India’s Automakers Prime for Post-Election Demand Rebound

India’s automakers are readying for a rebound in demand after national elections due by May, betting that a government armed with a new mandate will push through policies to jumpstart the economy.

From Tata Motors Ltd. to Honda Motor Co., automakers are holding back 11 of the 14 new models on show this month at India’s largest car exhibition for sale until after the polls.

“Consumers are saying ‘I am going to wait till elections are over,’” Anand Mahindra, chairman of Mahindra & Mahindra Ltd., India’s largest SUV maker that was co-founded by his grandfather, said at the New Delhi auto show. “Like everybody else, I’m in a twilight zone. I’m in a state of limbo. I’m not bothered about criticizing anything or worrying about the past, I’m just waiting for the new government to come.”

Auto sales in India are headed for the first annual drop since the fiscal year ended March 2002, as slowing economic growth, high inflation and political bickering depress consumer sentiment in Asia’s third-largest economy. Attendance at the biennial car show was 20 percent below the previous event.

“We think new models will help create excitement and also expect buyers to come to market once political uncertainty clears,” said Ammar Master, an analyst at LMC Automotive, who predicts vehicles sales may gain 7 percent in 2014. “At the same time, we are aware the risk to our forecast is on the downside.”

Consumer Confidence

Consumer confidence among India’s urban residents has seen a “marked decline,” with weakening discretionary spending and car purchases being deferred, Mumbai-based Religare Capital Markets Ltd. said in a report Feb. 5. The proportion of respondents who are more confident about the country’s economic prospects fell to 33 percent in the firm’s latest survey, from 51 percent in May 2012 and 40 percent in November 2012.

They include Rajkumar Shaw, who put off replacing his 10-year-old Ford Ikon until after the elections in the hope that a new government will stabilize the economy.

“I already have a housing loan,” said Shaw, 43, who lives in Kolkata and works in the accounts department of a glass company. “I don’t want to put myself in a place where if things get worse, I have one more burden.”

Election Year

Passenger-vehicle sales have risen in each of the three fiscal years when voters in the world’s largest democracy went to the ballot -- 1999, 2004 and 2009. Deliveries climbed by an average 31 percent during the past three election years, or more than twice the average 13 percent annual rate over the past 15 years, according to Society of Indian Automobile Manufacturers data compiled by Bloomberg News.

Auto sales jumped 49 percent during the 1999-2000 fiscal year when the BJP-led coalition formed the government. Deliveries climbed 18 percent in the 2005 fiscal year when the Congress-led coalition took over, and gained 26 percent in 2010 after the incumbent government retained power.

The finance ministry may have set the stage for a rebound, announcing this month temporary cuts to excise duties on vehicles starting from April 1 to June 30.

“The current domestic demand is weak and we don’t expect it to pick up before the elections,” said Rakesh Srivastava, senior vice president for sales and marketing at Hyundai Motor India. “Regardless of which party comes to power, it should lead to improvement in investment climate, which would help in terms of conversion of pent-up demand.”

Pent-Up Demand

That view is shared by Sumit Sawhney, managing director of Renault SA’s Indian operations. At Volvo AB’s local commercial vehicle venture, Philippe Divry sees “impatience in the system” as trucks are wearing out after two years of downturn and need to be replaced.

Not everyone thinks a post-election rebound is a given, especially with polls indicating neither the ruling Congress Party nor the opposition Bharatiya Janata Party are close to a majority. Without a clear mandate, both camps are at the mercy of regional parties and factions that may block reforms needed to spur growth.

“Demand will only turn around once we know who’s going to form the government, and the economic policies they take and how that impacts sentiment,” R.C. Bhargava, chairman of Maruti Suzuki India Ltd., which accounts for 40 percent of cars sold in the country, said in an interview.

Slowing Economy

Under the current Congress-led government, India grew 4.5 percent in the fiscal year through March 2013, the slowest in a decade. The country’s economy will expand 4.7 percent in the 12 months ending March 2014, accelerating to 5.4 percent the next fiscal year, according to the median forecast of 30 economists surveyed by Bloomberg.

The Reserve Bank of India has increased interest rates three times since Governor Raghuram Rajan took office in September to slow inflation that’s the highest in Asia. The benchmark repurchase rate has increased to 8 percent from 7.25 percent, hurting demand in a market where about 70 percent of all purchases are funded by bank loans.

The lack of consumer confidence means demand will remain muted for some time, according to Tata Motors Ltd., maker of the budget Nano car.

“We expect demand to remain stressed as it’s choppy times and tough to forecast,” said Ranjit Yadav, president of its passenger-vehicle business. “We expect a tough few quarters ahead.”

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