During an economic downturn, typically accompanied by a severe demand slump and job losses, the easiest mistake a government can make is not to acknowledge the problem. By playing down the issue, such governments only delay the much-needed solutions for the problem. It will then need to find a bigger justification for the worsened scenario. In the context of the auto sector slowdown and the government's approach towards it, this is precisely what Union Finance Minister Nirmala Sitharaman is doing right now.
Addressing reporters in Chennai on Tuesday, Sitharaman said the mindsets of millennials were adversely affecting the automobile industry as they prefer to use radio taxi services instead of buying their own vehicle. Here's is what Sitharaman said: "The automobile and components industry has been affected by BS6 and the mindsets of millennials who now prefer to have Ola and Uber rather than committing to buying an automobile."
There may be some truth in it. But arguably, this is a gross understatement of the auto sector crisis considering the extent of the ongoing auto sector sales slump and corresponding massive job losses reported in the sector. The reasons for record low sales by automakers are far beyond the change in millennial mindset if at all this factor has significantly contributed to the slump.
There are several reasons why Sitharaman's assessment of the problem is disappointing and fails to capture the magnitude of the developing crisis.
1) Ola, Uber-like car renting services are largely limited to metros and in the best scenario to tier-II cities. On the contrary, the kind of sales slump experienced by leading automakers is spread across even rural India, impacting sales of entry-level hatchbacks that typically first-time car buyers with a limited budget look at. There is no direct correlation one can draw between use of car renting services and decline in car sales of this scale.
2) Remember, car rental services based on mobile apps didn't take place overnight. They were there for a while now. In other words, people have been using car rental services even before. This isn't a new trend that is killing the new car market. Sales have been declining mainly since the last one year and in an alarming manner only in recent months, say last six months.
3) Even if app-based car renting services are picking up to the scale of upsetting the car sales market, as Sitharaman claims, that doesn't justify such a sharp decline. Domestic car sales were down 41.09 percent to 1,15,957 units as against 1,96,847 units in August 2018, according to data released by the Society of Indian Automobile Manufacturers (SIAM) released on Monday. This is the worst-ever fall for both the categories since SIAM started recording the data in 1997-98.
4) One can still blame record decline in car sales to Ola, Uber. But what will be the excuse for a similar downtrend in the truck, tractor sales and even moped sales? As this report in Business Standard says the overall volume at India's top four medium and heavy-duty commercial vehicles makers"Tata Motors, Ashok Leyland, Volvo Eicher, and Mahindra & Mahindra"fell 59.5 percent to 31,067 units during the month, compared with the year-ago period. In desperation, truck makers are offering discounts up to Rs 9,00,000 on high-tonnage (above 49 tonnes) duty trucks. Can the millennial mindset be blamed for dropping commercial vehicle sales too?
5) Sitharaman should remember that the demand slump isn't affecting auto companies alone, but its impact is felt across other sectors as well. FMCG companies are a good example. The same goes true with real estate and construction sectors and wherever manufacturing of products is involved. The June quarter GDP numbers a good reference for anyone to understand what is happening in the real economy.
Unless the auto sector slowdown is addressed through strong measures, the Goods and Services Tax (GST) rate cut, to begin with, the story will continue. The problem is that every slowdown is accompanied by job losses. The case is no different now as well. About 3.5 lakhs jobs have been lost so far in the auto and component industry alone. The millennial mindset or Ola/Uber cannot be certain blamed for this debacle.