Dip in auto sales growth: Blame softness in rural demand

Fall in sales growth is also caused by rise in diesel and petrol prices

From an impressive 15.83 per cent in April, growth in passenger vehicle sales slid to around seven per cent in May. The automobile market had shown strong signs of revival in the last few months, but the tepid growth in May has dampened the industry's spirits. As a bellwether sector for consumer demand and industrial health, these numbers also have grave implications for the nature of India's fragile economic recovery.

Three factors are at play here. First, the order of the National Green Tribunal to ban diesel vehicles that are more than 10 years old and petrol vehicles more than 15 years old from plying on Delhi roads has weakened the sentiment against diesel cars. Many car makers, especially those that derive a large chunk of their sales from diesel-powered vehicles, have argued that it is not passenger cars but old commercial vehicles that are responsible for the high pollution in Delhi, and, therefore, it is incorrect to penalise all diesel vehicles. After some affected parties complained that they had not been heard, the National Green Tribunal has put its decision on hold. Whatever the outcome, it has had an adverse impact on the diesel segment - which contributes as much as one-third of the total car sales in the country. Not just in Delhi, buyers all over India are apprehensive that the resale value of their diesel cars will plummet if the National Green Tribunal confirms its earlier decision. And this has impacted sales.

The second factor is the recent rise in fuel prices, both diesel and petrol, which mirrors the spike in international crude oil prices coupled with the weakening of the rupee. But this was only to be expected after the government fully deregulated fuel prices. Though there has been some talk of capping fuel prices if crude oil prices rise beyond a certain limit, and the automobile industry is likely to support such a move, the government must ensure that it does not succumb to this gimmick.

But the third factor, which is perhaps the biggest cause for concern, is the softness of rural demand. The numbers suggest that there is definite distress in the farm sector caused by the unseasonal rains in April that mauled the rabi crop and impacted rural household incomes. This segment now accounts for a large chunk of the market. For instance, Maruti Suzuki, the country's largest car maker, gets about a third of its domestic sales from small towns and villages. The softness in the rural market has also impacted the two-wheeler industry, which derives almost half of its sales from small towns and villages: two-wheeler sales declined 0.16 per cent in April and 0.8 per cent in May. Even more now depends on the monsoon - if it is not deficient, or if the harvest manages to survive a below-normal rainy season, then the automotive sector may revive, along with other demand-sensitive sectors.