Automotive Market’s Turnaround - An Elusive Story

Dear friends,

We have been hoping for an early turnaround in the fortunes of India’s automotive market for over two years now. However, all such hopes have been belied. There is no respite in sight, as the sales numbers of April indicate. To make the matters worse, the prolonged election phase, coupled with the prevailing code of conduct since the announcement of elections, has put the immediate mid-course correction on the backburner, resulting in inertia.

Various reports on India’s economy emanating of late are not inspiring either.  The recent set of announcements – (i) the downward revision of GDP growth estimate for 2012-13 from 5.0% to 4.5% and (ii) the advance estimate for 2013-14 at 4.9% - clearly point towards the fact that the slowdown is more deeply entrenched than what was thought earlier. 

With previous three quarters posting tepid GDP growth numbers, the Indian economy will have to clock in a growth of about 5.7% in the fourth quarter to achieve the projected 4.9% growth in 2013-14. This looks difficult to realize. The much anticipated improvement in the second half of this fiscal year has not really shaped up and there is enough reason to dispel the earlier expectation of a possible turnaround. 

The agriculture sector has, of course, been the saving grace. With the second advance estimate exceeding the target level for most of the crops, the food grain production is projected at 263.20 million tonnes in 2013-14. This is a record high. 

One of the major factors bogging down the outlook is the performance of industrial sector and its consequent impact on services. The slowdown in the manufacturing is distressing especially when we are looking at the sector to create new jobs for millions being added to the workforce every year.

According to CMIE estimates, IIP is projected to grow by 0.6% in 2013-14, which is the slowest in over 30 years! For the quarter ending December 2013, the freight traffic in volume terms increased by 1.9%, which is the lowest quarterly growth in almost 20 quarters.

The investment sentiment is still under the shadow of grey clouds and a sense of anxiety among investors’ remains. In addition to the weak business sentiment, high interest rates continue to be one of the key factors adversely affecting the investment outlook. 

The use-based classification of IIP reports 14 consecutive months of decline in consumer durables, including automobiles. The vote on account in last February laid emphasis on the need to get manufacturing back on track and provided tax relief for certain sectors like capital goods, automobiles and consumer goods. This was certainly a positive move; however, we are yet to see a return in buoyancy.

With price levels consistently remaining sticky, high inflation has grabbed much attention and has been the centre piece of monetary policy. Between December 2013 and February 2014, prices did ease off led by a perceptible fall in vegetable prices. However, the latest data for WPI and CPI indicates prices inching up once again. The fuel prices that had not been revised due to the code of conduct for elections are witnessing upswing again with diesel price being increased by over Re. 1 recently.

On the external front, a crisis of sort was averted with the policy measures announced last year. The CAD has been successfully tamed and is expected to be around USD 35 billion in 2013-14, almost half of USD 88 billion in 2012-13. 

On the other hand, the exports after witnessing double digit growth between July and October 2013, have reported a sluggish growth in recent months. February data indicated deceleration after seven consecutive months of positive growth. This trend continued in March 2014 as well, with exports declining by 3.1%. An element of uncertainty remains about near-term export prospects. The continuing sluggishness in the European economy is not helping either.

With host of challenges looming on the horizon, it is critical to give correct policy signals and strengthen the potential upsides. On a positive note, the industry growth is expected to see a rebound in 2014-15. The extent of recovery, however, would depend on the implementation of projects cleared by Cabinet Committee on Investments (CCI). Also, inflation is likely to remain range bound. 

Nonetheless, some stress points remain and might mar the recovery process. First, agricultural production might come under strain as monsoon is expected to be sub-par in the year 2014. Preliminary monsoon reports by various forecasting agencies expect 2014 to be an El Nino year. 

Second, the services sector growth will, of course, be influenced by the recovery in the industrial sector. However, given the precarious fiscal situation, the government is expected to be stringent on the expenditure side. 

Third, while the fiscal deficit as a proportion of GDP has been contained at 4.6% in 2013-14, the target has been accomplished largely as a result of the cut in plan expenditure, which is not good from the standpoint of long-term growth prospects of the economy.

Going forward, it will be vital for the incoming Government at the Centre to ensure stability in policy & a capital friendly environment - an absolute imperative for fulfilling the objective of generating more jobs and fuelling demand.

Regarding activities of FADA, we are in the process of giving shape to a clutch of new initiatives. A study on Competitive Benchmarking of Passenger Vehicle Retail Practices of OEMs in India, for which internationally renowned consultancy firm - F&S was commissioned by FADA, has been completed. Major findings of the report will be released at a Press Conference in Mumbai on June 4.

As you are aware, the study was commissioned by FADA to identify the best practices of various OEMs in various parameters of auto retail and to impress upon other OEMs to adopt those practices in the interest of the sustainable growth of auto industry and retail trade. Another objective of the study is to benchmark auto retail practices in India against international norms and practices.

With the introduction of Basel II & Basel III norms, evaluation of financial health and its rating by an accredited rating agency is one of the important criteria for the automobile dealerships to access loans and borrowings from the banks at attractive rate of interest. FADA Council is in dialogue with a rating agency for rating services for automobile dealerships. The underlying idea is to enable FADA members to avail the rating service at competitive rate. It will be an informal arrangement with an option for FADA members to negotiate with any other rating agency, if they so desire.

We are also working to give impetus to the FADA Academy Training & Development Programme for my fellow dealers across the country. FADA Council is scheduled to meet on June 4 and will consider a number of proposals that have been received in this regard.

Although the Government is hamstrung in taking any major decision due to ongoing elections, I have written to the Hon’ble Union Minister of Heavy Industries & Public Enterprises for appropriate representation of FADA in the Government bodies and early creation of a mechanism for redressal of the concerns of automobile retail trade, which he had assured during his address at FADA’s Auto Summit 2014 on 7th February 2014 at New Delhi.

As I sign off, it is encouraging to note that the General Elections 2014 have given a decisive mandate for a change and a strong Government at the Centre. The country could ill-afford political uncertainty at this critical juncture. Hopefully, it will boost the business and consumer confidence, leading to the turnaround in economy in general and auto market in particular.

With best wishes,

Yours sincerely,

Mohan Himatsingka

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