Don’t Blame Sitharaman; India’s Auto Blues Are The Result Of Past Preference For Steroid-Driven Growth

You can also read this article in Hindi- भारत के ऑटो उद्योग में मंदी का दोष निर्मला का नहीं, वृद्धि के लिए पूर्व चुनावों का

Electric vehicles (EVs) got a lot of attention in Finance Minister Nirmala Sitharaman’s budget, with tax reliefs being given on interest paid on loans to buy EVs, import duties being eliminated for lithium ion batteries, and investment-linked tax exemptions promised for EV-related components, batteries and infrastructure creators in India.

While this is obviously needed to boost EV sales and investments in India, the auto industry sported glum faces on budget day as Sitharaman’s speech contained nothing to mitigate their woes. Among other things, the auto industry has seen sales declining for eight months in a row, and the prospects for the rest of the year do not look any better. Consumer confidence is weak, and car and bike buyers may be waiting for the end of the fiscal year when auto companies could be offering steep discounts to offload their non-Bharat Stage-VI-compliant vehicles inventories. All vehicles have to be BS-VI-compliant from 1 April 2020.

However, the automobile industry has mostly itself to blame for not seeing the writing on the wall earlier. The truth is that India had prematurely opted to promote private passenger vehicles to make up for the colossal failure of public transport in almost all states. The net result has been that passenger and personal transport vehicle sales boomed over the last decade, more so after excise cuts were offered after the 2008 global financial crisis.

If you grow on steroids, there is always a price to pay. This is the price the industry is paying today. It has to take it on the chin.

But something fundamental has also changed for the automobile industry over the last few years.

First, the coming death of diesel. Last year, a court in Germany allowed cities to ban diesel cars, especially older ones, and this move is likely to spread all over Europe. In India, the Supreme Court got into the act as early as 2015 when it banned the sale of large diesel SUVs in Delhi. In October last year, it additionally banned the sale of Bharat Stage IV vehicles after 1 April 2020, even if they were manufactured before the deadline. The rising cost of building small diesel engines has already forced Maruti and Renault to announce a halt to their production and sale by April 2020. Diesel will now be sold only at the top end of the range, and for commercial vehicles. An India-specific event that is killing diesel is the gradual elimination of the price advantage vis-a-vis petrol since 2014. Even though diesel is still cheaper than petrol, the cost advantage is neutralised by the higher cost of the engines, especially in the small car ranges.

Second, the rise of EVs in urban transport. Thanks to global concerns over pollution, most cities are now mandating a steady shift to EVs, and India too is contemplating a ban on regular petrol and diesel two-wheelers and three-wheelers by 2025 and 2023. While this move is obviously too drastic and too soon, the direction is clear: the days of internal combustion-powered vehicles are numbered. EVs will gradually become the norm in most congested cities purely because they are non-polluting.

Third, shared mobility – the rise of the Olas and Ubers – means fewer people will be investing in cars and two-wheelers beyond a point. Two- and three-vehicle families will decline as public transport, metros, and shared mobility starts improving in India.

Fourth, there is the lifecycle issue. If we assume that the average car will be driven for at least 10 years, and if we additionally realise that car and two-wheelers have been bought by the tens of millions over the last decade, clearly the overall stock of usable vehicles is already very high for a country like India. The business cycle in cars is not specific to India. In Canada, auto sales have been dropping for 16 straight months for the same reason. The US has seen sales declines for the whole of 2019.

You cannot be selling cars and two-wheelers to 10 per cent of the total number of households in India every year and still expect demand to hold up. Between 2013-14 and 2018-19, domestic sales of automobiles (including commercial vehicles), soared from 18.4 million to 26.6 million. This implies that 10 per cent of the total number of households in the country is buying an automobile every year. This rate is clearly unsustainable in a situation where cities are clogged with traffic, smoke and smog is making people sick, and the total stock of vehicles on the road is probably in excess of 250 million today. (The last official figure was 210 million registered vehicles in 2015).

In large part, the recent and continuing slowdown in automobile sales is the result of the availability of plenty of registered vehicles already on the roads. Some uptick can be expected only if there is legislative pressure to start scrapping vehicles over 15 years old, and incentivising the purchase of more fuel-efficient and less polluting vehicles.

There is no early nirvana for India’s mollycoddled auto industry. It has to find the resources to invest in the kinds of vehicles the country may want in future, and also digest the steroid-driven sales of the past few years.