Yesterday morning, there was a news flash that the carmaker Toyota does not want to expand any further in India.
Shekar Viswanathan, vice chairman of Toyota’s Indian unit, Toyota Kirloskar Motor, told the news-agency Bloomberg: “The government keeps taxes on cars and motorbikes so high that companies find it hard to build scale.”
The company later released a statement saying: “Toyota Kirloskar Motor would like to state that we continue to be committed to the Indian market and our operations in the country is an integral part of our global strategy.” General Motors quit India in 2017.
In 2019, Ford Motor Company agreed to move a bulk of its assets into a joint venture with Mahindra and Mahindra. Whether Toyota wants to expand in India or not remains to be seen, but this sort of prompted me to look at car sales data over the years and it makes for a very interesting read.
Motown Slowdown
Source: Centre for Monitoring Indian Economy.
The car sales data is available from 1991-92 onwards, a year in which around 1.5 lakh units were sold. The actual jump in car sales came in the decade between 2001-02 and 2011-12, when the car sales jumped from 5.09 lakh units to 20.31 lakh units, an increase of 14.8% per year on an average.
The car sales in 2019-20 were at 16.95 lakh units and lower than the sales in 2011-12. Of course, some of this was on account of the spread of the covid-pandemic. But car sales had been slow even before covid struck. Let’s ignore the car sales for 2019-20 and look at car sales for 2018-19, which were at 22.18 lakh units.
The car sales between 2011-12 and 2018-19 grew at the rate of 1.3% per year, which basically means that they were largely flat.
If one looks at the increase in car sales over the decade between 2008-09 and 2018-19, when the sales jumped from 12.2 lakh units to 22.2 lakh units, it works out to an increase of 6.2% per year.
Irrespective of whether Toyota is leaving India or not it is safe to say that car sales haven’t been going up much in the last ten years or more. In fact, if we look at data a little more minutely, things get more interesting.
A bulk of the cars being sold are essentially mini and compact cars (3201mm to 3600mm and 3601mm to 4000mm). Data for this is available from 2001-02 onwards. Take a look at the following chart, which plots the number of mini and compact cars sold as a proportion of total cars sold.
Value for Money?
Source: Author calculations on Centre for Monitoring Indian Economy data.
In 2001-02, mini and compact cars formed 82.4% of cars sold. It fell to a low of 72.9% in 2012-13. It has largely risen since and in 2019-20 reached a high of 93.7%. The point being that over the years a greater proportion of car buyers have bought value for money cars, making it difficult for many foreign car companies, given that this end of the market is dominated by Maruti Suzuki and Hyundai.
In the last five years, the sales of cars of up to 4,000 mm in length has simply gone through the roof. This is a function of the fact that the economic growth and the income growth have both stagnated in comparison to the past. Take a look at the following chart, which plots the increase in per capita income over the years in nominal terms.
Show Me the Money
Source: Centre for Monitoring Indian Economy.
The per capita income growth has fallen over the years and that is reflected in the kind of cars people buy. There is a straightforward connect between the second chart and the third chart. Car sales have gone up at a fast pace whenever there has been a consistent double-digit growth in income. Between 2014-15 and 2019-20, the per capita income has consistently grown in single digits, except in 2016-17, when it grew at 10.4%. This reflects in the car sales as well.
This slowdown in income growth indicates an economy which has slowed down majorly over the last few years. And this shows in the slow growth in car sales.
Of course, this is not the only reason for slow growth in car sales. There is also the problem of higher taxes. And Viswanathan of Toyota is not the only one who thinks so.
As RC Bhargava, the current chairman of Maruti Suzuki, India’s largest carmaker, and the grand old man of India’s car industry, puts it in his new book Getting Competitive—A Practitioner’s Guide for India:
“In India cars have always been considered a luxury product and taxed accordingly till the present… [this] despite being one of the few globally competitive industries. Both the Central and state governments levy taxes and the total is 2–3 times the tax in the developed countries.”
Of course, these taxes make cars expensive and that leads to lower sales growth. The car industry has tremendous multiplier effect on the overall economy. As Bhargava puts it:
“It generates high volumes of employment and leads to the development of many technologies and industries whose products are used in the manufacture of cars. These include steel, aluminium, copper, glass, fabrics, electronics and electricals, rubber and plastics.”
Essentially, high taxes on cars have ensured a slow growth of the industry. Slow growth of this industry has contributed to the overall slow growth of the economy. And the overall slow growth of the economy and incomes have contributed to the slow growth of the car industry. This is how it links up.
Hence, lowering taxes on the automobile sector in particular (something I have written about in the past) and on cars in particular, will work well for the economy. It might lead to lower per unit tax collections for the government, but the increase in sales volume should gradually make up for this.
Also, as I explain here, an expansion in manufacturing creates many services jobs as well. But for all that to happen taxes need to come down. Nevertheless, as Viswanathan told Bloomberg: “You’d think the auto sector is making drugs or liquor.”
