Across the world, fears of a recession are looming large. India is no exception. One sector, in the country, that is in focus these days is the automobile sector. People are talking about a slowdown in the sector and how the auto companies are making losses. I have a different take on this sector. In my opinion, the current scenario is more of a ‘correction’ than a ‘slowdown’.
The biggest barometer of the health of the auto industry is the volume of vehicle sales. Surely, the number of vehicles being sold has reduced. Does that mean the sector is heading towards a recession? I think the vehicle sales for domestic consumption had reached exorbitantly high levels that were not sustainable. If we look at the rise in income levels and compare them with the rise in the cost of living, the former would pale in comparison. Buying a car is a discretionary expense that can be postponed if the basics are at stake. School fees and hospital expenses are cases in point that are skyrocketing. They cannot be forgone, so ‘good-to-have’ items take a backseat.
Another interesting aspect to look at would be the changing demographics. The number of middle-class or upper-class people, who form the major chunk of high-value vehicle purchases, is limited. They can buy only an ‘x’ number of vehicles, which they have already bought. Such people can only replace their vehicles with new ones, keeping the total number more or less the same. If car production is more than the increase of buying group, sales are bound to decline.
Three decades back, it was not uncommon to find only one car per family even when the number of members per family was larger at the time. As women started working and families became nuclear, the demand for cars per family increased manifold. Nowadays, in many middle-class or upper-class households, the number of cars per family is more than the number of family members. However, a decade or two down the line, the total number of cars is not likely to increase any further than the current levels. Many people now have only one child or two children unlike two decades back where the norm was two-five children per family; and on an average, one person owns one or at max two cars for himself/ herself. Therefore, the overall number of households or members per family and consequently the number of cars is likely to go down in the times to come, and the process has already started.
The preferences or buying patterns of the current generation are also going through a paradigm shift. Many times, the young generation that has limited resources at disposal, prefers to take cabs instead of buying a car. Well, in such a case, the number of cars being purchased for running as cabs is also increasing. At peak hours, it is not uncommon to find more cabs on the roads than private vehicles. So, to an extent, the loss from one customer segment is getting offset by profits from another one, though not in the same proportion.
Recently, in an interview, Maruti Suzuki India Chairman RC Bhargava said that the youth prefers buying an expensive gadget over a car. Well, it is very true. As a matter of fact, one luxury item like a car is now being replaced by many more choices like mobiles, tablets, and smartwatches. If we look at the bigger picture, more items to the shopping bag help the economy as a whole.
Vehicle sales are also indirectly related to other factors like the availability of supporting infrastructure such as roads. The condition of roads in many big cities like Gurugram is very bad. Even space is limited for vehicles on roads, leading to traffic jams. Many people have already chosen Metro over their own vehicles as a faster mode of commuting. Then, there are other issues like limited parking spaces. Many times, people prefer cabs over self-driving because of the hassle of parking at their destinations. What’s sad is that many people even have to pay (per vehicle) for parking their vehicles outside their homes.
There is some news about unsold stocks lying in the auto plants. One reason other than the low demand could be faulty demand forecasting. The auto industry, in fact, any industry, cannot keep growing forever at high rates. There are periods of low growth, and this is a normal aspect of a business cycle. The auto sector too is going through one such low phase.
There is also a lot of hue and cry over the number of temporary workers being reduced at major automobile manufacturing plants. Well, that is the very nature of ‘temporary’ workers. They are temporary and are employed with the objective of meeting increased demand. There is nothing surprising about this.
Finance Minister Nirmala Sitharaman has already given the economy a helpline with a reduction in the corporate tax rate, so let’s hope things get only better from here on. At least, the soaring stock market is a reflection of the optimistic sentiment.
Before I end, let me add that I understand the arguments given by me are very simplistic. I am no expert in economics, therefore, I haven’t referred to any economic parameters like gross domestic product, unemployment rate, and consumer price index in my analysis. I have based my view on my experiences in day-to-day life. According to me, the softer aspects of any economic scenario are also equally important. Hope this article helped you see the current state of the auto sector from a different perspective.