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Automobile

Modi government takes heat as India auto slump hits 10th month

Record sales decline in August spurs industry to call for more action

Maruti Suzuki released a new compact car in August in hopes of energizing sales in India. (Photo courtesy of Maruti Suzuki)

MUMBAI -- With India's auto sales notching a record fall in August for a 10th straight month of declines, the Indian government has come under increasing criticism for failing to reverse the slide.

August's 33% year-on-year decline, India's steepest in data going back to 2006, came after first-half unit sales pulled the country back to fifth place, behind Germany, in global rankings.

While steep oil prices and a soft currency sparked the decline, and the banks' reluctance to extend auto loans dragged it out, critics believe the government exacerbated the problem through clumsy policies that disregarded market conditions.

India's new-auto sales grew 10% in 2017 to 4.02 million, beating Germany's to become the world's No. 4 market. But cracks began to appear around July 2018, when passenger car sales dropped on the year for the first time in nine months.

In September 2018, a rule took effect requiring new-car buyers to take out insurance for three years upfront, roughly tripling the premiums needed for a purchase. Moreover, India's Supreme Court has ruled that once emissions regulations known as Bharat Stage VI take effect in spring 2020, vehicles that miss those standards cannot be sold. Would-be purchasers have held off on buying cars only approved for the current Bharat Stage IV, fearing the vehicles will no longer be considered fit for the road.

The government may also have taken an overly sunny view of the auto market. When Prime Minister Narendra Modi began his second term in May, unit sales had already been sliding for seven months. The industry hoped to receive a helping hand when the government unveiled its budget proposal in July. But tax breaks were ultimately introduced only for electric vehicles, whose sales the government aims to spur.

New-car purchases in India come with a steep 28% goods and services tax. Lowering that to 18% was among the relief measures requested by industry players. Sport utility vehicles face additional taxes that bring the total to 50%.

Tata Motors CEO Guenter Butschek last week asked that the government "let us know here and now" whether a tax reduction would be possible. He noted that people who might otherwise make a purchase are holding back, "expecting some kind of movement."

Until recently, the government appeared unconcerned. In July, it said it would raise new vehicle registration fees for diesel and gasoline cars more than eightfold to 5,000 rupees ($70) from 600 rupees. This move has also been seen as an effort to promote electric cars.

However, with sales skidding rapidly, the government said last month that it would take steps to intervene. A ban on government departments buying new vehicles would be lifted, said Finance Minister Nirmala Sitharaman, to spur purchases of new cars. She also stressed that BSIV-compliant vehicles will be usable for the entire length of their registration, even after BSVI takes effect. But such moves are not expected to yield significant benefits.

On Thursday, Maruti Suzuki India CEO Kenichi Ayukawa suggested at an annual industry meeting that the government create a platform for discussing the effect policy has on the auto sector. The Suzuki Motor unit controls roughly half of India's passenger car market.

India is crucial for Suzuki, which has been in the market since 1982 and wields great brand power here. The country makes up more than half the company's global unit sales for four-wheelers.

The slowdown in this market impacted Suzuki's April-June earnings, with group operating profit sliding 46% on the year to 62.6 billion yen ($582 million). Maruti Suzuki suspended operations at two Indian facilities on Saturday and Monday to help clear inventory. Suzuki director Masahiko Nagao said there was "no cause for optimism in sight."

The long auto slump could also further blunt India's real economic growth rate, which has shrunk for five quarters straight. The global auto industry will watch how Modi's government responds.

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