Indian Automobile Market: Signs of recession in Indian automobile sector

The festive season has begun in the Indian market, and this period holds significant importance for the country’s economy. The excitement of the festive season is typically reflected in market activity. However, the 2024 festive season has kicked off slowly, raising concerns among experts about a potential recession in the Indian automobile sector.

According to a report by the Federation of Automobile Dealers Associations (FADA), approximately 800,000 new cars are ready for sale, but the sluggish market has dampened purchasing activity.

A weakening economy, reduced employment, and decreased production are all factors that can seriously impact economic stability. This leads to the question: why is there a risk of recession in the Indian automobile sector? Furthermore, what effects could this recession have on the broader Indian economy? Let’s explore these important questions related to the automobile industry.

Indian Automobile Market

The festive season has begun in the Indian market, and this period holds significant importance for the country’s economy. The excitement of the festive season is typically reflected in market activity. However, the 2024 festive season has kicked off slowly, raising concerns among experts about a potential recession in the Indian automobile sector. According to a report by the Federation of Automobile Dealers Associations (FADA), approximately 800,000 new cars are ready for sale, but the sluggish market has dampened purchasing activity.

A weakening economy, reduced employment, and decreased production are all factors that can seriously impact economic stability. This leads to the question: why is there a risk of recession in the Indian automobile sector? Furthermore, what effects could this recession have on the broader Indian economy? Let’s explore these important questions related to the automobile industry.

2008 Recession

in the year 2008 automobiles were hit by a big slump. When the global financial crisis struck, several countries suffered many difficulties. Though the recession originally directly devastated the USA and Europe, India was extremely damaged, with GDP growth rates falling nearly 50 per cent.

2013-2014 Slowdown

In 2013, the Indian economy noticed its most destructive contraction in almost a decade. Some of the causes that led to the downturn include persistent inflation, poor investments, external influences, and speculation of quantitative easing by the US Federal Reserve. and India’s economy was slowed down by high interest rates & fuel price increases suddenly.

2018 Recession

time for the automobile market was critical and their auto sales went down badly. There, total sales of vehicles across all categories, including passenger vehicles, two-wheelers, and commercial vehicles, observed a decline of 13.77 per cent in 2019, at 23,073,438 units as opposed to 26,758,787 units in 2018.

Does GDP affect Indian Car Markets?

India’s automobile sector has experienced significant growth over the past few years, employing over 19 million people directly and indirectly. Its contribution to the national GDP has risen from 2.77% in 1992-1993 to approximately 7.1% today, underscoring its importance to the economy. The Indian government aims to expand the industry’s size to Rs. 15 lakh crores by the end of 2024, highlighting the sector’s growing role in creating job opportunities.

However, several factors could impact the future growth of the Indian car market. Economic uncertainty, including financial instability, may lead to a decline in demand. Furthermore, shifts in consumer preferences, such as a growing interest in electric vehicles or more affordable options, could reshape the market and require manufacturers to adapt. The industry is also reorganizing as it adjusts to new technologies and heightened competition.

Labor market reforms will play a crucial role in shaping the automobile industry’s future. These reforms could reduce informal employment and boost productivity, attracting more investment to the sector. Such changes would enhance efficiency, increase production, and improve competitiveness in international markets. Overall, a combination of economic, consumer, and regulatory factors will determine the successful future of India’s automobile industry.

• Economic uncertainty
• Consumer preferences
• Sector reorganization
• Labour market reforms

Sectors Affected by Automobile Recession

The auto sector will suffer a lot from a broad economic failure. Since the 2008 financial crisis, the car industry has been in decline and is yet to recover. A recession is bound to cause huge losses in a particular sector but its side effects are felt across every sector. The industries most affected by this recession include real estate, retail, restaurants, travel/tourism, leisure/hospitality, manufacturing/warehousing and many others. The 2008 recession was so devastating that its effects are still visible in the market and the government needs to learn from all these recessions and take drastic steps to protect the market from future disasters.

• Real Estate
• Retail 
• Restaurants
• Travel/Tourism 
• Leisure/Hospitality 
• Manufacturing/Warehousing

Will the Market Situation Improve during the festive Season?

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Experts anticipate that this will pass and that development will be aided by the festival season and a favourable monsoon. Manufacturing activity and GST revenues were two important metrics that declined, although the rebound is anticipated to be aided by favourable trends in consumer products and private investment.

Impact of GST on the Indian Car Market

The introduction of GST has brought about several significant changes in the automobile sector. There was some turmoil initially, but as buyers adjusted to the new tax system, auto sales began to stabilise. One of the major benefits has been that GST has replaced several taxes, which has increased transparency in pricing, and made it easier for consumers to compare prices across different states. In addition, the overall tax burden on automobiles has reduced, leading to lower prices for consumers across different market segments.

Read Also: What is GNSS & its new toll rules of 2024

It has also led to the expansion of organised retail channels and online sales of automobiles. At the same time, the tax rates applicable under GST have impacted market dynamics, making certain vehicle segments more attractive to buyers, and this has impacted sales patterns across different categories.

Impacts of Inflation and Unemployment on the Tax Market

The tax market is directly impacted by unemployment and inflation, mainly because of changes in the size of the taxable income base and how taxpayers behave during times of economic volatility such as high unemployment or high inflation. These factors also have an impact on the total amount of tax revenue that governments collect.

Inflation

Inflation can significantly impact the tax system in various ways. One major effect is the distortion of the tax system, where the actual value of tax credits and deductions diminishes if tax rates are not adjusted for inflation. This leads to a higher effective tax burden on individuals and businesses. Additionally, high inflation can create challenges in tax collection, as payment schedules may not align with inflationary pressures, resulting in delays that reduce the actual tax revenue collected by the government.

Another consequence of inflation is the increase in nominal income, which may push taxpayers into higher tax brackets, a situation known as “bracket creep.” Although their real purchasing power remains unchanged, their tax liability increases, thus raising overall tax revenue without a corresponding improvement in their financial well-being.

Unemployment

Unemployment rates can have a significant impact on the tax market. One key issue is the increased possibility of tax evasion, as individuals facing severe financial hardship may be more tempted to evade taxes to make ends meet. In response to rising unemployment, governments often introduce additional tax credits or deductions to support the unemployed, which further reduces overall tax revenue.

Additionally, with more people out of work, there is a reduction in the total taxable income pool, as fewer individuals are earning wages. This decline in taxable income leads to lower tax collection, putting additional strain on government finances during periods of economic downturn.

Government Policies and Automobile Market

Government policies significantly shape the business environment and influence economic performance. For example, changes in policies, such as increasing subsidies for specific industries, can directly affect the profitability of businesses within those sectors.

These targeted policies can make certain industries more attractive to investors and create a ripple effect in the stock market. Additionally, government monetary and fiscal policies, including taxation and government spending, have a substantial impact on international transactions, which in turn affects the overall health of the economy.

Furthermore, the government’s budgetary decisions can influence the stock market in various ways. Changes in interest rates, inflation forecasts, and industry-specific policies can impact market sentiment, business earnings, and sector performance. Beyond fiscal policies, governments also play a crucial role in maintaining market stability by enforcing property rights, contract laws, and regulating transactions. These actions contribute to creating a stable institutional framework that ensures smooth economic functioning and fosters market confidence.

What Phase of Downturn in the Indian Auto Sector? 

The automobile sector is currently facing significant challenges, especially due to high inventory levels across commercial vehicles, two-wheelers, and passenger cars. These excessive inventories reflect a situation where production has outpaced demand, placing additional strain on manufacturers and dealers.

Low demand for vehicles, exacerbated by regulatory uncertainties and a shortage of financing options for buyers in the Indian market, has intensified these issues. As a result, the industry is grappling with excess supply and insufficient consumer interest, which negatively impacts overall growth and profitability.

The slowdown in the auto industry has also led to severe social and economic consequences. An estimated 345,000 jobs have been lost due to the industry’s decline, leaving many families and individuals without employment.

Furthermore, weak demand and a lack of working capital have resulted in the closure of around 300 foreign dealerships, further destabilizing the market. These closures not only affect local economies but also reduce the availability of vehicles, limiting options for consumers and creating additional setbacks for the automotive industry.

• High Invertary Levels
• Low Vehicle Demand
• Huge Job Losses
• Foreign Dealership Closure

Conclusion

The Indian automobile sector, being the third largest in the world, plays a vital role in the country’s economy, especially during the festive season when consumer activity typically peaks. However, a slow start to the 2024 festive season has raised concerns about a potential slowdown in the industry. The sector is already grappling with significant challenges such as weak demand, regulatory uncertainties and financial constraints, leading to an unsold inventory of about ₹77,000 crore.

This situation mirrors previous downturns in the industry, such as the 2008 global financial crisis, the economic recession of 2013-2014 and the 2018 recession, all of which severely impacted auto sales and overall economic growth. As the sector struggles to recover, the potential repercussions for employment, production and the broader economy remain significant. Addressing these challenges requires a combination of strategic policies, financial support and consumer confidence to prevent a prolonged slowdown. We would love to hear your thoughts on this article! Please share your feedback by leaving a comment.

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