The Indian banking system, already reeling under a pile of bad loans from the infrastructure and aviation sectors, is now faced with increased risks from the auto industry.
Having cruised along smoothly for half-a-decade, the auto industry, where sales have grown at over 7% on average since 2013, may be in trouble due to a number of factors, according to credit rating agency Fitch.
India’s biggest carmaker Maruti Suzuki posted a 17% year-on-year decline in profits for the October-December 2018 quarter. It was also industry major Tata Motors third consecutive quarter in the red.
Automobile sales had grown by 15% in the last financial year, but the new normal will be sub-10%. That we have to get used to, Kumar Kandaswami, partner with Deloitte India, had told Quartz last month.
Commercial vehicle sales have suffered more than those of personal vehicles as the NBFCs liquidity crunch made loans more difficult to come by, said Darshini Kansara, deputy manager at CARE Ratings.
The Indian economy’s growth rate may dip a little to 7% in the next financial year, according to a report published by Fitch last week. This may limit demand for commercial vehicles, said Arvind Rana, associate director at the rating agency.
The rather volatile Indian rupee is expected to depreciate to the 75-a-dollar (£59) mark by the end of this calendar year, the agency believes.
At present, India meets nearly 80% of its fuel demand via imports. If the domestic currency slides, petrol and diesel prices would rise, hitting the auto industry badly.
This could hurt the operating margins of truck owners if higher costs are not passed on to customers, which can be difficult during stressful periods, the report added.
The global macroeconomic conditions have also not been very robust and economic growth is expected to slow down, if this is coupled with the worsening situation back home then auto sector may end up suffering, said an analyst at another rating agency, requesting anonymity.
However, it is the election year and so a lot of this is unclear at the moment and a clear picture will emerge only in the second half of this calendar year.