India's car market revs up as pandemic-wary drivers seek personal space

The recovering automotive industry accounts for 7% of the country's GDP

A salesman talks to a customer at a Ford showroom in Mumbai. Car sales in India were up 125% year-on-year in March and were 4% higher month-on-month, according to Acuite Ratings & Research. Reuters

Car sales are revving up in India.

A preference for travelling in a personal car rather than public transport and taxis during the pandemic is helping to fuel the industry's growth, as India goes through a fresh wave of the coronavirus, analysts say.

“We believe that the consumer sentiments in the passenger vehicle segment remain positive due to a preference for personal mobility and a significant number of new and competitively priced product launches,” says Suman Chowdhury, chief analytical officer at Acuité Ratings & Research, based in Mumbai.

The overall sales volumes of passenger vehicles for India's top 11 car companies grew by about 125 per cent in March compared to the same month last year, according to data from Acuité. The surge largely reflects the low base from a year ago, when sales were hit as the Covid-19 pandemic took hold. But sales in March were also up on the previous month, by 4 per cent. This “indicates a continuing buoyancy in demand”, Mr Chowdhury says.

India's automotive industry accounts for 7 per cent of the country's gross domestic product, according to the Society of Indian Automobile Manufacturers (Siam). It is often considered a bellwether for the country's wider economy, which plunged into recession last year because of a nationwide lockdown. It has since returned to growth as restrictions were eased and S&P Global Ratings now forecasts an 11 per cent rise in GDP in the current financial year from April 1.

In the year before the pandemic hit, the automotive sector had been spluttering. In 2019, the country saw its sharpest fall in car sales in more than two decades, according to Siam data. This prompted some dealerships to close down showrooms, while factories also temporarily shut.

An economic slowdown in India, the rising popularity of ride hailing apps Uber and homegrown rival Ola, and a liquidity crunch among non-banking lenders – which had become a popular source of loans for consumers – were the main factors behind the industry's woes at that time.

“The industry was witnessing a slowdown prior to pandemic due to weak economic growth – and its implication on job and income growth, and the impact of shared mobility,” says Jinesh Gandhi, the deputy head of research and an automobiles analyst at Motilal Oswal Financial Services, based in Mumbai.

The situation was so bad that 350,000 jobs were lost – including across parts manufacturers and dealers – in the sector in India between April and August 2019, according to a Reuters report.

The industry was dealt a further blow as the pandemic began to spread in March last year, leading to factory closures as one of the world's strictest nationwide lockdowns came into effect, keeping citizens confined to their homes for months.

But the sector's outlook has improved in recent months.

On Thursday, India's largest car manufacturer Maruti Suzuki posted domestic passenger vehicle sales of 146,203 units for last month. That represents a 91 per cent rise on March last year “when the pandemic impacted consumer sentiment”, the company said in a statement. Sales were marginally higher than in March 2019, when it sold 145,031 units.

“The industry is seeing a good recovery, supported by pent-up demand, a preference for personal mobility due to fear of Covid, and savings on high ticket discretionary spends, such as family holidays,” says Mr Gandhi.

This comes as India is going through a second wave of the coronavirus. The country recorded 89,129 new Covid-19 infections on Saturday, according to figures released by its health ministry. This was the largest one-day spike in more than six months. More than 12.3 million Covid-19 cases have been recorded in the country since the onset of the pandemic, with more than 164,000 deaths, according to Worldometer.

The rate of ongoing infections is making people warier about using public transport and services such as Uber.

A healthcare worker collects a swab sample from a woman for a Covid-19 test on a railway platform in Mumbai. Analysts say a desire to avoid public transport during the pandemic is fuelling car sales. Reuters

A strong performance in the agriculture sector throughout the Covid-19 crisis has boosted sentiment among rural buyers, generating demand among them for cars. The majority of the country's population live in rural areas and it is a market that is still significantly under-penetrated when it comes to car sales, Mr Gandhi adds.

Car loans have also become cheaper in India following two emergency central bank interest rate cuts during last year's lockdown, which has helped to boost sales.

India's Tata Motors and other manufacturers have benefitted from the improving outlook.

“Tata Motors' passenger vehicles business posted its highest ever sales in nine years in March 2021 and the fourth quarter of the financial year (January to March 2021),” says Shailesh Chandra, president of the company's passenger vehicles business unit.

Its car sales were up 422 per cent in March to 29,654 vehicles on the previous year, while its quarterly numbers from January to March rose 162 per cent compared to the same time last year.
"Passenger vehicle industry volumes are likely to remain in positive territory," says Raghunandhan NL, an automobiles analyst at Emkay Global Financial Services. "Our positive view on the automobile sector is underpinned by expectations of a strong cyclical upturn, which is expected to last for at least three years."

The government has also announced a new scrappage policy, which could help generate some demand for new cars. This dictates that passenger vehicles that are more than 20 years old and fail emissions tests will have to be scrapped.

But analysts warn that there could also be some roadblocks that may hamper the recovery.

Globally, the industry is facing challenges with shortages of semiconductors and this is slowing down production.

“The demand, perhaps is not fully reflected yet in the sales numbers due to supply constraints in semiconductors leading to production cuts for specific models and delays in new launches,” says Mr Chowdhury.

Several car models have waiting periods for customers ranging from one to four months, according to research by Emkay.

Vivek Kumar, an analyst at JM Financial Institutional Securities, says “the current [semiconductor shortage] is unlikely to resolve completely by the end of the second half of this year”.

There are other issues that could affect India's car sales going forwards.

Mr Gandhi says that as well as “potential threats from supply side disruptions ... higher fuel prices and any increase in [the] cost of vehicle due to commodity price inflation”, could also impact the recovery.

In the longer term, car makers also face the challenge of having to increasingly adapt as the government has ambitions to push the country towards using electric vehicles. But factors including a lack of charging infrastructure in India mean that this policy is slow in getting off the ground.

“Electrification of the Indian passenger vehicle industry seems to be at least three to five years away, considering the [high] median selling price,” says Mr Gandhi.

In the near term, if Covid-19 cases continue to surge, there is a risk that this could derail the recovery in India's automotive sector, analysts warn. Some parts of the country have already enforced new coronavirus curbs, and any widespread and prolonged new lockdown restrictions could impact operations and sales for car companies.

“The sharp rise in Covid-19 cases since mid-February 2021 and the impact of any stringent containment measures on businesses are the key threats to the nascent [consumer] demand recovery," Crisil Ratings, which is part of S&P Global, says in a new report.