Vital to maintain GST numbers

However, the October passenger vehicle numbers are not reassuring

Car sales are a good indicator of economic health. Buying a vehicle is a big-ticket expense. The auto industry has a very long value-chain. Automobile manufacturing drives demand for primary metal miners, plastics, electronics, forgings, cables, rubber, etc. Since manufacturers are basically assemblers, there is a large ecosystem of OEM suppliers. 

The industry also generates activity in marketing, advertising, and finance, as well as repair and maintenance. Apart from generating high employment, auto manufacturing is capital-intensive and rate-sensitive. Holding inventory is expensive, and almost all sales are equated monthly instalment-based. So there's a big impact on the financial industry. 

Almost 30 per cent of car sales are made in the festive season starting with Mahalaya (Navratri) and ending with Kali Puja (Diwali). This year, the period falls between roughly October 10 and November 10, so both months are affected. 

Deseasonalising festive activity is tough. There are holidays, so industrial production is low. But consumption is high across a wide range of goods, and there is a spurt in airfares, hotel occupancies, etc.  

Some years, Vijaya Dasami (Dussehra) and Kali Puja (Diwali) fall across two months of the September-October-November period and sometimes, they fall in the same month. Year-on-year comparisons of fast twitch indicators like the Purchasing Managers Index , rail freight, the Index of Industrial Production, sales of white goods, Core Sector activity, and so on, can be distorted by base effects. 

Last year, Vijaya Dasami was on September 30, which means Mahalaya (the start of Navratri) was in September 2017. Kali Puja was on October 20. So September-October saw lower industrial activity and higher consumption. We also had the GST launch in July 2017, and we had demonetisation in November 2016. 

Those were one-off events with impacts lingering over many quarters. Arguably, both events are still affecting economic activity. So there are ‘wild-card’ base effects, which we cannot easily correct for and deseasonalising will be especially hard.

The period June 2017-September 2017 was unusual. June was abnormally low due to cutbacks in production prior to the Goods and Services Tax (GST). The next three months were very high. A total of 1.08 million units of passenger cars were sent to dealers by 15 manufacturers, with a total of 887,221 units despatched in Q2, 2017-18. A year later, in June 2018, there were 268,695 despatches. 
 

In Q2, 2018-19, 857, 349 units were despatched, at an average of 285,783 units per month - that's about 10,000 less than a year ago. A total of 1.126 million units were sold over June-Sep 2018.  

Inventory levels were high by end-September 2018, with dealers holding an extra 10-15 days, due to anticipated sales.  However, September 2017 saw 304,765 passenger car despatches while September 2018 saw 288,805 units. This was due to the Sep 2017 festive season and the post-GST surge. 

In October 2017, 275,757 units were despatched by the top 15 manufacturers as the festival season went into full-swing. The October 2018 numbers have just started coming in. Note that the first few days of Oct 2018 were ‘Shradh’. Anyhow, individual vehicle registrations (not only cars) are down about 35 per cent year-on-year (till Oct 29) and down about 15 per cent month-on-month over Sep 2018. 

Looking at despatches to dealers, we have the October 2018 numbers for Maruti, Hyundai, M&M, Tata Motors, Honda, Ford and Toyota. Despatches for the top six in Oct 2018 hit 268,340 units, versus 256,371 units for the same set in October 2017.  That's about five per cent up. Reconciling the sharp dip in registration versus dealer-despatches, there's still very high inventory. 

Given base effects, one would be cautious. November buying could pick up. But a great surge in demand isn't visible. The Q2 numbers show that the industry has been hit by higher raw material costs, higher cost of financing, and the weak rupee. Most models are on discount. Rising EMIs and rising fuel prices may have hurt demand. 

There have been big bets on overall consumption growth in this fiscal.  October 2018 saw overall Goods and Services Tax collections cross Rs 1 trillion for the first time since April 2018. It's vital that this pace is maintained, otherwise those bets will lose. The October passenger vehicle numbers are not reassuring.