Indian auto industry needs to refocus on future
June 17, 2021
India's automotive sector, which contributes 7.1% of India's gross domestic product (GDP), has been pushed back into the slow lane by the second coronavirus wave, with sales for the month of May falling to significantly low levels.
As reported recently by the ratings agency Care Ratings, "in May, factory dispatches of passenger vehicles and two-wheelers contracted to one-third of the level of the previous month, while three-wheelers made negligible sales of just about 1,200 units."
The top five players in the commercial vehicle industry reported cumulative sales of nearly half the levels of April. Tractor sales were down 12%.
Monsoons to the rescue?
In its note, Care Ratings talked about three scenarios in which it had connected the pace of recovery in the sector to the speed at which the COVID-19 vaccination drive was conducted in India.
The report assumes that if vaccinations are kept going at the current pace of 2.5 million individuals per day, then the government would take 336 days to vaccinate 60% of the population with a first dose.
But with the danger of a possible third wave looming, states may not be able to start opening up the economy. This could eventually trigger supply constraints, and automobile dealers will not serve customers at full capacity for the rest of the year.
Still, normal monsoons will help push demand for tractors and two-wheelers. Schools and colleges, meanwhile, will continue to be shut until at least September, and consumers seem to prefer saving cash and avoiding discretionary spending on items like automobiles.
The other two scenarios
The second scenario assumes that there could be a shortage of vaccines and that a lethal third wave could hit the economy.
If only 1.8 to 2 million individuals are vaccinated a day, then the country will take 14-15 months to vaccinate 60% of the population with the first dose. Caseloads will therefore rise in rural areas, hurting their spending capacity on tractors and two-wheelers.
The third scenario is an optimistic approach, and assumes the country is able to vaccinate 3 million people a day. That would mean vaccinating 60% of the population with the first dose in just nine months.
This scenario also assumes that there would be an improvement in bank financing, along with a recovery in consumption and private investment. Infrastructure activities would grow and boost the sales of commercial vehicles. Discretionary spending by consumers would improve and lockdowns would be lifted. Unemployment rates would simultaneously fall.
It also assumes a gradual improvement in supply and demand, with adequate and timely monsoons that will lead to an improvement in rural farm incomes.
Looking at the wider picture
The Society of Indian Automobile Manufacturers (SIAM) says that the May data doesn't paint the whole picture.
Rajesh Menon, director general of SIAM, said in a press statement that "most part of May was under lockdown in many states thus impacting overall sales and production. Since both May 2020 and May 2021 were abnormal months because of the COVID-19 situation and lockdowns, comparison of these two months holds no meaning."
"The second wave of COVID has left the entire country devastated as there may not be a single household which did not get affected," said Vinkesh Gulati, president of the Federation of Automobile Dealers Associations (FADA), commenting on the impact of the second wave.
"Apart from urban markets, this time even rural areas were badly hit," he said in a press release.
Government action is coming
The national investment promotion and facilitation agency estimates that India's auto industry is currently valued at $118 billion (€97 billion). By 2026, it is expected to be the world's third-largest automotive market in terms of volume, reaching an estimated $300 billion.
Experts believe that the Indian government has also taken some decisions that could help the sector revive quickly.
For starters, the government has offered production-linked incentives that will total $7.5 billion over the next five years and encourage exports.
In the 2021-22 budget, the government also introduced the voluntary vehicle-scrappage policy, which will eventually boost demand for new vehicles by removing old, unfit vehicles currently plying Indian roads. The Cabinet even outlined $7.8 billion for the automobile and auto components sector in production-linked incentive schemes under the Department of Heavy Industries.