Text size:

  • Small
  • Normal
  • Large
Traffic in New Delhi. Sales potential drove car makers to India, but a slowing economy has ground demand to a halt. Prashanth Vishwanathan / Bloomberg
Traffic in New Delhi. Sales potential drove car makers to India, but a slowing economy has ground demand to a halt. Prashanth Vishwanathan / Bloomberg

Indian car market stuck in low gear

High fuel prices and a faltering economy have prompted Indian car sales to stall in a country that global car makers have been focusing on as they turn to emerging markets for growth.

India's car market is unlikely to move out of the slow lane very soon.

High fuel prices and a faltering economy have prompted sales to stall in a country that global carmakers have been focusing on as they turn to emerging markets for growth.

"We expect the next six months to remain weak with the market showing no growth," said Dhananjay Sinha, an economist at Emkay, a financial services company based in Mumbai.

"The industry is not showing any growth and recent data points to deteriorating demand," he added. "The most affected segment is the entry level cars as higher fuel prices and inflation have led to severe cuts in discretionary spending of the first-time car buyer."

Car sales in India plunged almost 26 per cent last month compared with the same month last year to 158,513 vehicles, according to figures released by the Society of Indian Automobile Manufacturers (Siam) recently.

This was the fourth consecutive month of decline.

Strong growth in India's car industry over the past decade led to companies pouring billions of dollars into the market.

High interest rates in India add to the cost of borrowing money to buy a vehicle at a time of concerns surrounding the heath of the country's economy, with GDP expected to slow to a decade low during the current financial year, which ends this month. This has prompted potential customers to put the brakes on spending.

"The February industry decline is slightly exaggerated given February last year was a leap year and also with expectation of an excise duty hike there was a lot of pre-buying and dealer inventory build-up," Mr Sinha said.

Announcements in the federal budget for the next financial year, beginning next month, are unlikely to help the car sector. The finance minister, P Chidambaram, unveiled higher taxes on imported luxury cars, while the excise duty on SUVs was hiked to 30 per cent from 27 per cent.

Interest rates have started to ease, though. India's central bank cut the key interest rate this month by 25 basis points to 7.5 per cent. This followed another 25 basis point cut in January, which was the first time the central bank had trimmed the benchmark interest rate in nine months.

But these cuts were not necessarily likely to boost demand in the very near future.

"Near-term demand pick-up appears unlikely," said Rohan Korde, an analyst at Anand Rathi Institutional Equities.

"A combination of factors - higher cost of acquisition and ownership of petrol cars, a higher base, and the recent increase being witnessed in diesel prices - coupled with slowdown in economic growth have led to deferment of purchases."

"The most impacted are the entry-level mini and micro segments, which are also petrol-dominated segments."

Prices vary across India, but in Mumbai, petrol is about 75 rupees (Dh5.06) a litre, while diesel is about 55 rupees a litre.

Figures from Maruti Suzuki show that sales of its budget "mini" cars, including the Alto, fell 15.9 per cent last month compared with the same month last year. The company is trying to cut costs by controlling spend on marketing and travel.

Last week, it stopped production at it Gurgaon and Manesar plants for a day in an effort to limit its build up of stock.

Tata Motors recently announced its first buy-back scheme in an effort to increase sales. The company said for the next two months it would guarantee customers 60 per cent of the price paid for its Manza model after three years.

With petrol prices being much higher than diesel prices in India, buyers were turning to diesel models. But a recent increase in diesel prices could hamper this trend.

"Higher diesel prices are likely to temper growth rates for diesel vehicles and act as a motivator to retrieve customers back to the petrol segment. At present a pick-up appears likely only around the festival season around October," said Mr Korde.

Car companies in recent months have launched new models and offered discounts in a bid to boost sales.

"Discounts and incentives are on the rise," says Mr Korde. "However, in addition to cost of acquisition, the cost of running the vehicle also is high due to the increase in fuel prices."

Competition from foreign car companies that have entered India and expanded operations aggressively has added to the pressure on local manufacturers.

ICICI Bank is somewhat upbeat on the car industry's future, noting that the "demand slowdown appears to be in the final leg".

"Our volume growth outlook for the industry is mildly positive with growth ranging at 9 to 10 per cent for the financial year 2014," it said. "Volumes are likely to witness an increase in the passenger car segment as the segment will witness a host of new launches in [the year]."

But Mr Korde said it believed it would be some months before the beginnings of a U-turn in the sector might emerge."We are hoping for a recovery post monsoon from a confluence of rate cuts and a relative improvement in the macro-environment," he said.

 

business@thenational.ae

Back to the top

More articles


Editor's Picks

 The Greens, villas: Q1 no change. 3BR - Dh210-250,000. 4BR - Dh210-260,000. 5BR - Dh220-300,000. Q1 2013-Q1 2014 5% rise. Pawan Singh / The National

In pictures: Where Dubai rents have risen and fallen, Q1 2014

Find out how rental prices in the prime locations in Dubai have altered during the first three months of the year and the current rates you will pay according to data provided by Asteco.

 Above, the private pool of Ocean Heights' five-bedroom penthouse flat. Courtesy Christie’s International Real Estate

In pictures: Penthouse flat is height of Dubai luxury living

A five-bedroom penthouse in Ocean Heights in Dubai Marina is on sale for Dh25 million and comes with a private pool and an unparalleled view of Dubai.

 The cooling towers of the Temelin nuclear power plant near the Tyn nad Vltavou in Czech Republic. The country wants to continue expanding nuclear energy capacity despite cancelling a tender to build two new units. David W Cerny / Reuters

In pictures: Best business images for the week to April 17, 2014

Here are some of the best business images for the week to April 17, 2014.

 Three generations of the Hakimi family tend to their stall Crawford Market in Mumbai. Subhash Sharma for The National

In pictures: Shopper’s delight at Crawford Market in Mumbai

Crawford Market is an old British-style covered market dealing in just about every kind of fresh food and domestic animal imaginable. Later on renamed Mahatma Jotirao Phule, the market remains popular among locals and visitors by its old name, taken from Arthur Crawford who was the first municipal commissioner of the city.

 The Wind, Energy, Technology and Environment Exhibition takes place from April 14 to April 16. Above, the Dewa showroom during last year’s Wetex. Jaime Puebla / The National

April corporate and economic calendar for the UAE and overseas

From Cityscape to Wetex to stock-market holidays to nations reporting first-quarter GDP figures, here is our helpful calendar of April's business events in the UAE and internationally.

 Get the latest information on credit cards, bank accounts and loan products in the UAE. Mark Lennihan / AP Photo

Rates report: Latest on UAE loans, accounts and credit cards

Souqamal.com brings you the latest interest rates on banking products in the UAE.

Events

To add your event to The National listings, click here

Get the most from The National