What’s ailing India’s auto sector in post-COVID times?

India’s auto industry, which was growing at above 10% in early 2010s, is now struggling to remain in positive territory. 

Published: 28th August 2021 11:40 PM  |   Last Updated: 29th August 2021 11:21 AM   |  A+A-

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Representational Image. (File Photo | Shekhar Yadav, EPS)

Express News Service

NEW DELHI:  In one week, three auto industry associations (ACMA, SIAM and FADA) held their annual convention and spoke about poor demand for vehicles in current times and challenges that have really crippled growth forecast.

India’s auto industry, which was growing at above 10% in early 2010s, is now struggling to remain in positive territory. 

In the last two fiscals (FY20 and FY21), total automobile sales in India has fallen in double digits.

With second wave of Covid-19 pandemic severely impacting sales in first quarter of on-going fiscal, it is highly unlikely that total sales in FY2022 will be anywhere closer to FY2019 levels, best figure achieved in one fiscal so far.

While Covid-19 can be said as the biggest deterrent for this downfall, it is not the only one.

A host of factors such as new safety and environmental regulations, high GST rate, liquidity crunch after the NBFC crisis, successive fuel price hikes along with falling economic activity have driven the fall in vehicle sales.

The pandemic then led the fall to new lows. 

Even before India’ GDP contracted by 7.3% in FY21, primarily due to Covid-19, it was on a downward trajectory. India’s economic growth rate has been declining since FY2017, and in FY20, it had slowed down to an 11-year low of 4.2%. Auto sales, a major indicator of economic activity, is falling in tandem. 

According to Siam data, Indian automobile industry CAGR (Compounded Annual Growth Rate) has fallen to -1.9% (between FY16-FY21) from 5.7% registered between FY11-FY16. In FY20, the sector reported an 18% year-on-year drop in sales to 21,548,494 units while in FY21 sales dropped 14% more to 18,615,588 units.

Amid this economic slowdown, regulators in India implemented numerous norms to improve the safety aspect of vehicles and reduce harmful carbon emissions.

While these steps augur well for consumers and the nation overall, it certainly was a big setback for the Industry as it led to steep hike in automobile prices. 

There was new insurance norm mandating third party insurance cover to be paid upfront for three years for passenger vehicles and five years for two-wheelers, significantly increasing upfront cost. Anti-lock braking system and airbags were also made mandatory in recent years. Revised axle load norms and NBFC crisis post the collapse of IL&FS hampered sales of commercial vehicles. Then came the regulatory mandate for moving away from BS IV to BS-VI emission norms before April 2020, forcing companies to pump billions of dollars to make changes in their production line. These new norms significantly pushed up on-road prices of vehicles and impacted demand. 

After meeting these norms, the industry was struck by the pandemic. It wiped out sales in the first quarter of FY21 when the whole country was under a strict lockdown. The second wave of Covid-19 infection had a similar but less severe impact on auto sales in Q1 of FY22. During the on-going pandemic, raw materials and fuel prices touched new highs. This forced automakers to increases prices once every quarter.

“The price of the moped has gone up by 45-50% in the last few years. The switch to BS6, cost of ABS, Supreme Court ruling on mandatory purchase of three-year insurance, and a one-time tax have pushed prices of two-wheelers higher. I think we have given away too many low tax benefits on other products which has made one of the major engines of growth globally to stall,” said Venu Srinivasan, Chairman and MD of TVS Motor Company this week at the SIAM convention. 

He added that GST on two-wheelers is the same as a luxury-level product despite it being a basic mode of transportation.RC Bhargava, Chairman of Maruti Suzuki (MSIL), said that tax rates in India is more than double when compared to the EU, Japan or the US, and given the lower income levels in India, the question of affordability comes in. 

GST on cars is primarily fixed at 28%. However, if the vehicle exceeds certain body/engine size, there is an additional cess of up to 22%. While it is highly unlikely the government is going to cut down GST rates, more regulatory hurdles are on the way. The new stage of Corporate Average Fuel Economy (CAFE) norms are set to kick in from next fiscal, which again will lead to price hike. Besides, the Madras High Court verdict making 5-year ‘bumper-to-bumper’ insurance mandatory will increase the cost of vehicles by 8-10% .

India Matters


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