The coronavirus pandemic has done more for cars than any climate-change denier could have. Even the greenest amongst us is now wary of switching to public transport. Those who had given up personal cars for Uber rides, will think twice now. And, those who were sharing rides to save money will probably pay that bit extra to avoid sitting next to a coughing stranger.
That means passenger vehicle sales – both cars and two-wheelers – have the potential to go up, once the lockdown is over.
The trouble, however, is that you can’t just walk into a showroom and drive out with a new car. There is always that tiny irritant that you have to deal with first – you have to pay for it. That means, you either need a decent bank balance, or have enough cash left over after meeting all essential monthly expenses, to pay an EMI on a car loan.
The ‘Auto Story’ Isn’t Just About One Industry
Now, India’s middle class has been facing a tough economy for almost a decade now. What began as a slow erosion of the irrational wealth-effect of the mid-2000s, has now turned into its opposite. People are unsure about their future earnings and their current investments. So, they are embracing minimalism in their daily-life, postponing buying gadgets and durables, and saving cash for an increasingly uncertain future.
So, what the auto industry gains because ‘social distancing’ makes private vehicles the safest bet, it loses because COVID-19 has cost the world more jobs than any economic crisis since the Great Depression.
But the auto story is not just about one industry. In many countries across the world, car companies have acted as the engine of economic growth. In the US, Detroit, which housed most of the country’s car factories, was synonymous with the American dream. By the 1970s, Germany and Japan, and later South Korea emerged as the three other big auto-driven economies. It gave rise to several other job-creating industries – from oil to motels or ‘motor hotels’.
India’s Growing Middle Class Wealth Ensured Car Industry’s Boom
In India, the auto industry has been one of the few bright stars in an otherwise dark night of manufacturing. Since India’s economy was opened up and privatised 30 years ago, our factories haven’t kept pace with growth in the services sector. Auto companies have been the key exception. In 1988, India produced about 1.5 lakh cars.
By 2018, in the space of just 30 years, production increased to over 40 lakh cars.
One reason for this was growing middle class wealth. But, the bigger reason was the easy availability of car loans. When India opened its doors to foreign portfolio capital, foreign investors came with dollars and converted them into rupees to invest in Indian assets.
While the dollars helped build RBI’s forex reserves, the Indian financial system got flooded with a higher supply of rupees.
A small part of this went into funding industry, when companies sold their stake directly to foreign investors (FDI) or when foreign investors bought Indian stocks during an IPO (FII). The bulk of the cash kept circulating in the financial system – banks and bourses. This inflated the valuation of listed companies, who used this to raise funds either through small stake sales or taking big loans.
Car Loans Boosted Car Sales – All Of It Crashed Post-2008 Recession
The massive liquidity boost meant companies could offer top dollars to attract managerial talent. The top five percent of the middle class moved up and became genuinely affluent.
Meanwhile, banks were flush with funds, and had to lend it out to make money. So, they gave loans, to businesses and consumers, at lower interest rates and easier terms. Car loans boomed in this period, leading to the dramatic rise in car sales in India.
You could walk into a car dealership and find easy financing options, especially from ‘shadow’ banks or NBFCs. Neither the car salesperson, nor the person selling finance, cared much about how much you earned.
The system came crashing about a decade ago, after the global financial crisis. It first hit the real estate sector, and home sales collapsed overnight. Since the middle class was no longer taking long-term housing loans, they had money to pay EMIs on new cars. That is what kept car sales going till 2017-18.
But, the massive economic slowdown caused first by demonetisation and then GST, stopped that as well.
As jobs were lost, car buyers began to default on EMI payments. A 2018 CIBIL study shows that automobile loans had a delinquency rate of 2.75 percent, just a shade below the 3 percent delinquency rate in home loans. Banks withdrew funds from NBFCs, which provided much of the last mile financing for cars and two-wheelers, especially to consumers with uncertain earnings and dubious credit history.
Stop-Gap Solutions Like ‘Home-Delivery’ Of Cars Won’t Help. Modi Govt Must Step In & Do More
India’s auto industry, which has held up much of manufacturing for the past two decades, has already been on its knees for over a year now. Even before the lockdown was fully in place, auto sales dropped sharply. Although only the last one week of March was affected by the shutdown, car sales dropped by 52 percent compared to last year, and two-wheeler sales decreased by 40 percent.
The lockdown brought sales down to zero in April, since neither factories, nor dealerships were open.
Auto manufacturers want to restart operations. They have petitioned the government asking that car production and sales be declared essential services. That involves opening up the entire chain of interconnected industries that supply equipment to carmakers and also dealerships which take them to buyers. Some companies are trying to solve this problem by planning to home-deliver cars to consumers.
But these are stop-gap solutions. The Modi government needs to be much more proactive in helping India’s best performing industry get back onto its feet.
Even before the lockdown, carmakers have been asking for GST cuts to revive demand. This demand is likely to become even louder, given the huge revenue losses the lockdown has caused to the auto industry. One year ago, the government didn’t have the fiscal space to reduce GST on cars.
Now, however, the Modi government will have the moral space to consider it favourably, since governments across the world are opening up their coffers to resuscitate their comatose economies.
Car Industry Is a Hug Job-Creator – How Can Modi Govt Save It From Ruin?
The auto industry is also a significant job-creator – directly and indirectly. An estimated 1.4 million people were employed directly in auto and auto-ancillary companies in 2016-17, and another 3.8 million in sales, repairs and servicing.
That’s about 5.2 million jobs out of approximately 260 million, or 2 percent of all non-agricultural jobs in India.
This excludes the hundreds of thousands who work as drivers of trucks, buses, personal cars and cabs. At a time when the lockdown has cost 11.4 crore jobs in just the month of April, boosting the auto industry could help restore a section of these very quickly.
Ultimately however, only a massive coordinated fiscal and monetary stimulus by the Modi government and RBI can revive India’s auto industry.
Unless corporates make money, middle class jobs will continue to shrink, pay cuts will become more common, and more people will be sent on unpaid leave. Even if corporate earnings revive, the RBI has to ensure that there’s enough liquidity in the hands of NBFCs so that consumers can get easy car loans again. And, all this has to be done, without creating a credit bubble or hyperinflation.
It is easier said than done. But, that’s why we elect governments – to achieve difficult tasks in difficult times.
(The author was Senior Managing Editor, NDTV India & NDTV Profit. He now runs the independent YouTube channel ‘Desi Democracy’. He tweets @AunindyoC. This is an opinion piece. The views expressed above are the author’s own. The Quint neither endorses nor is responsible for them.)
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