Car sales grew at just 1.6% in June ? the slowest since the slowdown of 2008 ? compared with nearly 31% in the corresponding month a year back.

This has prompted the apex auto body, the Society of Indian Automobile Manufacturers (Siam), to lower its growth forecast for passenger cars to 10-12% in 2011-12 against 16-18% projected earlier. According to president of Siam Pawan Goenka, factors such as lower gross domestic product (GDP) and higher interest rates had surpassed expectations. ?In the last 15 months interest rates have increased three percentage points. If they keep increasing, then it would have a devastating impact on the sector,? Goenka said. He said the escalation in fuel prices continued to hurt sales apart from uncertainties in the European markets.

As per Siam?s revised forecasts, commercial vehicle sales would hover at 12-14% while two-wheelers would maintain its earlier projected growth of 12-14%. As a result of the sharp revision in car sales, total automobile growth would be around 11-13% compared to 12-15% projected earlier.

Goenka said despite ?clear signs of moderation in sales,? the auto sector grew the fastest in the world at over 18% in January-May period followed by the US at 14.4%, Germany at 14.3% and China at 11%. ?An early double digit growth is lower than what we achieved last year but it is still a very healthy rate to grow at,? Goenka said. He said that positive factors such as better-than-expected rainfall and a softening in commodity prices would push car sales in Q2 and Q3 of the fiscal.

Interestingly, in the last three months of the fiscal, prices of key raw materials such as steel, copper and lead reduced by 3-4% thereby reducing margin pressures on original equipment manufacturers. In the April-June period, Maruti Suzuki grew just 3.2% at 2.5 lakh units while Tata Motors? sales declined 8.5% to 76,167 units. Hyundai became the only major OEM to witness double-digit growth of 12.2% at 93,161 units.

Interestingly, while the three major players that constitute over 60% of the car sales, reported flat growth in Q1 2011-12, Volkswagen, Toyota, Nissan and Mahindra reported higher growth. According to auto analyst with Mumbai-based brokerage Prabhudas Lilladher Surjit Arora, market share of companies such as Maruti would be under stress owing to new market dynamics. Two-wheeler sales continued its upward march in June growing at 14.5% ?10.7 lakh units against 9.3 lakh units in the corresponding month last year. According to vice-president of Siam S Sandilya rural sales were pushing two-wheeler numbers.

Meanwhile, Goenka said that negative sentiments in the country on account of the scams hitting the country and lower GDP forecast was still a major concern for auto companies.

In fact, earlier this month global rating agency Fitch lowered its growth forecast for the economy to 7.7% in 2011 against 8.3% projected earlier.

Factors such as Reserve Bank of India?s tight monetary policy and rising fuel prices have contributed to the lower forecast. Earlier, International Monetary Fund and World Bank had also reduced India’s growth forecast for the year to below 8%.

Meanwhile, the labour strike at Maruti Suzuki?s Manesar facility is expected to increase the demand pitch for labour reforms by the auto industry. Goenka said though matters concerning labour policy is a company specific subject, he, however, called for a framework in place to address critical issues in the future.

He said that India could study the model developed in the US under which a special fund is created with contribution from government and the company that pay a certain percentage of the workers wages every month for a considerable period if they are laid off. According to him archaic labour laws in India were preventing companies from making contractual workers permanent since the latter cannot be laid off even if the company and sector is going through a rough patch.