Mumbai: Passenger vehicle sales in India posted the steepest drop in nearly 18 years in May amid weak demand and a liquidity crunch faced by non-bank vehicle financiers, prompting major auto makers to cut production.

Sales fell 20.6% in May to 239,347 vehicles from a year earlier, according to data released on Tuesday by the Society of Indian Automobile Manufacturers (Siam). It was the biggest fall since a 22% decline in September 2001 and the seventh consecutive drop in monthly domestic passenger vehicle sales. Vehicle sales in India are counted as factory dispatches and not retail sales.

With retail demand staying weak for several months, some of the top carmakers such as Maruti Suzuki India Ltd and Mahindra and Mahindra Ltd have announced temporary factory closures to trim mounting stocks at their dealerships as well as factories.

In the passenger vehicle segment, car sales fell 26% from the year earlier in May to 147,546 units. Sales of utility vehicles and vans fell 5.6% and 27%, respectively.

The “auto industry has been moving towards inventory correction", said Vishnu Mathur, director general of Siam. “The industry is investing huge amounts of money in R&D (research and development) for upcoming safety and emission norms," he said, pointing to new regulations that will come into force from early next year. These rules are leading companies to alter their business models, with the top carmaker, Maruti Suzuki, announcing that it will stop manufacturing diesel cars from 1 April 2020. Others such as Tata Motors and Mahindra have said that they would upgrade most of their diesel engines to the new Bharat Stage VI emission norms from next April while discontinuing a few diesel vehicles.

In the commercial vehicle category, sales declined 10% from the year earlier in May to 68,847 units. Sales of medium and heavy commercial vehicles fell 20% last month, while light commercial vehicles posted a 3.7% drop.

Two-wheelers also continued to stay in negative territory, with demand staying weak in both rural and urban areas.

Total sales of two-wheelers fell 6.7% from the year earlier in May to nearly 1.73 million units. Factory dispatches of motorcycles declined 4.9% in May to 1.16 million units. Scooter sales dropped 7.9% to 511,724 units.

View Full Image (Graphic: Sarvesh Kumar Sharma/Mint)

Two-wheeler sales, especially in urban centres, have remained subdued, underscoring overall weak market sentiment and an absence of jobs, coupled with an increase in vehicle insurance premiums.

The three-wheeler segment, too, posted a decline, falling 5.8% last month to 51,650 units.

With lower sales across segments, overall industry sales of automobiles in India declined 8.6% from the year earlier in May to nearly 2.09 million vehicles.

Total automobile production in India declined 8% from the year earlier in May to more than 2.51 million units. This included a 12% cut in passenger vehicle production and a 10.5% cut in production of commercial vehicles.

On the exports front, passenger cars and motorcycles registered growth rates of 8% and 5%, respectively, according to Siam. A total of 48,447 cars and 265,585 motorcycles were exported last month.

“While the wholesale data continues to drop, the dimension of this downturn is now moving beyond the regular reasons such as negative consumer sentiments, fuel price volatility, increased insurance costs and others. It is time when government intervention is required in the form of demand stimulus and tax rationalization," said Sugato Sen, deputy director general of Siam.

Sen suggested the government cut the goods and services tax on all vehicle categories to 18% from the current 28%, reduce corporate tax to 25% from 30%, along with reinstating incentives for R&D investments to arrest the downturn in the automobile sector.

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