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Micro Economics

Notes

Case Study Auto Industry — Economic Slowdown as a Determinant
of Demand

utomobile sector is taken as the indicator of a modern and liberalised industrial
India. But as of now there is not much to write in praise of this star-studded sector
Awith gleaming Fords, Astras and Cielos. There is a gloom in this sector as on date.
The economic slowdown has led to unexpected downturn in demand.

With the first quarter of the current financial year (1997-98) having ended, the ` 30,000

crores automobile industry has shown very little signs of a much hoped for recovery
from the massive slowdown it registered last year. In fact it has shown continuous signs
of a decline in growth with most segments cutting down production due to poor sales
and inventory pile up. After witnessing whopping sales in 1995-96, the slowdown in the
last fiscal year was viewed by many as the inevitable correction in growth. However, the

continuing depressed condition has come as a dampener to the entire industry.
After becoming a blue-chip industry soon after the government liberalised the economy,
the automobile industry has been growing at break-neck pace, almost to the point of being
dubbed an overhead industry. The 1995-96 financial year saw the industry grow by around

30%, the luxury car segment by nearly 130 per cent. Last year the growth rates came back

to normal figures, registering a decline of over 10 per cent. Worst affected was the luxury
car segment – from a 132% growth rate it registered a negative growth. Though experts
were quick to dismiss last year’s poor performance, vis-à-vis 1995-96, as a correction, the
continuing depressed conditions are beginning to worry manufacturers as inventories
have started to pile up. With the general economy itself showing signs of a lethargy the
chances of a speedy recovery by the automobile industry look anything but likely.

Production and sale of vehicles has registered declining growths in the fi rst two months

of the financial year according to the latest data released by the Association of Automobile
Manufacturers (AIAM). The only segment that was able to register any impressive growth,
both in production and sales, was the motor cycles segment. Despite the strong growth of
the solitary segment, the entire automobile industry showed a declining growth.
While automobile production showed a negative two per cent growth the sales were
dipping at a fraction over 0.6%. Worst affected were the scooter segment (production
down 14% and sales down 9%) and mopeds (production down 13% and sales 11%).
The poor sales of heavy commercial vehicles virtually sums up the performance of the
automobile industry. The industry is peculiar in the sense that most of the sales here take
place through hire purchase or financing. While the three major heavy truck manufacturers

did not cut down production in the first two months, their sales were down by a massive

19.8 per cent. The entire industry was reeling under the liquidity crunch last year. The

effects of this do not seem to have worn out as evident from sales figures. With the general
economy not picking up, the demand for the heavy vehicles too has come down. In such
a situation a cut in production might be very pronounced in the coming months in this
segment.
The light commercial vehicle segment was no different either. Boosted by the sales of
Tata ‘Sumo’ last year, the light commercial vehicle segment has already shown signs of
its inability to sustain the tempo. Though ‘Sumo’ continued to do well and improve its
market share, the players in this segment cut down production by about two per cent.
However, the effect on sales was even more significant as it dipped by nearly 9.5 per cent.

Contd...

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