FILE - A new Ford Aspire car is on display for sale inside a showroom in New Delhi, India, Nov. 1, 2018.
India's auto industry is now grappling with its worst slump in over a decade as Asia’s third largest economy slows down.

NEW DELHI - At a Hyundai showroom in Gurgaon, college student Hitesh Kaushik, is helping his elder brother decide what car to buy in exchange for their old vehicle.  “The old car is around 10 to11 years old.  And since you are not allowed to drive a car older than 15 years in Delhi, we decided to change it now.”

The family is taking advantage of the deals and attractive prices being offered by auto dealers trying to lure customers as they grapple with plunging sales of passenger cars.
 
“There is a drop of around 25 to 30 per cent at least,” says Gagan Arora, Business Head at Safdarjang Motors, a Hyundai auto dealership. “Like a dealer who used to sell around 150 cars every month he has come to 110-115. It is the same with us also.”  
 
It’s a huge reversal in fortunes for automakers that were eying the growing market in a country that just a year ago was forecast to overtake Japan to become the world’s third largest automobile market. Booming sales between 2015 and the first half of last year made the industry the most conspicuous sign of the country’s economic potential and prompted global automakers to expand operations. The sector became a bright spot in a country that largely missed the manufacturing revolution that has catapulted several Asian countries to prosperity since the nineteen nineties.

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The worst slump of the industry
 
But the industry is now grappling with its worst slump in over a decade as Asia’s third largest economy slows down. “It’s a very difficult situation for the industry,” according to Sugato Sen, Assistant Director General at the Society for Automobile Manufacturers. “We have not seen this kind of continuous month on month downturn for many, many years in fact, early 2000 we saw something like this.”

Economic growth slackened to 5.8 per cent in the first quarter of the year – the slowest in nearly five years. Jobs have become scarcer, wages in many sectors are flat and credit is tighter.
 
The slowdown has prompted an aspirational middle class with disposable urban incomes to cut back on purchases of everything from cars to other high value goods.
 
Faced with a stalling market, several automakers including India’s biggest – Maruti Suzuki, have cut production in recent months. “All the companies are doing unscheduled production cuts,” says Sen pointing out that sales of passenger cars have been the worst hit, falling by nearly 20 per cent in the last three months.  It is not good news for global automakers hoping that a country with only 30 cars for 1000 people would drive their growth.
 
And it’s crunch time for car dealers. While the four showrooms of Safdarjang Motors in Delhi and its vicinity are up and running, many others have not been so lucky. “The salaries are going up, the infrastructure costs are the same and with low sales, makes it difficult, not viable to even run the showrooms.  That is why you see all around many showrooms being shutdown,” said Arora.

Economic slowdown
 
Economists say the auto industry’s woes reflect a broader slowdown that has hit several sectors. Himanshu at Jawaharlal Nehru University’s Center for Economic Studies and Planning points out that signs of a slowing economy had been building up in recent years particularly after 2016 when Indians faced a massive cash crunch when the government abruptly scrapped 90 per cent of its currency.
 
“We did not do enough to increase the demand, to put the economy back on track. Remember, we are a domestic consumption driven economy, we are not dependent on exports,” said Himanshu.
 
Domestic sales account for $ 70 billion in the $ 100 billion automobile sector.
 
The slowdown is also at least partly based in India’s ailing rural sector – farm incomes have plunged in recent years resulting in widespread rural distress.  “The rural sector plays a very important role and if the sentiment and potential goes down in the rural sector, the overall industry definitely gets very, very impacted,” said Sen.
 
Rural areas had also emerged as a big market for automakers as farmers switched from motorcycles to cars -- almost 30 per cent of the cars sold in India are in villages where over 60 percent of the population lives.
 
“If two thirds of your economy is going through a slowdown, the remaining one third cannot sustain it for long,” said Himanshu. “ And finally what we are seeing is what has spilled over after two three years of neglect of the rural economy.”
 
For the time being, the auto industry is stuck in the slow lane, hoping for an early economic revival to get back on track.

 

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