Is India’s Auto Industry Really Facing a Recession?

The automobile industry is often considered to be a proxy for a nation’s economy. Nowhere is this truer than in India today. The economy is slowing down, largely because of external problems. Protests and agitations have sapped the government’s resolve to take the next phase of reform measures. Policy-making is practically at a standstill. Inflation is galloping: food inflation was at 9.47% for the week ended September 3, a shade lower than 9.55% the previous week.

Still, several bright spots exist. India is one of the few large economies that is growing. When the appetite for risk returns, foreign institutional investors should come flocking back. Exports have performed handsomely; at US$24.3 billion, exports were up 44.2% in August over the corresponding month of 2010. Part of this increase is because of the base effect – exports were in the doldrums in August 2010. But services export in July 2011 (the latest month for which data is available) fell to US$10.40 billion from US$11.04 billion in June. This reflects the slowdown in IT spending in Western markets.

As for the auto industry, the country’s biggest carmaker – Maruti Suzuki India – has closed down its plants from September 16. This follows worker protests over a “good conduct” bond that the Maruti management was insisting that they sign. Earlier in the week, 11 supervisors were beaten up by the agitating employees. With the government forcing the two sides to the table, a solution is likely to be found soon; a similar truce was enforced in August. But that may not end the industry’s problems. The unrest, which started in Maruti’s Manesar plant in Haryana, near New Delhi, has spread to other Suzuki units. More disturbingly, it is affecting industrial units in the Gurgaon (Haryana) industrial belt.

Maruti will miss the bus in the festival season which starts next month. But other automakers are unlikely to find too much to celebrate. According to figures from the Society of Indian Automobile Manufacturers (SIAM), passenger car sales dropped from 160,000 units in July 2011 to 144,000 in August. The July number was itself 16% lower than June.

“Car sales slipped yet again in the domestic market as high interest rates and the spike in petrol prices weighed heavy over demand,” reported a few days ago. “Now that the festival season is coming, we hope to see some cheer. But it’s only a hope,” Vishnu Mathur, SIAM director general, told Newsindia.

That hope may prove false. On September 15, the government increased the price of gasoline. (Gasoline is a price-controlled item in India.) Effective from September 16, gasoline costs 25 U.S. cents a U.S. gallon more in New Delhi. (The rate is marginally different in other cities.) Gasoline now costs approximately US$5.2 a gallon in the capital.

A few hours later the Reserve Bank of India (RBI) acted in ways that may further hurt the auto industry. RBI raised interest rates by 25 basis points (100 basis points equals 1%). Auto finance companies will inevitably pass this on to consumers (though some may hold rates in the short term as a competitive measure). That means fewer cars rolling out of the showrooms.

From another perspective, things are looking up for the auto industry. There has been a spate of new launches – the Fluence from Renault, the third generation Swift and the upmarket Kizashi from Maruti, the Verna from Hyundai, the Brio from Honda, the Liva from Toyota, the Fiesta from Ford, and the Passat from Volkswagen. In addition, luxury car makers have seen several launches. Another statistic: exports in July at 48,000 were up 40% over the corresponding month last year.

The new companies have to make investments. But even the established players are thinking about expansion. The currently beleaguered Maruti Suzuki is putting in US$1.25 billion into a new plant, the site of which is yet to be decided. According to SIAM estimates, the Indian automobile industry along with the auto components business will invest US$30 billion in setting up fresh capacity in the next four years. That’s a recession any industry would love to face.   (Newsindia Syndication)