The long and short of falling car sales

The economy is still growing at over seven per cent. Corporate profits will rise this year, too (if advance tax payments are an indication) and employees have got healthy pay hikes.

Under the circumstances, car sales should be galloping. But, they are down to a crawl, registering a drop in July, the first since January 2009. The domestic passenger car sales were 1,33,747 in July compared to 1,58,767 in the same month of the previous year. The 16 per cent fall is the steepest since November 2008.

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The fall came as a surprise to many who were, at best, expecting a slowdown. The Society of Indian Automobile Manufacturers (SIAM) has already scaled down the growth projection in passenger car segment from 18 per cent to about 10 per cent.

Even if the loss of numbers (estimated at 22,000) from Maruti - as its Manesar plant gets ready for the new Swift - is added, the car sales in July would have still ended in red. Major players posted lower sales. Maruti's sales fell 31 per cent, Hyundai's 11.50 per cent and Tata Motors' 43 per cent.

Rising interest rates (the Reserve Bank of India effected an 11th consecutive rise in interest rates last month since March 2010 in a bid to rein in inflation) and fuel prices appear to have hurt consumer sentiment.

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Interest costs on car loans have risen from 10 per cent in September last year to over 15 per cent. As a result, Equated Monthly Instalments, or EMIs, on a Rs 5 lakh loan for a five-year tenure have risen from Rs 10,600 to Rs 11,900. The rising petrol prices have meant that a person who drives 1,500 kilometres a month (assuming a mileage of 14 km a litre) would spend Rs 2,000 more every month on fuel.

This saw a sharp dip in sale of petrol cars and the demand shifted to diesel vehicles, as the price differential between the two fuels widened.

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Almost 90 per cent of the new buyers at Maruti are queuing up for diesel models, wherever the option exists. In the case of Hyundai's new Verna, it is 75 per cent. This rush has forced car makers to alter their product mix at a short notice.

However, a recent statement attributed to Finance Minister Pranab Mukherjee that soon diesel for cars will be priced higher, is likely to create further confusion and smother the demand for diesel cars, too.

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The slowdown is having a larger impact. It is destroying India's rise as a global auto hub as Business Today's recent cover story 'Going Nowhere', in the issue dated August 21, explains.

Hyundai and Suzuki export small cars to all over the world from India. Over 75 per cent of Micra manufactured by Nissan at its brand new plant near Chennai is exported. The exports looked attractive from India as they could be competitively priced - thanks to the huge domestic demand and the consequent economies of scale. But now that is under threat.

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The government's tight monetary policy may not have had the desired effect when it comes to controlling inflation, but it has begun to hurt growth in select sectors.

If this trend continues, the auto sector will be worried. After all, it has drawn up huge expansion plans and a negative sentiment is the last thing it would hope for.