For the month of September 2019, the sales of passenger cars fell by 23.7% on a YOY basis. This marks the eleventh month in succession when car sales have dropped precipitously. A fall of 24% is not a correction; it is a slump. What has changed for passenger car industry in the last one year?
Uncertain economic future
A car purchase has two distinct aspects; it is a medium term commitment and it is also a negative equity game. That means; by the time you drive your car home from the showroom, its market value is already below the value of your loan outstanding. Unless the market price is tweaked accordingly, car sales are unlikely to pick up. This gets more pronounced in a situation where growth is falling and the immediate outlook for incomes and jobs is very hazy.
Fuel and finance costs
In the last 15 months since the IL&FS crisis, two things changed for auto demand. Firstly, the price of fuel in India has gone up sharply. Any fall in crude price is retained as tax revenues, so people are not benefitting. Secondly, finance costs have gone up by 150 to 200 basis points and when that is added to the fuel costs, it is going out of most household budgets. Over the last five years most cars have become a lot more expensive without any additional benefit in terms of safety or performance.
Indian cities are changing
If you travel into any city today, there is one trend you cannot miss. That is the level of investments going into visible infrastructure. Intercity metros, better roads, link roads and improved public transport are changing Indian cities for good. Even five years back, it was hard to imagine smaller towns like Lucknow and Kochi having an organized internal transport system. Today that is a reality in most of the large and mid-sized cities and people are betting that it would become a dominant trend across. Like in the case of more evolved urban centers like London, Hong Kong, Singapore and Seoul, India is finally waking up to the merits of quality public transport. That is not great news for car demand.
When Nirmala Sitharaman pointed to an increasing shift to services like Uber; she was actually making a larger point. The millennial generation is realizing that access to a car is more important than owning a car. Today the choice in most cities is not between an own car and an antique taxi. You have flexible options as good as owning your car. In a way, the demand for cars in India is falling for the same reason that demand for homes are also falling. Buyers do not see the point of investing in an asset and living with negative equity. If the FM can solve this puzzle, the slowdown in auto demand will be addressed! ©