Why falling car sales is bad news for almost everybody

Vivek Kaul
The great film director Alfred Hitchcock started making films in the early 1920s in Great Britain. This was the era of silent movies. But Hitchcock really came into his own once he moved to Hollywood, where he first made the very dark Rebecca in 1940. For the next twenty years Hitchcock was at his peak churning out one hit film after another. This lasted till he made his scariest movie Psycho in 1960.
Among the many classics that he made during the period was a movie called 
Rear Window (which Ashutosh Gowariker before he became a director of epic movies tried to copy as Pehla Nasha). The movie tells a story of a photographer Jeff who has broken his leg and is bed ridden. A nurse called Thelma is taking care of him.
Jeff and Thelma are shown to be having conversations throughout the movie. One such conversation is reproduced below.
Stella: You heard of that market crash in ’29? I predicted that.
Jeff: Oh, just how did you do that, Stella?
Stella: Oh, simple. I was nursing a director of General Motors. Kidney ailment, they said. Nerves, I said. And I asked myself, “What’s General Motors got to be nervous about?” Overproduction, I says; collapse. When General Motors has to go to the bathroom ten times a day, the whole country’s ready to let go.
In the conversation above Stella tells Jeff that she had predicted the stock market crash of 1929 which led to the Great Depression, once she figured out that General Motors was in trouble because they were not selling enough and as a result overproducing. 
While Stella’s claim of having predicted the stock market crash was a little far fetched, the conversation in a very simple way shows the clear link that exists between the automobile industry of a country and its overall economy. General Motors got into trouble only when the American economy was in trouble and this in turn added to the troubles of the American economy further. So when car sales are down dramatically it is a reflection of the overall economy being in a bad shape and the stiuation probably worsening in the days to come. 
The domestic passenger car sales in India hit a twelve year low for the month of February 2013 when they fell by 25.71% to 1,58,513 units in comparison to the same month last year. In February 2012, domestic passenger car sales were at 2,13,362 units. This is the biggest decline in domestic passenger car sales since December 2000, when sales had declined by 39.9%.
In fact for the period between April 2012 and February 2013, car sales were down by 4.6%. This is a reflection of the overall state of the Indian economy, which is slowing down considerably. 
Lets look at the points one by one. Household savings have gone down from 25.2% of the GDP in 2009-2010(the period between April 1, 2009 and March 31, 2010) to 22.3% of the GDP in 2011-2012(the period between April 1, 2011 and March 31, 2012). While the household savings number for the current year is not available, the broader trend in savings has been downward. 
So people have been saving lesser over the last few years. A straightforward explanation for this is the high inflation that has prevailed over the last few years. The consumer price inflation for the month of February 2013 stood at 10.91% in comparison to 10.79% for the month of January 2013. Food prices in February 2013 rose at a much faster 13.73%.
People are possibly spending greater proportions of their income to meet the rising expenses due to high inflation and this has in turn led to a lower savings rate. High inflation would not have been a problem if incomes also had been growing at a fast rate. But that doesn’t seem to be the case.
Estimates released by the Ministry of Statistics and Programme Implementation clearly point that out. As a release dated February 7,2013, states “The per capita income in real terms (at 2004-05 prices) during 2012-13 is likely to attain a level of Rs.39,143 as compared to the First Revised Estimate for the year 2011-12 of Rs. 38,037. The growth rate in per capita income is estimated at 2.9 per cent during 2012-13, as against the previous year’s estimate of 4.7 per cent.”
So prices have been growing at a very fast rate and incomes haven’t. In this scenario people have been cutting down on the consumption of high costs items like cars as they struggle to save the same amount of money as they had been doing in the past.
High inflation and lower household savings has also led to higher interest rates, which in turn has meant higher EMIs on automobile loans. This also has had its impact on car sales. And high inflation is here to stay. As Ruchir Sharma, a Managing Director & Head of Emerging Markets and Global Macro, Morgan Stanley Investment Managemen, recently said “The whole issue is that inflation is symptomatic of a wider problem in India.”
What has not helped is the fact that the government borrowing to finance its increased fiscal deficit(the difference between what it earns and what it spends) has also gone up over the last few years. Banks have had a lower pool of money to borrow from because of this and have had to offer higher interest rates to attract depositors. Higher interest rates on deposits have meant higher interest rates on loans and thus higher EMIs. 
But the greater impact has been because of the government deciding to allow the price of petrol and diesel to go up. With the government holding back the price of petrol and diesel for a very long time, prospective car buyers kept buying cars because they were not feeling the pinch of the high cost of fuel. Now any prospective car buyer also needs to take the high cost of fuel into account while making a decision. Since people were not paying the right price for diesel and petrol, this had artificially held up the demand for cars. Now that demand is coming down crashing. The point is that any artificial demand cannot hold up beyond a point. 
What this also tells us is that if the government had allowed the market to operate when it came to fuel prices, auto demand would have not come crashing down as it has, but would have adjusted gradually to a change in higher fuel prices. And you don’t need to be an expert to understand that a gradual adjustment is better than a dramatic fall. 
Now this is just one part of the story which explains why car sales have slowed down dramatically. But there is another part to the story. Slowing car sales also slow down other sectors of the economy as well, and this slows down the overall economy further. As T N Ninan wrote in a brilliant column in Business Standard in January 2013 “The car industry is a key economic marker, because of its unmatched backward linkages – to component manufacturers, tyre companies, steel producers, battery makers, glass manufacturers, paint companies, and so on – and forward linkages to energy demand, sales and servicing outlets, et al.”
In that context the fall of car sales by more than 25% in the month of February 2013 should be a clear sign of worry. Slowing car sales are also a reflection of the fact that people expect the bad times to either continue or to get even worse in the months to come. And this makes them hold onto the money they would have used to buy a car otherwise. It also means that they do not want to commit to an EMI right now. 
Floyd Norris writing in The New York Times explains it best: “New-car sales can be a particularly sensitive economic indicator because few people really need to buy a new car, and thus tend not to do so when they feel uncertain about their economic prospects. Even if a car purchase can no longer be delayed, a used car is an alternative.”
The article originally appeared on www.firstpost.com on March 12, 2013 

(Vivek Kaul is a writer. He tweets @kaul_vivek)