government has been proactive in terms of bringing Indian global industry at par with
the global standards and they stand committed. In Modi government, prices of cars have
been going up pre dominantly because they are equipped with better emission and safety
standards.,” explains Gupta.

“UPA2’s policies clearly led to greater auto sales, but that was post-global financial crisis
stimulus and hence not comparable (with the current government). The fallout of inadequate
pullout of stimulus was clearly seen through higher inflation and eventual slowdown in
structural growth in the latter half of UPA2. The Modi govt’s policies haven’t targeted the
auto sector directly per se, but the auto industry has indirectly benefited from it and would
continue to benefit from them in the coming years. Think rural credit penetration, mobile
penetration (aspiration) and direct benefit transfer,” Srinivas added.

What Lies Ahead

Kanika Goyal, Analyst, India Ratings and Research ( Fitch Group) says, “We expect PV
demand to remain subdued in FY19 amid weak consumer sentiments, lack of financing
availability and no new model launches. However, PV sales volume is likely to increase on a
y-o-y basis in FY20, on account of improved consumer sentiments, and BS VI
implementation, which will increase the cost of vehicles from 1 April 2020, thus preponing
the purchases.”
The company expects PV to record a mid-single digit growth in FY20. The sector is
witnessing several regulatory changes including BS VI, CAFE norms, higher axle load
norms, vehicle scrappage policy as well as alternate mobility. “The ongoing regulatory
changes in the industry and lack of clarity on the policy front, brings uncertainty in the
demand pattern in FY20,” adds Goyal.

It is true that the current scenario in the automobile market needs to get better. However,
many believe that the current mood may not change till end of May. “The average customer
wants stability of purpose, clarity in policy and strength in decision making. The earlier we
experience the same, the better for all the stakeholders in the automobile market,” says
Chattopadhyay.