The Real Story Behind India’s Two Wheeler Sales or Rather the Lack of It

Two wheeler sales are a widely used economic indicator. They give us a good indication of the prevailing spending capacity of the middle class. To put it in simpler words, is the middle class in the mood to borrow and spend money or simply spend money (given that everyone doesn’t take a loan to buy a two-wheeler).

In the last few months, several economists, analysts, journalists, politicians and many Twitter warriors, have cited robust domestic two wheeler sales data to tell us lesser mortals that the economy is well on its way to revival.
But is that really the case?

Two wheeler sales data are reported in two ways. The industry body Society of Indian Automobile Manufacturers (SIAM) publishes sales data every month. The Federation of Automobile Dealers Associations (FADA) also publishes this data every month.

The manufacturers produce the two wheelers and the dealers sell them to the end consumers.

Let’s take a look at the following graph which basically plots domestic sales of two wheelers as reported by SIAM and FADA, for this financial year.

What’s that GAP?

Source: SIAM and FADA.

As can be seen from the chart, there is a wide difference in sales as reported by SIAM and as reported by FADA (The blue bar is bigger than the orange bar throughout). Why is this the case? Let’s look at this pointwise.

1) The only month where SIAM and FADA reported same sales was in April, when the economy was under a lockdown, and the two wheeler sales reported by both the bodies was zero.

2) While both the bodies report sales, what they report are totally different numbers. SIAM reports the number of units of two-wheelers leaving the gates of manufacturers or factory gate shipments. In simpler words, these are units which have been sold by manufacturers to dealers across the country, who in turn will sell to the end consumers.

In turn, FADA reports the number of units of two wheelers registered at the Regional Transport Offices (RTOs) across the country after they have been sold to the end consumer. Hence, the sales number reported by FADA is a better representation of sales to end consumers.

3) As can be seen from the chart, in every month from May to October, two wheeler sales as reported by SIAM were more than that reported by FADA. As per SIAM a total of 8.04 million units of two-wheelers were sold during the period April to October 2020, or the first seven months of this financial year. This is around 29.8% lower than sales reported by SIAM during the same period last year. Clearly, year on year sales are down even as per SIAM data.

4) As per FADA, the two wheeler sales during the period April to October stood at 4.78 million units, which is 3.26 million units or 40.5% lower than the number reported by SIAM. Cleary, there is a huge difference between the two numbers. One reason for this lies in the fact that the FADA data still does not capture registrations made at RTOs all offices across the country. The states of Andhra Pradesh, Madhya Pradesh and Telangana, are not hooked on to the Vahan 4 system from which FADA draws its data.

This explains a part of the discrepancy but it’s still not good enough to explain the difference of 3.26 million units in the data  between SIAM and FADA.  The difference was more than a million units in October.

5) Why is the difference so huge? What SIAM is counting as sales is essentially inventory getting built up at their dealer level, something that the FADA data does not capture. This explains a bulk of the difference. A good proportion of the two wheeler units which have been sent from manufacturers to the dealers have not been sold to the end consumer.

Companies have been building up inventory with dealers across the country in the hope of good festival season sales. Also, the new Bharat Stage VI emission norms came into force from April 1. This meant that the inventory of two-wheelers at the dealer level had to be built all over again.

In fact, in its October press release, FADA pointed out that the inventory at the dealer level was at its highest in this financial year and it may impact the financial health of the dealers. In September, FADA had pointed out: “Inventory for two wheelers stands at 45-50 days”. It has only gone up since then.

6) Has this strategy of companies piling up inventory at dealer level in the hope of festive season sales worked? The answer to this question will become clearer once we get the November data from both SIAM and FADA, early next month.

Hero Motorcorp has put out a press release saying it has had a good festival season.  As the company points out:

“Despite the severe disruptions on account of the Covid-19 this year, the good retail off-take during the 32-day festival period – spread between the first day of Navratra and the concluding day after Bhai Duj – was 98% of the festive season volumes sold by the Company in the previous year (2019) and 103% compared to the same period in 2018.”

The question is does this apply to the sector as a whole or has Hero Motorcorp simply been gaining market share? The festival season this year was from around the middle of October to the middle of November. The October data as we have already seen hasn’t really been inspiring on the end consumer sales front with a gap of more than a million units in the sales data as reported by SIAM and FADA.

To conclude, two wheeler sales this year have been weak. As we have already seen, they are down 29.8% year on year, as per SIAM. As per FADA, they are down close to 40.3% year on year. This is the real picture of two-wheeler sales in the country and not the one several economists, analysts, journalists, politicians and many Twitter warriors, have been citing to us lesser mortals.

Of course, things may have improved a tad in November due to the Diwali festival. But will that be good enough to pull the industry out of the mess that it currently is in? I have my doubts about that. Also, in the months to come, the pent up demand will get exhausted. Further, one reason people are buying two wheelers these days is to avoid travelling by public transport. This is likely to have played out by the end of the year.

It will be interesting to see what happens next. Meanwhile, it is safe to say that a large part of the great Indian middle class isn’t really in the mood to spend currently like they did in the past.

It's just another manic Monday for the Indian rupee

 rupeeVivek Kaul  
The Indian rupee crashed to an all time low level, crossing 61 to a dollar, this morning. As I write this one dollar is worth around Rs 61.2. On Friday when the foreign exchange market closed one dollar was worth Rs 60.24.
The rupee has crashed in response to return on the 10 year American treasury bond spiking to 2.73% on Friday i.e. July 5, 2013. This was an increase of 21 basis points (one basis point is equal to one hundredth of a percentage) in comparison to the return on Wednesday i.e. July 3, 2013. The bond market was closed on July 4, 2013, the American independence day.
A 10 year treasury bond is a bond issued by the American government to finance its fiscal deficit i.e. the difference between what it earns and what it spends. These bonds can be bought and sold in the open market. This buying and selling impacts the price of these bonds and hence their overall return.
The return on the 10 year American treasury bond spiked in response to better than expected jobs data. American businesses added 1,95,000 jobs in June, 2013, which was better than what the market expected. This faster than expected recovery in the job market is being taken as a signal that the American economy is finally getting back on track.
Since the start of the financial crisis in late 2008, the Federal Reserve of United States, the American central bank, has been printing dollars and pumping them into the financial system. This is to ensure that there are enough dollars going around in the financial system, so that interest rates continue to stay low. At low interest rates people are likely to borrow and spend more. Consumer spending makes up for around 71-72% of the American gross domestic product. Hence, an increase in consumer spending is very important for the American economy to keep growing.
The Federal Reserve prints dollars and pumps them into the financial system by buying bonds worth $85 billion every month. This includes government bonds and mortgage backed securities. On June 19,2013, Ben Bernanke, the Chairman of the Federal Reserve of United States, had said that if the American economy kept improving, the Federal Reserve would go slow on money printing in the time to come. He had said that it was possible that the Fed could stop money printing to buy bonds by the middle of next year.
The jobs data has come out better than expected. This is a signal to the bond market that the Federal Reserve will start going slow on money printing sooner rather than later. Several estimates now suggest that the Federal Reserve will start going slow on money printing as soon as September this year.
As and when the Federal Reserve goes slow on money printing the interest rates are likely to go up, as the financial system will have lesser amount of dollars going around. This is likely to push interest rates up. Bond prices are inversely related to interest rates. So as interest rates will go up, bond prices will fall, leading to losses for investors.
But markets don’t wait for things to happen. They start discounting likely happenings in advance.
Given this, the bond market investors are selling out on American government bonds to limit their losses. This has led to bond prices falling. Even when bond prices fall, the interest paid on these bonds continues to remain the same. This means a higher return for the investors who buy the bonds that are being sold.
So this has pushed the return on the 10 year American treasury bond to 2.73%. On May 1, 2013, the return on the 10 year American treasury bond was 1.66%.
An increase in return on government bonds pushes up interest rates on all other loans. This is because lending to the government is deemed to the safest, and hence the return on other loans has to be greater than that, to compensate for the higher risk involved.
As mentioned above, in the aftermath of the financial crisis, the Federal Reserve started to print money, in order to get the American economy up and running again. The trouble was that the average American was just coming out of a huge borrowing binge and was not ready to borrow again, so soon.
But the financial system was slush with money available at very low interest rates. This led to large institutional investors indulging in what came to be known as the dollar carry trade. Money was borrowed in dollars at low interest rates and invested in financial assets all over the world. The difference in return between what the investor makes and the interest he pays on his dollar borrowing, is referred to as the carry.
With interest rates in the United States going up, as returns on government bonds up, the carry made on the dollar carry trade has been on its way down. The arbitrage that investors were indulging in by borrowing in dollars and investing those dollars all across the world with a prospect of making higher returns is no longer as viable as it used to be.
A lot of this money came into the Indian stock market as well as the bond market. In case of the bond market the amount of return that can made is limited. Hence, carry trade investors who had invested in Indian bonds have been selling out. Between May end and now, foreign investors have sold out around $6 billion worth of Indian bonds.
When they sell out on these bonds, the investors are paid in rupees. In order to repatriate these rupees abroad they need to convert them into dollars. Hence they sell rupees to buy dollars. When they sell rupees there is a surfeit of rupees in the market and not enough dollars going around. In this scenario, the rupee tends to fall in value against the dollar.
And that’s what has happened in the morning today when the rupee crossed 61 to a dollar. As the rupee loses value against the dollar, foreign investors face a higher amount of currency risk, leading to more of them selling out. This puts further pressure on the rupee. ( you can read more about it here).
The pressure on the rupee will continue in the days to come. If American bond yields keep going up, more foreign investors will sell out of India and this will lead to the rupee continuing to lose value against the dollar. Over and above that there are several home grown issues that will ensure that the rupee will keep depreciating against the dollar. (You can read more about it here) This is not the last manic Monday we have seen as far as the rupee is concerned.

 PS: In the time that it took me to write this piece, the rupee recovered against the dollar. One dollar is now worth around Rs 60.99. Looks like the RBI has intervened to sell dollars and buy rupees.
The article originally appeared on on July 8,2013.
 (Vivek Kaul is a writer. He tweets @kaul_vivek)