Production cutbacks in the auto sector suggest that the economy too is slowing down
The domestic auto industry, which began this fiscal on a high note, is staring at a crisis as the year draws to a close. The double digit volume growth (year-on-year) in automobile sales seen in the initial months slowed to single digits towards the middle of the year, and has rapidly lapsed into a drop in volumes in each of the last three months; as a result, companies have been forced to cut production due to weak demand. Market leader Maruti Suzuki pulled down production of passenger vehicles by 8-12 per cent in three of the last four months. Two-wheeler sales have hit first gear too, and production of major players such as Hero MotoCorp and Honda has fallen in the above period. Whether this is just a temporary blip or the start of a cyclical downturn is a moot point.
While vehicle sales did well to bounce back from setbacks such as demonetisation and GST, the industry has run out of luck this time around. A host of factors have been responsible for the waning demand. Post the good-run in the April-June quarter, automobile sales began to slip as rising fuel costs pinched pockets of consumers. Patchy monsoons and crash in farm prices dented rural sales. Higher insurance outgo due to an increase in premiums on third-party cover was a dampener too. The liquidity shortage among finance companies following the IL&FS crisis was the final blow. Vehicles are typically financed purchases and with credit lines for customers drying up, dealers who usually load up on inventory to meet the festival season demand were left with piles of unsold stock, forcing companies to slash production. But structural factors alone cannot be blamed for the slowdown. Crude oil prices, which touched a high of $86 a barrel in early October 2018, are at least 20 per cent lower now. A recent report by JP Morgan put out after checks with dealers indicates that financing concerns have eased up considerably both for cars and two-wheelers. Yet inventory build-up persists due to weak demand, and huge discounts seem to be the order of the day. These trends indicate that cyclical factors associated with the industry are coming into play. The fact that commercial vehicle sales too have hit a rough patch lends credence to this view. While overall sales volumes for all segments of the industry grew at a strong 14.2 per cent in 2017-18, it is expected to sign off 2018-19 with a lower 8 per cent growth and may worsen in 2019-20. Pre-buying before the implementation of BS-VI emission norms in April 2020 may provide some succour in early 2020.
The auto slowdown raises larger questions. With private investments being lukewarm and government spending winding down, slowing private consumption would imply that the economy is on a slippery wicket. Perhaps it is time to tone down GDP growth expectations for the next few quarters.
via Throttling back – The Hindu BusinessLine