Effect of Demonetisation on used car sales and the road ahead

The demonetisation of Rs 500 and Rs 1,000 currency notes in November 2016 affected used car sales as they plummetted by 15 percent in December 2016

By: | Updated: January 10, 2017 2:48 PM


On 8th November, 2016, the Prime Minister of India, Narendra Modi announced that Rs 500 and Rs 1,000 currency notes would not be legal starting midnight of the same evening. Although, select channels such as petrol pumps would accept old notes, various industries that are heavily dependent on cash are still recovering from this move. In a recent research done by IndianBlueBook.com, a vehicle pricing research firm, used car sales slipped by 15 percent in December 2016, majority decline in numbers being from the semi-organised/unorganised pre-owned car market compared to the organised sector for example outlets like Mahindra FirstChoice.

The Northern and Eastern regions are affected more with the demonetisation, compared to the Southern and Western regions of the country. According to the research, 85 percent of vehicles purchased are through cash transactions or informal borrowings. A number of customers also postponed their purchase decision which fell in the cycle of buying a used car within 30 days (13 percent decline compared from April to October 2016) and extended their purchase cycle. However, the research firm also emphasises the fact that October being a festive month saw better sales figures and the data 'can be flawed'. The used commercial vehicle, wholesale vehicle and two-wheeler segment also witnessed a gradual dip of six percent during the November – December 2016 period. In fact, due to the sluggish demand, prices of pre-owned vehicles also dipped by five percent for two-wheelers in particular and eight percent for cars in December 2016.

Also Read: How digitisation in wake of demonetisation is gaining ground for the automotive sector

Customers who had opted of buying a used car later on postponing their decision have not cancelled purchasing a vehicle. The demonetisation of the aforementioned notes will work in favour of the organised sector over the next one year, as per IndianBlueBook.com's research. From the current 12 percent market share, the organised used car sector should witness 8 percent growth wherein the gain would be from reduction in the unorganised sector. The latter currently being the major share holder at 54 percent would witness a drop to 48 percent. This could also mean that a number of unorganised players may resort to the organised market which also includes online e-commerce portals. In addition, used car finance is also expected to go up from 15 percent to 25 percent by December 2017.

According to the research, other major reasons are the economic uncertainty and a weaker new car market. First time used car buyers are mainly susceptible to such uncertainties in the market as well as economy and are the first ones to postpone the deal till the economy settles. This contributes 60 percent of the total used vehicle market share. In addition, customers planning to replace their current vehicle with a used car have also deferred their decision. New car showrooms who deal with the exchange of old cars are also facing the brunt as any customers' pre-owned car goes to the semi-organised/unorganised sector wherein cash is the major transaction mode.

The prediction of the recovery of the used car market is basis the recovery of the United States of America's pre-owned car segment after the recession in January 2009 compared to the 2007-08 period. The index initially dropped, later on recovering sharply in subsequent time. This research is based on the aforementioned statistics that affected the used car market in the United States of America after the recession of 2009.

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