The Indian automotive industry is the fourth largest in the world with a turnover of USD 100 billion and employs 32 million people. The two-wheeler industry in India is the largest in the world. India is also the largest tractor manufacturer and the 8th largest commercial vehicle manufacturer in the World. The Automobile sector in India presently contributes about 50% of the manufacturing GDP, 26% of the industry GDP and 7.1% of overall GDP up from 2.7% in 1992-93. The sector contributes approximately 13% of excise revenue to the Government. The total investment in this sector is around 40 billion USD in the last decade. The decade of 2001-2010 saw the automotive sales growth at a CAGR of 15.67%, which included 10% exports. The yearly growth of exports was 23% from 2000 to 2015 due to the regular government support.
The automobile industry includes two-wheeler, four-wheeler, passenger vehicle and commercial vehicles. In the year 2018-19 there was production of 4.06 million cars and presently around 32 million cars run on Indian streets. The two-wheeler segment dominates the industry with its share being 80%.
The year 2019-20 saw this sector facing troubles in maintaining the sales and profitability numbers in comparison to last quarterly and even yearly basis. In the last year, August 2019 had already seen a 35.9% drop in domestic sales for the market leader Maruti Suzuki at 94,728 units being sold due to subdued market confidence, slow economic growth and the crisis in the Nonbanking Financial Companies (NBFCs). The latest March 2020 numbers show the effect of lockdown due to the COVID-19 pandemic in the last month of Financial Year (FY) 2019-20, which is the peak period for inventory clearance for the industry. Maruti Suzuki India saw its total domestic passenger vehicle sales fall 47.4 per cent to 76,240 units in March 2020 as compared to 145,000 units in March’19. The Export sales were down almost 55% to 4,712 units from 10,463 in the March’19. With overall sales down by 16%, the company ended FY 2019-20 with total sales of 1.563 million units, down from 1.862 million in the previous fiscal. Similarly there was a 40% decline in domestic sales of Hyundai Motor India to 26,300 units in March 2020. Similar trend was seen in Mahindra and Mahindra's domestic passenger vehicle sales, which drastically plunged 88 per cent to 3,384 units in March 2020 from 27,637 units in March 2019.
The switch from Bharat Stage 4 (BS4) to Bharat Stage 6 (BS6) emission norms has also added to the woes of the sector as BS6 was to be implemented from 1st April 2020. This brought in long term problems to the automobile industry from both manufacturing end to sales point like Research and Development (R&D), technological up gradation and closing down of plants to stop piling up of old inventory production. As new BS6 vehicles were few in the market and the switch to BS6 saw the overall demand sales of BS4 vehicles drop, which led to increase in inventory of old (BS4) vehicles both in two wheeler and four wheeler segments. Hence many automobile plants of leading players were closed down for few days to halt the production, which led to loss of jobs of contractual work force. Macro-economic issues that added to this crisis include the decline in demand/consumption both from the rural and urban markets, and a liquidity crunch in the financial markets. NBFCs have had an enormous exposure to vehicle financing in the country, covering all segments, commercial vehicles, and passenger vehicles -two/three/four wheelers. In July’19 NBFCs financed almost 70 percent of new two-wheelers and 60 per cent of new commercial vehicles sold in the country comprising of Infrastructure Leasing & Financial Services (IL&FS) and Dewan Housing Finance Limited (DHFL) which were leading NBFCs. When IL&FS and DHFL went into financial distress, they transmitted this contagion from the financial services sector to automobile sector dragging it down. In July 2019, the Society of Indian Automobile Manufacturers (SIAM) wrote a letter to the Government of India (GOI) to take appropriate measures to promote flow of credit in the system to facilitate new vehicle purchases. This was emphasized to improve liquidity specifically in the NBFC sector lending that saw both monthly and quarterly basis downfall in sales and had even lead to closure of a few dealerships.
The reverse gear of auto-industry came immediately after GOI declared a nationwide lockdown on 24th March 2020 to contain COVID19. SIAM declared that the plant closure of Auto Original Equipment Manufacturers (OEMs) & Components manufacturers will lead to a loss of turnover of Rs 2,300 crore per day and a cumulatively three-week shut down of the automotive industry will translate into a total revenue loss of Rs 48,300 crore. Supporting the lockdown all the auto-makers immediately temporary closed down which included Maruti Suzuki, Honda, Hyundai, Tata Motors, Mahindra, Toyota Kirloskar Motors, Kia Motors and others. Even the two-wheeler segment manufacturers Hero MotoCorp, Honda Motorcycle, Scooter India, TVS Motor Company, Bajaj Auto, Suzuki Motorcycle and Yamaha have shut down manufacturing. A minor support came on March 27th, 2020, when the Federation of Automobile Dealers Associations (FADA) appealed to the Supreme Court to allow the sale of BS4 vehicle inventory which has piled up amid the COVID19 crisis. The Supreme Court gave an extension of ten days, post the ongoing 21-day lockdown to sell the old inventory of BS4 vehicles with a caveat that only 10 per cent of the unsold BS4 inventory could be sold in India excluding Delhi-NCR region where none can be sold. The stock lying includes approx. 7 lakh two-wheelers, 15,000 passenger cars and 12,000 commercial vehicles are left unsold.
Let us hope that the Indian automotive industry, which had been accelerating for the last two decades and has now gone into reverse gear has seen the worst. But the present global pandemic with the lockdown, job losses and declining demand casts a spell of gloom for the industry in the near future.
The article has been authored by Dr. Ruchi Mehrotra Joshi PGPIM (IMI, Delhi), Ph.D (Finance), School of Law, University of Petroleum & Energy Studies, Dehradun