Indian car sales splutter and stall

India Dispatch: Manufacturers have posted dismal results for the summer as potential buyers tighten their belts amid fears of rising inflation.

Car sales in India have declined in the past two months and dealers are hoping for a boost from the festive season.

TS Ramakrishnan is performing pooja, a Hindu ritual to promote good fortune, over his new Maruti Swift, hoping to ensure a smooth ride.

India Dispatch Inside the emerging giant

Keep pace with developing events in the BRICS economy Learn more

After the ceremony, he picks up the keys and proudly surveys his new car. For Mr Ramakrishnan, the purchase was strategically timed.

"It's the start of a festive season for us and we have saved our big purchases until now," he says.

"I was a little worried about splashing out, especially because the economy is not doing too great, but since I needed a new car for my business, I decided to go for it."

Car showrooms across India are now banking on people such as Mr Ramakrishnan after two solid months of poor sales. After all, the Indian car industry had a turnover of more than US$35 billion (Dh128.55bn) in 2009, according to ImaginMor, an analysis company.

But it has been a miserable time this summer with overall August sales dropping by 10 per cent compared with the same month last year, according to the Society of Indian Automobile Manufacturers (SIAM).

July was equally grim, with sales falling by nearly 16 per cent year on year, thanks to rising petrol prices, interest rate hikes and general economic uncertainty. And the gloom is set to affect the full year figures too.

"A petrol price hike in mid-September followed by a rate hike of 25 [basis points] by the [Reserve Bank of India] has led us to revise our demand for 2011-12 downwards from 8 to 10 per cent growth to 0 to 3 per cent in passenger cars. These will impact the consumer sentiment negatively causing the industry to grow at a much lower rate than previously anticipated," says a recent report from the research agency Crisil.

But the end of the monsoon is bringing new hope for dealers as sales are expected to rise dramatically during the festive season.

"The flurry of festivals like Durga Puja, Navratri and Diwali are considered auspicious for big-ticket purchases like cars, white goods and jewellery for Indian families. Most of our sales over the year come during this period," said Rahul Kale, the general manager at Vitesse, a Maruti Suzuki showroom in Mumbai.

The Indian market is dominated by small, inexpensive cars with 78 per cent of new buys belonging to this category.

But as the cost-conscious middle classes tighten their purse strings amid fears of rising inflation, it is the sales of such cars - Maruti Swifts and Hyundais and the like - that will be hit hardest.

India's biggest car manufacturer by volume, Maruti Suzuki, has experienced difficulties with deliveries thanks to prolonged industrial unrest that has caused a further dip in sales.

But Mr Kale's enthusiasm may be short lived as analysts predict sales growth this year could be among the lowest in a decade. "Growth is expected to reach levels comparable to 2008 to 2009, when domestic car sales grew by only 1.4 per cent due to global recession. This would be only the second time in the decade when the industry will grow at sub-5 per cent," says Crisil in a research report.

Mr Kale says the dealership has experienced an unusually slow start to the festive season.

"Our sales are down, about 10 to 15 per cent, but it's not a worrying situation. Mostly it's due to the industrial dispute but also because people are worried about the economic situation. But we are optimistic because we have a very loyal customer base with focus on volume sales, and middle-class Indians are still spending," he says.

About 70 per cent of cars in the low-cost segment in India are bought with loans, which makes sales vulnerable to interest rate hikes.

"The small-car market is the most sensitive one because people in this bracket are the most cost conscious, so it's fair to say that the slump in sales is caused by buyers worrying about rising fuel prices and interest rates," says Sridhar Chandrasekhar, the head of Crisil Research.

But there is some cheer. The saloon or middleweight market is booming, and grew by 17 per cent year-on-year between April and August, fuelled mainly by new model launches such as Toyota's Etios, Volkswagen's Vento, Hyundai's Verna and Ford's Fiesta,says Crisil.

"This segment behaves in a different manner to the mass market one. These buyers often don't have to take out loans, they are possibly upgrading and there have been launches of several new models in this segment," says Mr Chandrasekhar.

At the top end, things are different again. The luxury market in India makes up about 3 to 4 per cent of the whole market but it too has experienced a slump in sales.

The sales of Jaguar and BMW have not been booming, but the figures have been better than the sales of cars in the lower price brackets.

"It's a unique market but this segment too has been hurting, with sales declining 7 per cent in August. These buyers know the economy very well and they tend to be driven by business sentiment. Many may have decided to postpone their purchases," Mr Chandrasekhar says.

But the car makers are defiant. The country's leading manufacturers are expecting a 15 to 20 per cent increase in sales during the festival season, according to media reports.

Most are trying to recoup some of the lost revenue with new products such as Suzuki's Maruti Swift, Honda's Brio, the M&M XUV 500, Toyota's Etios diesel and Hyundai's Verna.

Aside from the flurry of new models, many brands have been tempting buyers with special finance schemes to stimulate sales. Volkswagen has been running a special finance scheme with interest rates as low as 6.99 per cent on the Vento and Polo petrol models - nearly half the rate commercial banks offer.

Pooja all done, Mr Ramakrishnan gets into his new car and switches on the engine. The senior manager smiles broadly as he prepares to drive off.

"It's a good vehicle, both economical and practical in the traffic. I'm looking forward to driving it because it is a well designed car for a city," he says and waves goodbye.