India Auto Sales Plunge Most in 16 Years on Modi’s Bank Note Ban

  • Demand wanes after old high-denomination banknotes scrapped
  • Industry wants federal budget to take steps to boost demand

India's Auto Sales Spur Oil Demand

India’s automobile sales fell the most in 16 years last month after Prime Minister Narendra Modi’s unprecedented clampdown on cash prompted consumers to delay their purchases of cars, motorcycles and trucks.

Automobile sales fell 19 percent to 1.2 million units in December, the biggest drop since the same month in 2000, according to data released by the Society of Indian Automobile Manufacturers in New Delhi. Passenger vehicles sales dropped 1.4 percent while scooters and motorcycles -- a key indicator of rural demand -- fell 22 percent, the biggest monthly contraction on record.

“Demonetization has had its impact on the industry although we feel it is a temporary phase,” Vishnu Mathur, director general of SIAM, told reporters in New Delhi. India’s budget, scheduled for Feb. 1, should include measures to increase disposable income of consumers to improve sentiments, he said.

The drop in auto sales is yet another indication that Modi’s move to suck out 86 percent of the currency in circulation is slowing Asia’s third-largest economy. The industry will miss its 12 percent sales-growth target if Modi’s budget doesn’t include sops for the industry, Mathur said. Gross domestic product is expected to expand 6.8 percent this fiscal year, according to the median estimate in a Bloomberg survey of 18 economists. That’s slower than the 7.7 percent expansion predicted before Modi’s Nov. 8 move.

“At present, the mind frame of the consumer is to hold the purchases," said Abdul Majeed, partner at Price Waterhouse. The negative sentiment toward vehicle purchases is likely to extend for the next two to three months, he said.

Sluggish consumer demand will add pressure on the Modi-led administration to implement measures in the federal budget to help kick-start growth. Even without accounting for demonetization, the statistics ministry forecasts gross domestic product growth to slow to 7.1 percent in the year through March, it said in a statement on Friday.

To see the impact of the cash ban on India’s cement industry, click here

The economy is getting back on track after the initial shock and some economists were overplaying the impact of demonetization, Power Minister Piyush Goyal said in an interview last week, adding that automobile sales and cement dispatches had stabilized.

The measure to ban high value currency notes prompted a rush to deposit the bills in banks spurring lenders to cut borrowing costs. Modi’s move could boost revenue collections and help government cut taxes, Goyal said.

Recent data back economists’ concerns that consumption has been hit. The Nikkei Purchasing Managers’ Index signaled December contractions in both manufacturing and the dominant services sector, which makes up about 60 percent of the economy. A private gauge of consumer sentiment has dipped since mid-December and anecdotal evidence suggests job losses in India’s vast informal sector that employs more than 90 percent of Indian workers.

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