Auto slump to hit investors, Indian economy; Here’s what government needs to do

Updated: August 16, 2019 1:11:17 PM

A vibrant auto sector is key to India's economic growth. The current prolonged slump amidst the weakening demand has brought the industry to its knees, which is not good for the economy.

auto sector, auto industry, Indian economy, Budget 2019, auto slump, Maruti, M&M, bajaj auto Investors in the auto sector have seen a significant meltdown in their investments.

The auto sector is the lifeline of the Indian manufacturing enterprise. The space is directly and indirectly responsible for millions of jobs, and also serves as the barometer for the overall economic growth. Troubles in the auto space lead to serious repercussions, the impact of which is pervasive and can be felt in almost all areas of economy. The current slump in the sector is a prolonged one. This is the tenth month of continuous decline with no signs of immediate relief. The industry is in the middle of one of its worst crisis, which is manifested in slowing sales, inventory buildup and forced production cuts.

In Q1 FY20, automobile sales witnessed the sharpest decline of 10.5% y-o-y in the last 5 years. There are several reasons that can be attributed to the this prolonged decline, but the biggest one is the overall week consumer sentiment that is pervasive in the economy. In addition, the crisis in the NBFC space has led to a liquidity squeeze, resulting in a drastic decline in the number of fresh loans to the auto sector. Other important reasons that have contributed to the weakness include new safety norms starting April 1, 2019, higher insurance costs, higher ownership costs, increased load carrying capacity for M&HCVs leading to high inventories at retail (dealers) level causing slow movement in the wholesale movement of vehicles.

Overall auto production witnessed a decline of about 10.5% y-o-y in Q1 FY20 vis-à-vis a growth of about 16.6% during Q1 FY19. There are large inventories of roughly about 30-45 days along with dealers and wholesalers forcing many major manufacturers (OEMs) to cut production during the months. Also, with the government’s deadline for all the existing PVs and two wheeler models to comply with new safety norms starting April 1, 2019, the overall industry production has slowed down.

The following table summarizes the Q1 FY 20 sales performance for the major players in the auto sector in India. It is very clear from the sales number that all big players have been affected in varying proportions with the industry leader in the passenger vehicle segment Maruti Suzuki being the hardest hit.

Investors in the auto sector have seen a significant meltdown in their investments. On an average their investments in the auto sector have come downy by approximately 25%, which is reflected in the performance of the BSE auto index which has shaved off approximately 27% on a YTD basis. Here again the market leaders viz. Maruti, Mahindra & Mahindra, TVS Motors have been the worst wealth destroyers.

In addition to hard hitting the equity investors, the overall auto industry has also impacted the Indian economy as a whole. The growth in auto sales is often considered as a benchmark to judge the prevailing economic conditions of a nation as it is closely forward and backward integrated with large sections of the economy. In the Indian context, the auto industry contributes 7.5% of India’s GDP and a whopping 49% of manufacturing GDP with a large economic multiplier impact. According to industry body SIAM, the industry directly employs eight million people in the manufacturing and services sector, including dealerships. When one considers the extensive backward and forward linkages that include, among others, small financiers, drivers and fuel pump attendants, the number swells to around 40 million people.

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It is estimated that in the last one year, the auto industry has already suffered job losses between 8 lakh and 10 lakh across key automobile manufacturing locations. Whenever there is production cut of 20% by OEMs, there is a cascading effect that leads to job losses across the value chain of the auto component manufacturers. Due to the prolonged slowdown in auto sales since September 2018, the automobile component manufacturing sector has already witnessed 10-15% loss in employment. If the current situation persists, it is expected that the auto manufactures would be forced to cut production at an accelerated rate that could mean significant job losses across the value chain. The auto component industry body ACMA fears that massive job losses to the tune of one million are inevitable if the situation is not addressed immediately.

The slump in the auto sector, which accounts for nearly half of India’s manufacturing output, has been a major factor behind the slide in economic growth to a five-year low as per the last quarter GDP numbers. Lack of clarity on the policy framework and a paradigm shift to Electric Vehicles as indicated in the Union Budget has caught the big auto players unaware. The push to electric vehicles, although a welcome step in the long term, is also expected to contribute to compounding of problems for the auto parts manufacturers, as the focus will now shift to imported parts.

Going forward, it is expected that the demand may continue to remain muted during Q2 FY20 and pick up only by Q3 FY20 and continue in Q4 FY20 with various planned product launches, festival demand and pre-buying of automobiles before the implementation of BS-VI norms on April 1, 2020. Also, with higher MSPs announced for FY20, farm income is expected to be marginally higher and that could encourage rural spending and thus boost demand for two wheelers and passenger vehicles.

To sum up, a vibrant auto sector is key to India’s economic growth; the current prolonged slump amidst weakening demand has brought the industry to its knees, which is not good for the economy. Time has come for the government to take a lead and help this industry, which directly or indirectly is responsible for millions of jobs. The current push towards electric vehicles and a favorable policy environment is a welcome step, but at this point this should not happen at the cost of the petrol or diesel vehicles. India is still lagging by at least by five years in terms of technology, affordability and consumer acceptance. The government at this point has to do whatever it takes to revive the sector. The government help can come in the form of a special package, tax incentive or through providing the much-needed liquidity boost that the sector immediately requires.

(By Rahul Agarwal, Director, Wealth Discovery and EZ Wealth)

(Disclaimer: These are the views of the author)

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