India’s auto sector has been facing problems since 2018. New, stricter emission standards and the first wave of COVID-19 in 2020 have exacerbated the industry’s problems.
The sector, which contributes 7.1% of India’s gross domestic product (GDP), was once again pushed back into the slow lane by the second wave of the coronavirus, as May 2021 sales fell to significantly low levels.
As the rating agency Care Ratings recently reported, “During the month, factory shipments of passenger vehicles and two-wheelers contracted to a third of the previous month’s level, while the three- wheels achieved negligible sales of around 1,200 units ”.
The top five players in the commercial vehicle industry reported cumulative sales at nearly half of the previous month’s levels. Tractor sales fell 12%.
Monsoons to the rescue?
In its note, Care Ratings referred to three scenarios in which it linked the pace of the sector’s recovery to the speed at which the COVID-19 vaccination campaign was carried out in the country.
The report assumes that if vaccinations continue at the current rate of 2.5 million people per day, then it will take 336 days for the government to vaccinate 60% of the population with a first dose.
But with the danger of a possible third wave looming, states may not be able to start opening up the economy. This could eventually trigger constraints on the supply side and auto dealers will not serve customers at full capacity for the rest of the year.
Still, normal monsoons will help boost demand for tractors and two-wheelers, but schools and colleges will continue to close until at least September 2021. In the meantime, consumers seem to prefer to save money and avoid discretionary spending on items like automobiles.
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The other two scenarios
The second scenario assumes that there could be a vaccine shortage and that a deadly third wave could hit the economy.
If only 1.8 to 2 million people are vaccinated per day, then it will take 14 to 15 months for the country to vaccinate 60% of the population with the first dose. The number of cases will increase in rural areas, affecting their ability to purchase tractors and two-wheelers.
The third scenario is an optimistic approach and assumes that the country is able to immunize 3 million people per day. That would mean vaccinating 60% of the population with the first dose in just nine months.
This scenario also assumes an improvement in bank financing, accompanied by a recovery in consumption and private investment. Infrastructure activities would develop and stimulate sales of commercial vehicles. Discretionary consumer spending would improve and the lockdowns would be lifted. Unemployment rates would fall simultaneously.
It also assumes a gradual improvement in supply and demand with adequate and timely monsoons that will lead to improved rural agricultural income.
Looking at the larger picture
However, the Company of Indian Automobile Manufacturers (SIAM) says the data for May does not paint the big picture.
Rajesh Menon, chief executive of SIAM, said in a press release, “most of May has been stranded in many states, impacting overall sales and production. As May 2020 and May 2021 were abnormal months due to the COVID-19 situation and lockdowns, comparing these two months makes no sense. “
Commenting on the impact of the second wave, Vinkesh Gulati, president of the Federation of Automobile Dealers Associations (FADA), said that “the second wave of COVID has devastated the whole country because there may not be a only household that was not affected. . Outside of urban markets, this time even rural areas have been hit hard. “
Government incentives could play a decisive role in reviving India’s automotive sector
Government action is coming
The National Investment Promotion and Facilitation Agency estimates India’s auto industry is currently valued at $ 118 billion (€ 97 billion). By 2026, it is expected to be the world’s third largest automotive market in terms of volume, reaching around $ 300 billion by then.
Experts believe that in addition to the vaccination campaign and the good monsoon, the Indian government has made decisions that will help the sector to recover quickly.
For starters, the Indian government has offered production-related incentives that will total $ 7.5 billion over the next five years and encourage exports.
In the 2021-2022 budget, the government also introduced the voluntary vehicle scrapping policy, which will eventually boost demand for new vehicles by removing old and unsuitable vehicles that currently ply Indian roads. The Cabinet even earmarked $ 7.8 billion for the auto and auto components sector in production-related incentive programs under the Ministry of Heavy Industries.