Passenger vehicle sales rise 13th month in a row

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New Delhi: After a five-year hiatus, passenger vehicle sales are set for double-digit growth in the current fiscal year owing to a better-than-expected monsoon, strong buying sentiment and an increase in salaries due to implementation of the Seventh Pay Commission’s recommendations.

Sales of passenger vehicles, which include cars, utility vehicles and vans, rose 16.78% in July to 259,658 units—increasing for the 13th month in a row and the fastest since October. Sales in the four months ended June grew 9.23% to 956,839 units.

Passenger vehicle sales grew 25.67% in 2009-10 and 29.16% in 2010-11 before slowing to 4.66% in 2011-12 and 2.15% in 2012-13. Sales fell 6% in 2013-14, and then grew 3.90% in 2014-15 and 7.24% in 2015-16.

The Society of Indian Automobile Manufacturers (Siam), an industry body, on Wednesday said that it is likely to revise upwards its earlier forecast of 6-8% growth for the year.

“We should be more than this… We are almost double-digit now,” Sugato Sen, deputy director general of Siam, said in an interview.

“One of the reasons that we had to issue a lower forecast was because Maruti had cited supply issues during the year. But it seems that they can ramp up production in the last quarter of this fiscal. That will be really helpful,” Sen added.

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Sales growth has been driven by improving buyer sentiment, a good monsoon and implementation of the Seventh Pay Commission’s recommendations, Sen said. “People are more confident about salary growth, job security and India’s economic growth,” he said.

His optimism also comes from a decline in lending rates for auto loans. Between July 2015 and June, car loan rates have come down by 65 basis points for public sector banks and 25 basis points for private banks. A basis point is one-hundredth of a percentage point.

Sales were also helped by the popularity of sport utility vehicles (SUVs). Their sales grew 39.03% in July to 62,543 units.

To be sure, the International Monetary Fund (IMF) on 20 July trimmed India’s 2016-17 growth forecast to 7.4% from 7.5% projected in April, blaming a sluggish recovery in private investment. The Indian economy grew 7.6% in 2015-16 and the government expects it to expand more than 8% in 2016-17.

The forecast of an above-average monsoon has fanned hopes of faster growth, Sen said.

Good rainfall is expected to boost farm output and improve demand for everything from motorcycles to smartphones and tractors. Improved rural consumption will increase gross domestic product by as much as a percentage point in the fastest-growing major economy in the world, according to estimates by CLSA Asia-Pacific Markets.

“Impact of a good monsoon can already be seen in the two-wheeler segment and it will reflect on passenger car sales shortly,” Sen said.

Two-wheeler sales grew 13.52% to 1,476,340 units in July.

The state-run India Meteorological Department and private forecaster Skymet Weather Services Pvt. Ltd have predicted above-normal rain during the June-September south-west monsoon season after two consecutive years of drought.

As of 4 August, India had received rainfall 2% more than the long-period average, with nearly 90% of the country receiving excess to normal rainfall and 11% receiving deficient rainfall since the start of the monsoon season in June.

Though the goods and services tax (GST) will bring relief to the auto industry, which is heavily taxed right now, an expert said that implementation of GST will lead to a rearrangement of the entire ecosystem.

“GST brings with it some sense that prices will go down. That said, there is still lack of clarity as to the fate of the sub-four metre vehicles. Will the lower tax advantage continue? We don’t know,” said Kumar Kandaswami, senior director, Deloitte in India.

“For the industry, GST will cause rearrangement of the warehouses, inventory management, vendor alignment, etc. But, this has been in the works for a long time and I would believe most companies would have their supply chains somewhat prepared for this,” Kandaswami said.

According to Abdul Majeed, partner and national auto practice leader at PricewaterhouseCoopers, the GST may have a negative impact on growth in the short run, mainly due to the expectation that the overall tax rate on vehicles might come down and customers would therefore defer vehicle purchases.

“In addition, in the short run, inflation also might go up due to higher tax on services. This might impact the cash flows of the customer,” Majeed said.

Commercial vehicle sales in July remained relatively flat at 51,853 units.