The Coming Months Will Be A Litmus Test For India's Automotive Industry: Here's Why

Indian consumers splurged big this festive season on everything from new gadgets to luxury homes providing a boost to the economy. The festive season also brought a much-needed surge in sales in the automotive industry, one of the key pillars of the Indian economy.

Historically Indians wait for the whole year to spend during the festive season for gifts and lifestyle buys as well. Among them are automobile purchases that people plan to do during this season to avail offers and discounts. The auto industry this year recorded a 19% increase in sales during the festival period selling 37.93 lakh vehicles during the 42-day festival period — which begins on the first day of Navratri and ends 15 days after Dhanteras. While there was a slump in rural spending earlier in the year, which also affected certain segments of the automobile industry, festive sales brought cheer to dampened consumer sentiments and fears of a further slump in sales.  

Strong consumer sentiment and attractive new car models got buyers to walk into car showrooms to loosen their purse strings. November too recorded the highest-ever sales  in the history of the Indian automotive market with a 18% year on year growth. Auto retail sales created history by selling 28.54 lakh vehicles in November 2023, crossing the previous March 2020 record when 25.69 lakh vehicles were sold,  Federation of Automobile Dealers Associations (FADA) data showed. 

FADA warned that the growth trajectory could be affected by other conditions. A statement from them read, “Severe rains and hailstorms in west and south India are expected to dampen rabi cultivation, which is already experiencing slow sowing and low reservoir levels, potentially impacting the final crop output. This may also lead to increased inflation, making daily essentials more expensive and thus affecting vehicle sales in the near term.” 

While certain segments have performed extremely well, others like tractors and commercial vehicles continued to struggle. 

The coming months will serve as a litmus test for the industry's growth as several factors such as the economic conditions at home and globally will play a crucial role. 

How The Market Fared Overall

As anticipated, the two-wheeler and sports utility vehicles (SUV) segments saw a double-digit growth in the second half of the holiday season. The demand increased in practically every region. This trend will likely continue in the northern parts of India as the winter wedding season adds to the demand. On the other hand, price increases because of rising commodity prices and regulatory changes are anticipated to be the industry's main short-term monitors.

All automotive categories experienced momentum because of the festivities. In November, two-wheelers, three-wheelers, and passenger vehicle categories grew by 21%, 23%, and 17% respectively year-on-year (YoY), while tractors and commercial vehicles witnessed a drop of -21% and -2%.

Navratri 2023 also brought unprecedented sales to auto retailers. Year-on-year (YoY) figures for this period show a robust 18% increase in overall auto retail.

While entry level cars did not fare so luxury cars. Luxury car makers like Audi, BMW and Mercedes-Benz registered record sales during the period. India’s luxury car industry is expected to reach over $1.54 billion in value by 2027, registering a CAGR of more than 6.4% from 2022 to 2027.

Lamborghini India head Sharad Agarwal perceived this as an evolution of consumer taste in a country that has the 3rd largest millionaire population in the world. “Hence the automobile segment is seeing substantial expansion with increasing demand for luxury cars with advanced tech and safety features," Agarwal said earlier this month. According to Agarwal, better road infrastructure and high aspirations were also driving demand from tier 2 cities and beyond. 

Two-Wheelers Outshine Passenger Vehicles

Passenger Vehicles: Despite the holiday season, passenger vehicles from original equipment manufacturers (OEMs) experienced sluggish growth due to persistently low sales of entry-level cars. Despite offering discounts of 25-30% for entry-level cars, the semi-urban and rural markets continued to be affected by an erratic monsoon.

In November, the passenger vehicle segment witnessed an overall growth of 17.19% YoY, marking the highest-ever recorded. This consistent trend of achieving record volumes each month throughout the year reflects the industry's exceptional performance in 2023.

Maruti's best-selling cars, including the Swift, WagonR, Baleno, Brezza, Dzire, Ertiga, and Eeco models, continued to dominate the market as part of the top 10 best-selling cars in India. Additionally, Tata's EV sales grew marginally in November. The company is a market leader in EVs and its lineup includes Nexon EV, Tiago EV, and Tigor EV, which experienced a slight growth.

Looking ahead, the sales of passenger vehicles in the upcoming months are likely to be influenced by factors such as the rising cost of ownership due to increased interest rates, new product launches, and improved inventory holding resulting from the stabilization in semiconductor supplies.  

FADA warned that passenger vehicle inventory had reduced slightly but continued to remain above 60 days. It urged passenger vehicle OEMs to “cut back on dispatches of slow-moving vehicles in the entry-level category and to announce extremely attractive schemes that will support year-end buying and help reduce inventory at dealerships”.

Two-Wheelers: In November, Indian two-wheeler manufacturers surpassed their four-wheeler counterparts, growing 21.08% YoY. This was driven by a surge in rural spending and the ongoing wedding season. During the festive season too, dealers reported a significant boost in foot traffic and bookings because of attractive discounts and offers.

The sustainability of this demand, however, remains uncertain. The current month's figures include half of the holiday season's sales and differ from the previous year's November. There is also a possibility that growth might taper to the high single digits in the upcoming months, despite the approaching wedding season and other minor holidays.

Hero Motocorp emerged as a frontrunner in this segment,  selling 8,02,234 units in November.

The FADA statement said, “In the near term, the two-wheeler category is poised to benefit from a liquidity boost, particularly in agricultural regions and the ongoing marriage season, with around 38 lakh marriages expected to drive vehicle sales. However, challenges persist as severe weather conditions impacting rabi cultivation might affect rural incomes, potentially dampening sales.” 

Looking ahead, players in this segment need to monitor two crucial variables — weak exports and the potential impact of irregular monsoons on farm cash flows. These factors will play a pivotal role in how the two-wheeler market performs in the coming months.

Commercial Vehicles: There were signs of slowdown, despite the market for commercial vehicles growing steadily throughout the fiscal year. Retail sales in November contracted 1.82% YoY with 84, 586 units sold this year as compared to 86,150 units last year. 

FADA said, “Seasonal slumps, exacerbated by unseasonal rains damaging crops and impacting transport demand, coupled with liquidity issues and delayed deliveries, further strained the industry. States going into elections also added to the woes, overshadowing the brief uplift from festive sales and the slight increase in tourism that helped in sales of buses.”

Government-back projects in the transportation sector and the increasing need for replacing vehicles because of environmental regulations are among the factors that are likely to affect sales in this segment in the coming months. 

The category is also likely to see recovery driven by business activities after elections. FADA said that “positive movements in key sectors like cement and coal. Backlogs in orders might also contribute to a sales boost”.

Tractors: An important indicator of better rural spending is the sales of tractors. Tractor sales contracted in November by 21.28% YoY selling 61,969 units in 2023, compared to 78,720 units a year earlier. 

Even during the festive period tractor sales saw a minor contraction of 0.44% YoY. This year saw erratic monsoons across the country with rural spending taking a hit. That is reflected in tractor sales in the last couple of months after a 6.15% YoY growth in October. 

Going forward, rural spending by the government and progress in rabi sowing will influence sales in the rest of the financial year. 

What Next? 

November was a mixed bag for the automotive sector. Passenger vehicles and two-wheeler sales saw positive trends, led by Maruti Suzuki and Tata Motors, while commercial vehicles faced challenges. Two-wheelers thrived during the festive season. 

A strong order book in passenger vehicles, the gradual recovery of two-wheeler sales and premiumisation across segments could mean a reversal in wholesale and retail dynamics. Adaptability to changing economic factors along with the new products and innovations would tell how the automotive industry will fare for the rest of the financial year. 

Although SUVs were the most in demand, OEMs' continued push for further dispatch means that passenger car inventory levels are still a major concern, with rates almost at an all-time high.