Impact of Demonetisation of Rs 500 and Rs 1,000 notes on the Automotive Industry

The recent move by the Government of India to demonetise Rs 500 and Rs 1,000 currency notes has had a short-term and negative impact on the Indian automotive industry

By: | Published: November 25, 2016 2:45 PM

The demonetisation of Rs 500 and Rs 1,000 notes was quite a surprise for the entire nation and the immediate ripple effect of this on the automotive industry was a dip in the BSE Auto Index of 2.5 percent on December 10, 2016. This is due to the fact that a number of potential buyers offer down payments in cash or sometimes, purchase a two-wheeler with a complete cash payment.

Although Tier-I cities still have comparably better sales due to a number of prospects purchasing cars through cheques or demand drafts, the rural areas and Tier II cities are worst hit where most transactions take place through cash as availability and usage of plastic money is limited in these areas. Another aspect to have taken a hit is the service and maintenance, which in many cases is carried out through cash transactions.

For purchase of two-wheelers many customers in rural areas prefer cash payment in full. Due to demonetization, circulation of cash has dried out, which has also led to decline in two-wheeler sales. Luxury cars also face the same problem as some of them are not financed or leased, but bought on cash down payment.

There's a larger impact on the unorganised used car market, which carries out most of its transactions in cash. Authorised pre-owned dealers like Maruti Suzuki True Value and Mahindra First Choice will not face such as problem as their dealings are through cashless methods. Independent dealers though are facing the brunt of cash crunch in the market as cars selling for smaller amounts are usually transacted in cash. The unorganised spare parts market is also facing issues as most components in such locations are purchased in cash. So, local mechanics and spare part dealers have to deal with the brunt of the demonetisation.

In order to counter the after effects, a number of automobile manufacturers have introduced cashless modes of payment. Recently, Nissan and Datsun introduced cashless transactions for their after sales needs including free pick-up and drop-off of the vehicle, roadside assistance and servicing (Click Here). Suzuki two-wheelers also has tied up with Paytm and HDFC for all vehicle purchases (Click here). As the demonetisation phase will take time to settle, the automotive industry will revive and sales would increase in the near future but the next few weeks could be tough and these new initiatives by industry players to overcome this problem will prove 'when the going gets tough, the tough get going'.