Explained: Old reasons and new red flags in continuing auto slowdownhttps://indianexpress.com/article/explained/explained-old-reasons-and-new-red-flags-in-continuing-auto-slowdown-5962908/

Explained: Old reasons and new red flags in continuing auto slowdown

In the commercial vehicles section, sales of Tata Motors, the largest commercial vehicle maker, fell by almost half as against August 2018. Mahindra & Mahindra (M&M), the second-largest manufacturer, posted a 28 per cent decline.

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The slowdown in the auto industry is due to a number of factors, such as the liquidity crunch due to continued stress on NBFCs. (Express Photo by Kamleshwar Singh)

The slowdown in the auto sector has worsened, with leading car manufacturers posting up to a 50 per cent drop in sales for August 2019 as against the corresponding month last year. Sales are down across segments — passenger vehicles, commercial vehicles, and two-wheelers.

Maruti Suzuki (MSIL) — the market leader with around 50 per cent market share — announced a 36 per cent drop in domestic passenger vehicle sales for August, the lowest monthly sales in almost five years. Honda Cars posted a massive 51 per cent fall, while Tata Motors passenger vehicle division fared worse with a 58 per cent decline in sales.

In the commercial vehicles section, sales of Tata Motors, the largest commercial vehicle maker, fell by almost half as against August 2018. Mahindra & Mahindra (M&M), the second-largest manufacturer, posted a 28 per cent decline. In the two-wheelers category, Hero MotoCop, the world’s largest two-wheeler manufacturer, registered a 20 per cent decline, while Bajaj Auto saw a decline of 13 per cent.

Why the reverse gear

The slowdown in the auto industry is due to a number of factors, such as the liquidity crunch due to continued stress on NBFCs (Non-Banking Financial Companies), the wait for the festive season, the change in axle load norms for trucks, and hopes of a GST cut.

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Another reason could be customers waiting for heavy discounts in the first few months of 2020, as manufacturers will have to unload their entire inventory of BS-IV compliant vehicles by March 31, 2020. From April 1, 2020, only BS-VI compliant vehicles can be sold and registered in the country.

However, BS-IV vehicles registered prior to that date can be used for their entire period of registration.

The effect of the liquidity crunch is writ large on automobile sales, especially of tractors and two-wheelers, which indicate slowing demand in rural areas and the hinterland. NBFCs are the major lenders in tier II and smaller towns.

Truck sales have been down ever since the government changed axle load norms last year, allowing existing trucks to carry more load, and thus pushing down the demand for new trucks.

Potential red flags

As part of its measures to boost economic growth, the government has lifted the ban on its departments buying new vehicles, announced a tax benefit for automakers, deferred the application of the one-time registration fee till June 2020, and assured that the government would consider a scrappage policy for old vehicles.

Finance Minister Nirmala Sitharaman has also announced measures to improve the liquidity scenario, which the government expects will help the auto industry.

Another concern is that while a reason being given for the slowdown is that consumers are waiting for lower prices ahead of the BS-IV deadline, auto manufacturers are already offering substantial discounts — but that has failed to improve sales.