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India is shifting towards the world’s third-largest passenger-vehicle market by 2021, as the auto industry continues growing and the demand for vehicles are on the rise. But amid this growing trend, vehicle sales in India, a key indicator of the economy, posted the steepest decline in nearly 18 years in May with a skid of 8.62%.

Since last July sales have been stepping down and in May this year, it fell to 239,347 vehicles, by 20.6%, from a year earlier. It’s a historic drop since a 22% decline in September 2001 and 7th consecutive drop in monthly domestic passenger vehicle sales. This slowdown sales indicate Indian consumers are holding back purchases while the passenger segment is the most valuable segment for the auto industry.

Sitting Back

As retail demand staying weak for several months, major car manufacturers, including Maruti Suzuki India Ltd and Mahindra and Mahindra Ltd have announced to temporary shutdown their plant between May and June.

India’s largest carmaker Maruti Suzuki’s sales in May this year declined with 22%, which is the highest fall since August 2012. “For some unknown reasons, customers put off purchases during the election, which has hit retail demand. I do not expect the demand to pick up in the first quarter,” Maruti Suzuki Chairman R C Bhargava said.

In the passenger vehicle segment, car sales declined by 26% in May from the year earlier to 147,546 units. Also, sales of utility vehicles (UVs) and vans witnessed a fall of 5.6% and 27%, respectively.

With these declines, industry executives are calling the decline unprecedented and have asked for government intervention in the matter. “The industry has asked for incentives from the government. Among the primary demands are reduction in the goods and services tax (GST) rate on vehicles to 18 per cent from the current 28 per cent, reduction in the corporate tax rate to 25 per cent, and weighted deduction for research and development to be reinstated at 200 per cent till the corporate tax rate is reduced, said Vishnu Mathur, director general, Society of Indian Automobile Manufacturers (SIAM).

Mathur further says, “We were expecting that there would be a recovery in sales after the election but this kind of decline is unprecedented, indicating a cyclical slowdown.”

Ahead of this fall, the SIAM data shows that this is the 11th consecutive month since July 2018 when car sales have shown a decline. In total, the auto industry sold 2,086,358 units in May, while the same month last year, it sold 2,283,262 units.

Perceive the Trend with Industry Experts

According to Mathur, the industry is investing huge amounts of money in R&D (research and development) for upcoming safety and emission norms, pointing to new regulations that will come into force from early next year. These rules are leading companies to alter their business models. On the other hand, Maruti Suzuki announced earlier that it will stop manufacturing diesel cars from 1 April 2020.

Other manufacturers like Tata Motors and Mahindra also have said that they would upgrade most of their diesel engines to the new Bharat Stage VI emission norms from next April while discontinuing a few diesel vehicles.

According to the FADA (Federation of Automobile Dealers Association), passenger vehicle inventories now stand at 50-60 days, while those of two-wheelers are even higher at 80-90 days. For commercial vehicles, inventory levels range between 45 and 50 days. President of FADA, Ashish Kale says, “We will be advocating an inventory of 21 days, almost half of the current level of 40-45 days. This is due to the overall decline in volumes, weak consumer sentiment, paucity of working capital, and an uncertain environment.”

Though the shutdown would not immediately result in job losses, industry executives say it was having an impact on suppliers. SIAM Deputy Director General Sugato Sen pointed out that “Original equipment manufacturers (OEMs) will not immediately feel the pinch but it severely impacts other suppliers in the value chain, many of whom would be unable to bear this shock. In the last 10 years, we have not seen anything like this, when all the segments are down.”

Two-wheelers Segment Also Posted a Decline  

Two-wheelers also continued to decline, as demand staying weak in both rural and urban areas. In urban areas, the sales of two-wheelers are low-spirited by 17.67 percent, while in rural areas where motorcycles are popular, 8.36% decline. On the other end, the three-wheeler segment, too, fell down with a decline rate of 5.8% last month to 51,650 units.

According to Mathur, the demand in the rural economy is not looking great and it has reflected in the sales of motorcycles, which were down by 8.36%. We cannot expect a sudden recovery in sales any time soon.

Overall Decline

With lower sales across segments, overall auto industry sales in India fell down to 8.6% in May from the last year to nearly 2.09 million vehicles.

Thus, total automobile production in India declined by 8 percent last month from the year earlier to over 2.51 million units, following 12% cut in passenger vehicle production and a 10.5% cut in commercial vehicles production.