Car sales: Running on borrowed fuel?

In fact, domestic market sales in October rose the fastest in the last nearly three years -- since Feb 2007 to be precise -- at 34% and growth was noticed across brands and companies. October was also the ninth straight month of growth in car sales and followed jumps of 21% in September, 26% in August and 31% in July. Total sales in the seven months of this fiscal have been up a healthy 17%, giving India an enviable double-digit growth.

But just as the numbers hand out a story of growth and bullishness, is it really time to celebrate a revival. A closer look at the reasons behind the turnaround betray talks of an all-out celebration and rather point out to a situation of 'cautious optimism'.

The biggest, and perhaps the most crucial, impetus for the car industry came in the form of the government stimulus packages announced at the peak of the industrial slowdown towards end 2008 and beginning 2009. The Government cut the excise duty or the duty on manufacturing, on cars, bringing down their affordability. Car companies, many of whom were staring excess capacities then, were quick to pass on the benefit to the market, creating an all-round feel good atmosphere and attracting people to showrooms.

This was sweetened further by the rate cuts announced by central bank RBI that not only reduced the interest rates on loan financing but also asked banks to be more liberal in financing, something they were avoiding due to the liquidity crunch in the market. Lower interest rates, and higher participation by PSU banks in rural markets, gave car sales another big booster as it ensured that those willing to buy found loans in the market, and at cheaper rates.

However, a quick reality check may show that these boosters may soon go. The low interest rate regime, a big reason behind the growth, may soon be on its way out. RBI has expressed concern over the rising inflation and hinted that interest rates may soon be headed northwards, surely a reason to worry for the car industry as well as buyers. Rising fiscal deficit of the Government is sure another reason that may make interest rates harden. Another cause for concern is the government's statement that it may withdraw the special stimulus packages (lower excise regime) as the economy seems to be coming back to its feet. If and when this happens, the price of cars would surely move up and so will the affordability, a sureshot dampener.

And while the sales numbers look healthy, they have to be looked into in perspective. Addition of new models that were not there in the comparative period is a big reason behind the higher growth rate. Models like Honda Jazz, Hyundai i20, Fiat Grande Punto, Suzuki Ritz, Fiat Linea (to name a few), have provided the incremental numbers to sales which makes the growth rate appear stronger. Also, a low base effect is another reason behind the noticeable spurt in growth rate now. Let us not forget that the economic slowdown hit the market around September-October last year following which sales remained impacted in the subsequent months.

So can the bulge in growth be dismissed as artificial. Not really, but it just requires an approach of cautious optimism. While some positive factors sure require a reality check, it will be unfair to ignore other favourables that are gradually building up. These include the surge in stock markets; revival of optimism in the corporate sector and creation of jobs and salary hikes; and the return of confidence among buyers. Addition of further new models, across segments, will also keep the momentum ticking. The real test, though, will come from February next year when the base returns to normal and actual growth can be measured.