Demonetisation decelerates auto sector

Recent demonetisation of high value currency notes is expected to put brakes on the economic growth. Things are beginning to look shaky for automobile sector as well which is one of the highest employment generating sector. Cash crunch in the market owing to note ban has driven potential buyers to postpone their purchase plans, if not scrap their decision altogether. Vehicle loan disbursals from banks have moderated as most of the staff is busy dealing with exchange of currency notes. S&P BSE Auto index has corrected 9.2 per cent to 20,208.52 as on 14 December 2016 since declaration of demonetisation on 8 November 2016.

Car makers such as Maruti Suzuki, Honda Motor, Hyundai Motor, Mahindra & Mahindra, Renault Nissan and Ford Motor are extending their shutdown from week to around two weeks this and next month, consequent to inventory built-up with dealers. Dealers have experienced footfall going down 30-40 per cent for the month of November 2016. Two-wheeler segment is expected to be impacted the most as cash transactions account for 50 per cent of non-finance (30-35 per cent) transactions, while down payment for finance transactions (60-70 per cent) is mostly cash. 

However, we expect sales to return to normal in a couple of quarters as cash circulation normalises in the economy. Changes in regulatory provisions related to two-wheelers, passenger vehicles and scrapping of old vehicles is expected to drive next leg of growth in volumes. The government’s initiative to promote eco-friendly technology like CNG-based vehicles, hybrid vehicles and electric vehicles is expected to benefit companies such as M&M, AL and Maruti, which have developed this technology.