January 11, 2021 4:05:01 am
Even as pent-up demand lifted passenger vehicle (PV) sales in the third quarter after it got derailed in the first and second quarters following the pandemic and lockdown announcement in March, the auto industry continues to languish on the growth front. Terming the recent growth in PV sales as a false euphoria, the industry has now requested the government to defer the implementation of fuel efficiency norms and second stage of emission norms to April 2024, in a bid to keep the cost of acquisition stable.
Industry data shows that while the compounded annual growth rate (CAGR) of PV sales stood at 12.9 per cent for the five-year period between March 2005 and March 2010, it fell sharply to a CAGR of 1.3 per cent for the five-year period between FY15 and FY20. Between FY10 and FY15, the sales rose by 5.9 per cent.
In fact, the CAGR for PV sales between 2000 and 2010 stood at 10.3 per cent and that between 2010 and 2020 has been 3.6 per cent. So, clearly the growth rate has slowed down over the last decade and more so over the last five years. Though car sales are closely related to GDP growth numbers, industry insiders say that PV sales have suffered despite a decent GDP growth rate.
Pandemic disruption: Seeking more time for transition
Shifting to CAFE-2 and BS-VI stage II would not only become more difficult for the auto industry amid the pandemic-led disruption but also raise cost of acquisition. In the current sales scenario, industry insiders say a further rise in acquisition costs for consumers could add to the concerns.
“The primary reason for that has been the sharp rise in cost of acquisition of cars in India. Almost 50 per cent of the car buyers in India are first-time buyers and since price elasticity for car purchase is high in India, it is a major factor for slowdown in growth,” said Shashank Srivastava, ED, sales and marketing, MSIL.
If rising cost of raw materials is a factor, insiders say that high tax rates and shift from BS-IV to BS-VI in a quick time has lifted the acquisition cost. “In European markets, the transition from Euro 4 to Euro 6 took 9 years, but in India the shift happened in just a period of three years and since all the cost is passed on to the consumer, it takes up the acquisition cost significantly. Besides, high tax rates and rising service tax and insurance cost has also taken the acquisition cost higher for customers,” said Srivastava.
As sales suffer, the industry has now made a representation to the government to defer the implementation of Corporate Average Fuel efficiency (CAFE-2) regulations and BS-VI stage II norms to April 2024. As of now, the CAFE-2 norms that aim to make cars more fuel efficient are set to come into effect in 2022 and BS-VI stage II norms are set to come into force beginning April 2023.
“Because of pandemic led disruption, we have requested the government to defer the implementation of both Cafe-2 norms and BS-VI stage II, to April 2024,” said Srivastava, pointing that adherence to new norms lifts the cost of acquisition.
While India has a huge potential for growth of PV sales, experts point to a slowdown in the pace of growth of first-time buyers. “If the pace of first-time buyers picks up, it will lead to higher replacement demand and additional purchase,” said an industry insider.
As of now, while first-time buyers account for almost 50 per cent of total sales, 24 per cent is replacement demand and the remaining 26 per cent is demand for additional car purchase.
“We are still in the initial phase of economic development and there is huge potential for growth but we need to convert potential into reality and the cost of acquisition has to be taken care of,” said Srivastava. He further said that companies are doing their bit to reduce the acquisition cost by increasing localisation and becoming more efficient and productive, however, “another factor that will lead to cost reduction is economies of scale and that will come in once we see volume growth.”
Many in the industry feel that besides lower cost of acquisition, a larger base of car buyers will depend upon sustained high growth of the economy as that will bring in more people into the job cycle who will generate demand.
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