india

Updated: Jun 14, 2019 08:30 IST

On Tuesday, the Society of Indian Automobile Manufacturers (SIAM) reported that domestic sales of passenger cars in May 2019 suffered the steepest annual drop in almost two decades. The annual growth in domestic passenger car sales in May 2019 was -26%, the lowest since the -31% figure in September 2001. To be sure, annual growth in passenger car sales has been going down since November 2018. Even two-wheeler domestic sales have been falling continuously since December 2018. When read with the fact that India’s GDP growth has been going down for four consecutive quarters (beginning June 2018), the car and two-wheeler sale statistics paint a disconcerting picture. Should we brace ourselves for an even bigger fall in GDP growth in the next quarter?

Looking at past statistics might offer some answers. A comparison of domestic sales of two-wheelers and passenger cars with quarterly GDP figures suggests that the recent deceleration in vehicle sales is in keeping with the fall in GDP growth.

However, there have been periods in the past where an increase in GDP growth has been accompanied by fall in car sales growth. There have also been times when growth in car and two-wheeler sales has moved in opposite directions.

Another set of statistics from the Reserve Bank of India’s Consumer Confidence Surveys (CCS) can help us understand this better. CCS gives the current perception of respondents in urban areas on key economic metrics such as general economic situation, income, employment and essential and non-essential spending. A comparison of these values shows that net current perceptions on non-essential spending, which is what car and two-wheeler purchases can be termed as, is often at variance with current perceptions on general economic situation and income. For example, while net current perception (difference between respondents with positive and negative perceptions) on general economic situation and income was the lowest during the November 2017 CCS round, non-essential spending recorded its highest value. These comparisons include statistics from the September 2015 CCS round onwards , which was the first to record perceptions on non-essential spending.

A comparison of passenger car sales growth and net perception on non-essential spending shows that the two move together more closely and have achieved their maximum and minimum values in almost the same periods. The relationship is not as strong in the case of two-wheeler sales growth. This makes sense, given the fact that CCS tracks only urban economic sentiment, and two-wheelers have a large market in rural India.

These statistics suggest that the current crash in car sales could be rooted in a crisis of consumer confidence in the urban economy, than overall activity levels in the economy. For example, Index of Industrial Production (IIP) grew at 0.1%, 0.4% and 3.4% in the months of February, March and April this year. However, growth in domestic passenger car sales in these months was -4.3%, -6.9% and -20% in these months. This shows that even as activity levels in the urban economy could have gone up, car sales have actually plummeted.

This crisis of confidence is not a benign issue. If urban consumers start cutting back on big-ticket spending in anticipation of bad times ahead, it can actually lead to a deceleration in economic activity via a negative multiplier effect. Herein lies the biggest policy challenge for the government with just weeks before the Union Budget. Any policy which hurts consumer sentiment in pursuit of fiscal or welfare goals could also hurt economic activity.