All you need to know about the slowdown in automotive industry

Reading time: 5-6 minutes.

The auto sector which contributes to more than 7% of India’s GDP is facing one of its worst downturns now. The reports of the Society of Indian Automobile Manufacturers in July revealed that, as compared to the previous year, vehicle sales have declined by 31% to 2,00,790 vehicles. There has been a reduction in sales across all vehicle categories such as passenger vehicles, commercial vehicles, two-wheeler and three-wheeler vehicles. Out of these, passenger vehicle segment has been the worst hit and has been declining for almost a year now.

This slowdown has resulted in a chain reaction in the entire industry. Automobile manufacturers have been offering discounts, offers and introducing new launches in the market. However, at the same time they are cutting down production to adjust inventory. Many vehicle dealerships have also shut down due to high inventory management cost.  This has resulted in massive layoff of workers by dealers and manufacturers in the supply chain.

This article endeavours to examine the reasons behind the slowdown in the automobile sector and its impact on the labour class.

What are the reasons for the slowdown in the automobile sector?

A number of factors have contributed to this slowdown. This section would examine some of the important factors.

The most prominent reason for this downfall is the NBFC (Non-Banking Financial Company) crisis which has led to liquidity crunch in the country. Stricter lending guidelines by banks for automobiles and granting of loans to only people with high credit rating have affected the purchasing capacity of the consumers, especially in tier 2 and tier 3 cities.

The customer confidence in the sector has also declined lately. The government has been ambitiously planning to make a full transition to electric vehicles by 2030. Though India is not fully prepared for such a transition now, the government’s proposal has created a doubt in the minds of people as to whether their vehicles will become obsolete after 2030. This uncertainty and fear has made some consumers to postpone their purchase of new vehicle until the future becomes clear. This mind set has also affected the vehicle sales. 

Another reason is the uncertainty over transition to the newer and stricter emission norms of Bharat Stage (BS) -VI, which the government proposes to enforce from April 2020. Currently, BS-IV norms are in effect and the vehicles are compliant to this standard only. This has made customers wary of buying BS-IV vehicles which may become obsolete in the BS-VI era. As a consequence, while some of the consumers are deferring their vehicle purchase plan for now so as to buy the latest BS-VI compliant vehicles when it rolls out, some others are waiting for better discounts and incentives that the vehicle manufacturers may offer when they rush to clear up their inventory of BS-IV vehicles before the April 2020 deadline. This postponement of purchase plans by consumers has affected the sales and production as it has created a situation of very high inventory but no sales.

Growth of ride-sharing services like Ola and Uber in the market has also affected the demand for ownership of cars as these services are very economical and hassle free. The over-crowding on the roads has contributed to this trend of people switching to ride-sharing services and public transport in order to avoid the inconvenience on roads.

The competition from the pre-owned market, which has grown substantially in the past 5 years, can also be attributed as another factor which has contributed to this slowdown.

 What is the impact of this slowdown on jobs in the sector?

286 dealership stores have been shut across 271 cities in the 18 month period which ended in April this year. This has resulted in 32, 000 people losing their employment. Further, 2 lakh job cuts have been witnessed in the last 3 months. The decline in the automobile industry has affected the component industry as well.

The major job losses have happened in the Gurugram- Manesar belt, Pune, Jamshedpur and parts of Madhya Pradesh, the major hubs of automobile industry in India. If the slowdown continues, one can expect more job layoffs in the industry.  As of now, majority of the job layoffs have been of contract workers. But, if the present condition persists, the time is not so far when the regular employees will also face the prospect of job loss.

How has the slowdown affected the rights of the workers in the sector?

Laws have been enacted by both Central and State governments covering general and specific labour issues. Some important legislations that have been enacted are Contract Labour Regulation Act, 1970, Industrial Employment Standing Order Act, 1946, Trade Unions Act, 1926, Minimum Wages Act, 1946, Workmen Compensation Act, 1923 etc. These legislations regulate wages, terms of services, leaves, conditions of work, holidays, overtime, social security and industrial relations. In case of employee retrenchment, the Industrial Dispute Act, 1947 provides that compensation is to be paid at the rate of 15 day wages to be calculated from the last drawn salary of employee.

Even though it is a common practice to have a written contract of employment, it is not a compulsory requirement. In the private sector, terms and conditions of employment are governed by the respective employment contracts and by legislations that govern both private and public sector.

Amidst the continuing slowdown in the automobile industry, the implementation of the various labour legislations has taken a backseat. Large scale lay-off of workers has been witnessed. Workers in the sector are also not paid fair wages. Further, they are facing the issue of auto sector companies declaring non-working days. This directly affects their wages as a non-working day is considered as a holiday without pay.

The way forward…

The current slump in the sector could be the beginning of a major recession in the world’s fourth largest automobile market. This calls for immediate government intervention to solve the liquidity problem. There is an urgent need for far-reaching reforms and incentives to revamp the industry.

Though the government has claimed that they are working on a revival plan, the industry might face slowdown till then. Recent measures that have been announced by Finance Minister Smt. Nirmala Sitharaman in this direction include plans like permitting government departments to buy new vehicles.

Industry players believe that the worst is yet to come as they have to make compulsory transition to new technologies which will make their products more expensive. This will prolong the low consumer demand and liquidity crisis. The Federation of Automobile Dealers Association fears that more jobs might be lost and therefore they propose immediate government intervention in the form of reduction of GST. There is also a need to stimulate vehicle demand and sustain it even after the BS-VI implementation when vehicles will become significantly expensive. Even though the government might take actions, the recovery will be extremely slow as the downfall is largely due to economic cycle rather than factors like production. 

-This article is brought to you in collaboration with Shreya Bansal from Jindal Global Law School, Sonipat.

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