FM Sitharaman right in saying Ola – Uber impacting auto sales? Here’s a revealing cost of ownership vs rental test

The minister's comments may have been subject to many a memes however, here is an analysis on what factors could be affecting the auto sector slowdown.

By: | Updated: September 13, 2019 3:15 PM

Nirmala Sitharaman, global investment destination, indian economy, US industry, public sector banks, angle tax, economic expansion, foreign portfolio investors

The finance minister, a couple of days ago said that the "Automobile industry is now affected by BS-VI and the mindsets of millennials, who now prefer to have Ola or Uber rather than committing to buying an automobile." This statement became the centre of controversy wherein the FM was trolled on Twitter and other social media. This was not all. The keyboard warriors also had a gala time when another minister was in the eye of the storm last night. This story though isn't about the trolls or how foot-in-mouth situations can be avoided? Here is what may have prompted Nirmala Sitharaman to come up with the response on auto sector slowdown.

Here is a quick analysis of buying a car vs using a cab. Let's take a car that costs Rs 6 lakh. This car will have a scrap value of Rs 1 lakh after six years (this is usually the time period we keep vehicles for. Many though prefer to retain their cars for a longer duration as well). Effectively, the net amount that goes in to the car is Rs 5 lakh over a six year time. If you divide Rs 5 lakh with the number of days in six years, it comes to Rs 230/day. If you have purchased the car on loan, the minimum interest will be 8 per cent and calculations show that the amount will be Rs 131/day.

Suppose, the yearly insurance amount is Rs 15,000 - translates to Rs 41/day. If on a daily basis, you end up driving the car for a distance of 20km, the petrol cost will be Rs 100. Adding up consumables, the amount comes to Rs 23/day. The yearly maintenance comes to Rs 9,000 at the least, i.e. Rs 25/day. The daily expense in procuring a new car comes to overall Rs 850/day. I am pretty sure we never thought of this before, have we?

At the same time, if you were to use a cab daily and the amount doesn't cross Rs 850/day, it is not justified in buying a new vehicle, right? The risk factors involved haven't been included here and this means parking charge, parking space, daily washing, puncture repair as well as damage due to external reasons.

Now, let's consider hailing a cab. You're saved from the mental stress of driving around in traffic. Moreover, the new driving penalties are supposedly busting many a wallet. You will be literally safe from this. A research done by a popular salt brand in India says that more than 56 per cent of Indians over-react when they speak with a traffic cop or with other drivers. 20 per cent also admitted that traffic is the main reason for them getting short-tempered and angry. 16 per cent said that they get hyper if there is a delay due to avoidable traffic jams and this leads to road rage.

It is quite possible that the FM may have thought on the above lines. However, come to think of it. The cab aggregates barely buy 200-300 cars in a month. That's a minuscule amount. Moreover, it still contributes to the GDP. If someone buys a car, it is at their beck and call all the time, provided it doesn't have a downtime. Ola/Uber or other cab aggregates aren't active in the villages or tier-III cities. The slowdown though can also be witnessed in these places too. So, technically cabs don't play a deciding factor in buying a vehicle or not. It is more on the lines of a personal aspect or wish. There are many people who love driving. These folks mostly don't trust the driving capabilities (or the lack of it from cab operators). The recent spurt of news coming in about passengers being molested in cabs is another reason why taxis aren't feasible for many.

What I believe that the FM may have said, is that this is one of the reasons for the auto industry slowdown. This isn't the first time someone has said this openly. Anand Mahindra, the chairman of Mahindra and Mahindra had said four years ago that cab aggregates on the rise means a youngster will not want to buy new cars. Instead he just looks at transportation which is fulfilled by cabs.

There are also other factors involved in the fall of vehicle sales for example, the lack of knowledge of new regulations pertaining to both traffic as well as engine norms, the general slowdown of the economy as well as high insurance rates. It is likely that people are also waiting for a deluge of discounts similar to those witnessed during the BS-III to BS-IV conversion.

We're sure that this issue will be raised at the GST council meeting that is supposedly happening on September 20. What do you think is the real reason? Was the finance minister right in saying that cab aggregates are causing the slowdown? Let us know.

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