“Probably the most prolonged de-growth phase we have seen.”
Car sales in India, the fifth-largest auto market in the world, plunged
24% in June, compared to June last year, after they’d already plunged 26% in
May, the Society of Indian Automobile Manufacturers reported. Year-over-year
declines have been dragging on for nearly a year.
Sales of “goods carriers,” which are seen as an indication of economic
momentum, dropped 18% from a year ago. Goods carriers include vehicles such
as these:
Scooter sales dropped 15% year-over-year. Sales of motorbikes dropped 10%.
Sales of mopeds plunged 22% — “an indication of a gigantic slump in economic
growth and decline in demand in rural areas,” The Week explained.
In India’s first fiscal quarter, ended June 30, sales of all two-wheel
motorized vehicles combined, by far the largest category of vehicles sold in
India, fell 12% to 5 million units. Passenger vehicle sales fell 18% to
712,620 units. Within this group, cars fell 23%, utility vehicles 4.5%, and
vans 25.7%, according to the Society of Indian Automobile Manufacturers (SIAM).
“I think…this is the worst phase India’s auto industry has seen,” said
Rajan Wadhera, president of SIAM and head of Mahindra & Mahindra’s
automotive group, when he unveiled the data. Even the once booming ride-share
demand has taken a hit. And weak farm income hurt sales of two-wheelers.
“There were patches of de-growth in 2009, 2011 and 2012, but the
government stepped in, tax incentives were given and situation got better.
This is probably the most prolonged de-growth phase we have seen,” Wadhera
said.
He warned of ripple effects throughout the economy, such as more job
losses and closings of dealerships. And he clamored for the government to
step in and do something, which is what you’d expect an executive of one of
India’s largest vehicle makers to say.
“A lot of dealerships have closed down in the past,” he said, citing data
from the Federation of Automobile Dealers Association that indicated that
around 300 auto dealerships had closed in recent months. And automakers in
India have started to cut production. “So the job losses have already
started,” he said.
The industry has been clamoring for the government to reduce the Goods and
Services Tax (GST) on vehicles to boost sales. And it has been clamoring for
the government to introduce the Indian version of the US cash-for-clunkers
program during the Financial Crisis. But those hopes were not fulfilled.
Instead, GST cuts and subsidies were granted only to the electric-vehicle
industry as all three-wheelers (see image above) have to go fully electric by
2023 to combat India’s horrendous air pollution.
In a sales decline of this magnitude, it’s never just one thing that
causes it, and so a slew of factors is getting blamed, including overall low
consumer demand, higher insurance costs, and financing issues.
These financing issues are the grand biggie.
India’s shadow banks – lenders that are not deposit-taking banks and are
outside of the regulated banking industry – provided about 40% of new vehicle loans. And these shadow
banks have plunged into a debt crisis.
This crisis has been in the making for years. As India’s regular banks
have been grappling with their $190 billion bad-loan crisis and a slew of hair-raising
banking scandals, and have tightened up lending as a result, the shadow banks
have jumped into the fray, aggressively lending at the grassroots level.
This worked like a charm until one such shadow bank, Infrastructure
Leasing & Financial Services Ltd., one of India’s biggest infrastructure
lenders, defaulted on a loan payment last year. To limit contagion across the
sector, the government seized control of IL&FS, purged its management,
and installed a six-member board.
The IL&FS shock made it more difficult and costly for other shadow
banks to access short-term funding. The Reserve Bank of India has cut its
policy rate three times so far in 2019, from 6.5% to 5.75%, and indicated
that it was willing to help the shadow banks if needed, but might tighten
liquidity requirements to curtail their growth.
Then in June, the next shoe dropped when another shadow bank, Dewan
Housing Finance Corp, a major mortgage lender, missed debt payments. Three
credit-rating agencies downgraded
the shadow lender in huge chunks to “D” for default. CARE, one of these
ratings agencies, still had rated Dewan’s debt AAA at the beginning of 2019, before launching a massive wave
of downgrades in a few months to “D.” This is not conducive to investor
confidence.
Other lenders, including Reliance Capital and Piramal Capital &
Housing Finance, have also been slammed by credit-rating downgrades.
Access to funding has gotten tougher. According to Bloomberg, the shadow lenders struggle with a “record 1.1
trillion rupees ($15.9 billion) of debt due in the third quarter of 2019.” If
they cannot access funding to refinance this maturing debt, there will be
more defaults.
Bloomberg notes that shadow lenders accounted for about one-third of all
new loans over the past three years, as the regular banks have been trying to
themselves out of their own crisis:
The worst is probably still to come. Observers warn the credit crunch may
hit the property sector next. It is heavily dependent on funds from shadow
banks, and concerns are already being reflected in some realtor bonds.
The auto sector is heavily impacted, with about 40% of new auto loans
being issued by shadow banks, and with these shadow banks now reeling from a
debt crisis, after regular banks had gotten sidetracked by their own bad-loan
crisis and banking scandals.
And contagion is rippling through the system as regular banks are heavily
exposed to shadow banks: According to Bloomberg, about 7% of all loans on the
books of regular banks have been extended to shadow banks.
Market participants have been clamoring for the government, regulators,
and the central bank to step in and do more, and to announce specific measures,
and to bail out teetering lenders. And the auto industry has chimed in,
clamoring for specific measures too, from tax relief to a cash-for-clunkers
program, as the debt crisis has hit the real economy.
Until all this happened, India was a fast-growing auto market. That
has not been the case in the US, a horribly mature market where auto sales in
2019 are on track to drop to the level they’d first seen in 1999. Read… New-Vehicle
Sales Fall to 1999 Levels: How to Grow Revenues After 20 Years of Stagnation
(Yup, You Guessed It)
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