An Unpopular Opinion: FM was logical about millenial theory
The comment by our Finance Minister Nirmala Sitharaman on ‘millenial mindset’ leading to slowdown in automobile industry attracted lot of memes and criticism on social media. Most concluded that the statement showcased FMs ignorance on the understanding of Indian economy. However, cutting through the clutter and based on ground realities, does FM statement’s make for a rationale view?
To put matters into perspective first, the FM said, “The slowdown is due to many factors ‘including’ the changing mindset of millennials.” The media is highlighting the news in a way which gives the impression FM meant ‘ola, uber and changing mindset’ are the only reasons, which certainly isn’t the case. Irrespective, distorted statements soon took centrestage on Social media for it was easy target for the ‘Meme World’. Also, the Finance Minister did not ‘blame’ the Millenials for slowdown as claimed by one of the leading online news portal.
However, the question that begs to be answered is – Has the changing mindset actually led to slowdown in auto industry? We believe, it certainly has. Not only for the millenials but also for the broader urban middle class. Owning a car is no more as aspirational in Urban Indian Society as it once was. Undertaking ‘New Experiences’ has indeed become a new aspiration. Further, the rising cost associated with owning a vehicle, has only acted as a deterrent. To be sure, this is not a trend which has emerged only recently in the Indian automobile industry and has been evident from quite some time.
During fiscal 2012 to fiscal 2015, the passenger vehicles segment witnessed substantial slowdown and infact recorded negative growth in fiscal 2013 and fiscal 2014. This slowdown can also be attributed to broader economy headwinds during fiscal 2013, when economy grew at 5.5%. But, as the economy gained momentum from fiscal 2015 onwards the automobile industry was also back to its growth path. However, majority of this growth was due to the emergence of cab aggregators. As per an Economic Times article published on January 18, 2017, 10% of the sales during 2015 and 2016 were on account of growing fleet of cab aggregators.
“Bulks of the cars will not be privately owned but will be used commercially by cab aggregators.” – RC Bhargava, Chairman, Maruti Suzuki India
Demand from Uber and Ola driving car sales, ET Bureau, January 18 2017
“Growth was stunted by diesel ban and demonetisation, which impacted the sentiment in 2016 and given the tough times, the fleet segment turned out to be a significant contributor.” – Rakesh Srivastava, senior vice-president, sales and marketing, Hyundai Motor India.
Demand from Uber and Ola driving car sales, ET Bureau, January 18 2017
Therefore, as the above comments also suggest, growth was driven especially by cab aggregators during last five years. As much as 6,00,000 PVs were sold to aggregators during 2013 to 2016 leading to rising demand for OEMs. Now, with this demand notwithstanding due to various reasons including higher commissions leading to dropping driver incentives, the growth has dried up. Further, the BS VI norms which will kick-in from April 2020 onwards has led to lower procurement by dealers, leading to lower sales for OEMs.
To sum up, the aggregators have been the major growth lever of PV segment for long, it is only now that there is a realisation and acknowledgment of the same by many industry participants.
Next question from many readers would be on Commercial Vehicle (CV) side and reasons for its slowdown. We believe the slowdown is on account of multiple factors including:
1) Overcapacity build over the years during period of easy credit during fiscal 2015 and 2017.
2) Substantial drop in freight movement due to slowdown in overall economic activity.
The lack of activity in overall infrastructure segment has led to poor freight availability. The already high inventory in the real estate segment does not bode well for increase in freight movement and rise in activity for CVs. So, what led to the slowdown in real estate segment? To a large extent, RERA played the villain here. Was RERA a step in the right direction? Certainly, Yes!
We do not intend to whitewash Government’s or Finance Minister’s image. For certainly, GST rates can be lowered for automobile industry. Also, the liquidity crunch situation is Government’s doing, the roots of which were sown on November 8, 2016. The IL&FS fiasco which led to liquidity crunch and crisis of confidence among various stakeholders could have been managed better. The Union Budget 2019-20 did not inspire much and perhaps did more damage to investor confidence rather than revive animal spirits. But criticizing Government by taking the comments out of context or partially quoting them is irresponsible at various levels.
We must read more of Rajiv Bajaj on the auto industry issue than WhatsApp University. If negativity about Government and Economy continues to spread the way it has during last month on Social Media, we will certainly head towards recession even if the economy does not deserve to. Spreading the narrative that ‘Economy will go belly up’ will only deter sentiment and lead to lower consumption spend, which has been growth engine of Indian Economy for more than a decade.