INDIA’S automobile industry has been finding the going tough for a while — a fact reinforced by the latest data on auto sales released by the Society of Indian Automobile Manufacturers (SIAM). Worryingly for the industry and the broader economy, vehicle sales across all categories slumped in April, with passenger vehicle sales down 17 per cent at 2.47 lakh, an eight-year low, compared to 2,98,504 a year earlier with car sales declining almost 20 per cent while two-wheeler sales dropped over 16 per cent to 1.6 million vehicles.
India’s top manufacturers have all reported a sharp slide in sales having been forced earlier to cut back on production and to clear inventories. Clearly, the economic slowdown is hurting, reflected in weak demand, both in rural and urban areas. So is the liquidity squeeze in the Non Banking Finance Companies (NBFC) segment, a major source of financing for buying automobiles in India after banks and mutual funds shut the tap following defaults in the sector led by IL&FS and rating downgrades besides higher insurance costs for two wheelers in the wake of a ruling by the Supreme Court. Coupled with that is the rising popularity of ride-sharing firms such as Uber and Ola in some of the bigger cities in the country. It is a telling sign also of the state of the industry that sales of second-hand cars now aggregate two million.
Not that the global auto industry is on a different track. Several car makers have, over the last few days, reported a drop in sales and a squeeze in margins.
For sure, there is a threat to the consumer story going by the latest numbers from FMCG companies. But what could pose a greater threat is the so called fragility of shadow banks or NBFCs, a decade or so after a clean up in the sector, brought about also by these companies occupying the financing space vacated by banks after the ballooning of bad loans.
The RBI does not appear to share the assessment of many of these firms or the government that this sector needs direct intervention and support, an approach which led to a conflict leading finally to the exit of governor Urjit Patel. It reckons that there is no strong case to step in as lender of last resort even if NBFCs have linkage to infrastructure developers, SMEs and other industry segments. The central bank would rather prefer that NBFCs make balance sheet adjustments. Growth, of course, is an antidote to all these. But the current crisis presents an opportunity now to look at cycle-proof regulation.