Relevance: mains: G.S paper III: Indian Economy
The automotive industry has been facing a slowdown worldwide. In the Indian case, the automotive industry was one of the fastest growing industries as well as an important driver of the manufacturing sector. Contributing 7% to India’s gross domestic product (GDP) in 2018, it provided direct and indirect employment due to its forward and backward linkages with other sectors. A slump in automotive sales—due to the cascading effect—thus, also affects sectors such as tyre, steel and steering manufacturers.
The current sales of vehicles have been the lowest in the last 19 years, due to a drop in the domestic demand. There was a 26% dip in car sales in May 2019 versus last year, and consequently a nearly 8% fall in overall vehicle production. In 2017–18, the sales of four-wheelers, which were growing at 14% are now down to 5%, while for two-wheelers, the decline has been from 15% to 5% over the same period. Carmakers have been halting production to clear inventories. The effect of low demand has hit the domestic component manufacturers the worst, with many reported operating at around 70% of their potential efficiency level, either by adopting a staggered system of work when they want to retain their workforce, or by simply laying off workers. Two questions arise at this juncture: first, whether this crisis has been in the making; and second, what its implications would be.
At the end of the first Automotive Mission Plan 2016, while the cumulative domestic sales volume targets of vehicles, mainly commercial and passenger vehicles and tractors, were achieved, those of the auto component segment, in fact, had already fallen short of the ₹ 1,20,000 crore target. On the other hand, the data published by the Society of Indian Automobile Manufacturers (SIAM) reveals that the average annual growth rate of the domestic production and sales of automobiles between 2013–14 and 2018–19 has been at 8% and 7%, respectively, and the 15% and the 14% rates in 2017–18, then, were rather outliers.
The crisis in the shadow banking sector has also been adversely affecting credit flows to dealers and consumers. With over three-fifths of the vehicles sold in the country being financed through loans, a squeeze in the supply of finance in the country since the last one and half years is bound to keep the growth rate of sales at lower levels. The challenges facing the sector today, however, include not only that of declining demand concomitant with the overall slowdown in the economy, but also changes in regulatory and technological norms, and that of higher input prices.
The environment of uncertainty has been aggravated by the implementation of various regulations that potentially affect the pricing structure, which include the Supreme Court’s order of extending insurances over a span of three years, or more importantly, the forthcoming shift to the new emission standards under the Bharat Stage (BS) VI in April 2020 from the current BS IV standard. The new emission standards would require technological overhauling, particularly for the diesel cars. With the expected rise in the price of diesel cars, its price gap with the petrol cars is estimated to be at a maximum of ₹ 2.5 lakh. However, the largest price differential, at about 50%, is likely to be seen in the small car category. In tandem, the overall share of diesel cars in total domestic sales is estimated to drop to 28% from the current 40%. But, the decline in diesel car sales has been underway since 2012–13, when this category was a market leader by constituting almost 60% of the sales. A major reason for this is the declining differential in petrol and diesel prices from ₹ 40 a litre in 2012–13 to almost ₹ 17 in 2017. In such a setting, particularly in the face of escalating input costs, the average gross margin of the top eight automobile manufacturers in the country fell by less than 1% to be at almost 34% in the financial year 2018. This gives rise to the scepticism about the high levels of operating margins of the automobile manufacturers. Auto part manufacturers, however, work on narrow margins.
The cumulative impact of these factors has been taking a toll on jobs lately, especially contract and casual jobs. It is estimated that automakers, auto part manufacturers, and dealers taken together have laid off about 3,50,000 workers in the last three months. For labour, the long-term effects of the slowdown in automobile manufacturing, in which the share of jobs had doubled from 3% to 7% between 2000 and 2015, would be deleterious. However, the employment outcomes have been in the making for some time as growth of new jobs had begun to taper from 2012 onwards. Automation in the industry has been underway, with average robot density at 79 per 10,000 workers, which is higher than that in manufacturing. Thus, apart from the current downturn affecting mainly the temporary and casual workforce, technological changes had also necessitated restructuring, reskilling, and manpower adjustments. It is imperative that, given the adverse circumstances, the industry transforms with minimal disruptions by streamlining the automotive businesses. This demands innovative processes, especially when there is a policy push towards a transition to electric vehicles. A related problem is of acquiring and developing new skill sets for those manning the novel methods along with redeployment or creation of new earning opportunities for the replaced workforce.