India’s vehicle sales are recovering but it’s too early to celebrate. Here’s why

India’s vehicle sales bounced back in the financial year ended March 31 but remained far below the numbers recorded two years ago, before the onset of the Covid-19 pandemic, indicating the long road to recovery.

Demand for cars and bikes has long been used as a bellwether for consumer sentiment while that for commercial vehicles (CVs) such as buses and trucks is a key indicator of business sentiment. This has significant implications for the domestic growth story and is a key determinant of industrial activity as lower sales lead to lower production of automobiles, which also affects the huge auto ancillary business.

Total retail vehicle sales in the country during March 2022 decreased 3% from a year earlier to 1.62 million units, according to the Federation of Automobile Dealers Associations (FADA), the apex national body of automobile retail industry in India. However, when compared with March 2020 numbers, sales in March 2022 were down 30%.

On year-on-year basis, three-wheeler and CV sales were up by 27% and 15%. Two-wheeler, passenger vehicle and tractor sales fell by 4%, 5% and 8%, respectively, in March 2022.

This essentially means that rural India is clearly not showing any sign of recovery as both two-wheeler and tractor sales continue to record lower numbers than two years ago.

FADA President Vinkesh Gulati said the two-wheeler segment, which was already a non-performer due to rural distress, saw further dampening due to rise in vehicle ownership cost coupled with rising fuel cost.

Moreover, despite demand from cars and SUVs remaining strong, supply crunch due to various global phenomenon such as the Russia-Ukraine war and China’s lockdown restricts customers from purchasing their favourite vehicle.

CVs continue to record double-digit growth when compared with last year even though the ride to pre-Covid levels is still an uphill task, FADA said.

Full-year numbers

For full FY22, total vehicle retail increased by 7% YoY but fell by 25% when compared with FY20, which was largely a pre-Covid year.

While tractor sales fell by 1%, two-wheeler, three-wheeler, passenger vehicle and CVs grew by 4%, 50%, 14% and 45%, respectively, during the year when compared with FY21.

However, the year was no different when compared with the month of March as tractors and two-wheelers (with low single-digit growth), which largely represent rural India, underperformed and remained under stress.

FADA said the recent challenges in the rural economy are due to the devastation caused by the second wave in April-June 2021. Workers who returned to their villages from urban areas are yet to go back to their jobs, it said.

The PV segment for the entire year saw high demand with low supplies due to the semiconductor shortage.

The three-wheeler segment is witnessing a shrinking market. A tactical shift from internal combustion engines to electrical vehicle is also visible as 45% of the three-wheeler market is now driven by EVs.

FADA’s Gulati said FY2022 was the first year of recovery after Covid-19 hit in 2020-21. He said that despite “total chaos”, especially in rural India, auto retail sale saw a 7% rise during the year.

However, overall full recovery is yet to be seen as retail sales are down by 25% when compared with FY20.

Near-Term Outlook

The impact of Covid lockdowns during April 2020 and April 2021 means April 2022 will see growth, though on low base. But when compared to a pre-Covid year, this will still be in deep red, FADA said.

The near-term outlook for Indian auto industry remains challenging as the Russia-Ukraine war and China lockdown hint towards a rough path. Crude oil is also on a boil and hence fuel prices have been raised by around Rs 10. This will continue to rise and further hit sentiments, FADA said. Along with this, increase in raw material costs have made automakers increase the prices of their vehicles. While no dent in terms of demand has been seen in PV segment, it will definitely have its impact on the two-wheeler segment, which is an extremely price-sensitive market.

Precious metals and neon gas, which come from the war-hit zone, will further slow the supply of semiconductors. This will make waiting periods longer for cars and SUVs, FADA said.

Overall, FADA remains “extremely cautious” in terms of any recovery in sight until Russia-Ukraine war and China lockdown come to an end.