How currency scrappage will impact the Indian auto industry

The Indian government’s decision to scrap the legal tender of Rs 500 and Rs 1,000 notes could impact vehicle sales in the rural markets in the coming few months as a big chunk of the market is driven by cash.

“There will be a temporary disruption in the auto industry in the near term due to the ban on currency notes. But a larger impact will be in the rural markets as the number of cash transactions is high. It is, however, too soon to comment and more clarity will emerge in a few days,” Sugato Sen, deputy director general, Society of Indian Automobile Manufacturers, told our sister publication Autocar India.

Mahindra & Mahindra says that although the demonetisation move is likely see a short-term impact on the sales volume, it will not have any long-term implications. The company is of the opinion that as most transactions in rural areas happen in cash, it will affect sales for a month or two, without causing any long-term distress.

The two-wheeler sector though could feel the pressure in the coming months. Motorcycles sales in rural India, which have bounced back in recent months, could slow down since a majority of two-wheelers here are bought with cash. Besides, two-wheelers are exempt from disclosure of Permanent Account Number (PAN) which is mandatory for larger vehicles.

Luxury cars and used car market to take a hit

Furthermore, sales of luxury cars and premium SUVs, along with the unorganised used car market, could also witness a slump due to the demonetisation, according to industry watchers.

“It is too soon to perceive what will actually happen but there could be an impact on car buying in the short term, particularly in the luxury vehicle space,” a proprietor at one of the largest car dealers in Mumbai said, requesting anonymity.

The unorganised used car market could also be hit due to scrapping of the currency notes. In fact, some dealers are known to encourage cash transactions.

“It will impact buying power for about 4-5 months since there many cash transactions take place. The delay in buying decisions too, will result in a lot of unsold cars being carried forward to next year which will make them cheaper,” commented a used car dealer.

Dealers expect activity to normalise once new notes of Rs 500 and Rs 2,000 get into circulation starting Friday, November 11.

Small car sales likely to be unaffected

The impact on small car sales may be minimal as most of the transactions occur through bank financing or loans, according to an executive at Maruti Suzuki India. The official added that activity in the organised used car segment arm too, will remain unaffected. Some of the leading organised used car dealers include Maruti True Value, Mahindra First Choice and Hyundai H Promise.

The same applies to virtual marketplace for used cars. Shubh Bansal, co-founder of virtual marketplace for pre-owned cars Truebil, called the decision by the government to scrap the Rs 500 and Rs 1,000 notes as positive.

“The used car industry is set to experience a positive turnaround by the currency withdrawal move. Considering the current state of the industry -- being unorganised -- the move will help to curb a lot of unaccounted cash transactions. It will help organised players to gain traction and both the stakeholders -- consumers (buyer and seller) will see transparency in transactions,” explained Bansal.

Related: Demonetisation leads to dip in car bookings across India