Demonetisation May Slowdown Car Sales Up To 25% In The Medium Term

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New Delhi: The demonetisation drive by the Centre has not only caught the average citizen unawares but has also thrown a spanner in immediate demand for automobiles in the country. Industry feels that while the impact would obviously be more in the short term, however, the sucking out of unaccounted cash from the system is going to have a medium to long-term impact on sales.

Vishnu Mathur, director general of Society of Indian Automobile Manufacturers (SIAM) said that around 75-80% of automobile sales are financed, and for the remaining transactions too there are enough checks and balances in place that prevents any unaccounted for transaction. “However, sheer logistical reasons will dampen the demand in the near term. In urban areas most transactions are financed, but the share is lesser in rural areas. Cash paucity is likely to impact demand. People are likely to defer purchases,” he added.

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Around 35% of passenger car sales in India come from the rural markets, and this share is even higher in case of two-wheelers, at around 50%, Mathur informed.

Dealers admit that the propensity to pay the down-payment for the car in cash is more in rural areas as agricultural income is mostly in cash as well as a portion of the income from land transactions. A dealer of a German luxury carmaker explained, “farm income does not really drive demand for cars, especially luxury cars. It is driven by income from land sale, and other real estate deals. Now that the valuation of these assets has been significantly eroded, the risk appetite is going to be significantly lesser.”

Most automotive original equipment makers (OEMs) and industry experts seemed to agree with this view.

As John Paul, vice president of the Federation of Automobile Dealers Associations (FADA), the apex national body representing automobile dealers of India said, “a lot of cash is going to get sucked out of the system. This is definitely going to impact demand not just in the short term, but in the medium term as well. We see demand to be in a slow lane for the next six months or so at least.”

As for the immediate impact, Paul said that historically the November and December months are not the best months for car sales, and now there would be more of a slowdown.

Passenger vehicle sales were up 4.4% year-on-year (y-o-y) in October. This is already in a slow lane when compared to September which saw a 21% y-o-y increase.

SIAM had earlier estimated passenger vehicle sales to touch the 3 million mark in FY17.

The industry is unlikely to achieve that number now. “While it is too early to quantify the drop in sales, it is going to be as high as 50% in the coming one or two months, and can be about 20-25% in the medium term,” said a sector analyst.

OEMs, on the other hand, did not wish to comment at the moment. India’s largest passenger car maker Maruti Suzuki India declined to comment while Mahindra and Mahindra could not be reached for one.

Roland Folger, MD & CEO, Mercedes-Benz said, “The demonetisation is a bold step and we welcome the government’s decision. We foresee no mid to long-term impact on our business, as more than 80% of our cars are financed and also as a highly compliant company, we discourage cash transactions. There might be a slight short-term impact in certain markets, but that should be marginal.”

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