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23 Oct 19

Banking Crisis India: dropping car sales

The Indian automotive sector is facing its worst slowdown in decades. The Society of Indian Automobile Manufacturers released its September figures, showing a 24% decline in passenger car sales and 62% decline in commercial car sales.

Manufacturing in panic

The world’s fourth largest car industry is now formally in crisis mode and massive job loss is feared to impact a 35 million people working directly or indirectly in car manufacturing. Many companies, such as Maruti-Suzuki, Tata Motors and Ashok Leyland have already introduced non-working days (forced leave without pay).

Bubble?

Most of the investments in the Indian car industry were driven by the prospected growth of the country’s middle class and its appetite to buy new cars. The uptake was there indeed but is not demonstrating the exponential growth that was expected. The country’s GDP growth has started to slow down and a more frightening, but familiar phenomenon is starting to spook the market: a shadow banking crisis.

Car and house loans

Shadow banks are institutions that offer similar services to those that normal banks offer, but that are not subject to the same strict regulations of regular banks. These banks offer loans to those people who would not be able to receive loans from regulated banks or, in other words, people with less credit security. It is reported that up to 50% of Indians fund their cars through shadow bank loans.

When all goes well and GDP is growing, there’s not much of an issue with these practices. Now however, India’s economy is slowing down, revealing the weaknesses of the system. When people stop paying and the shadow banks don’t have enough funding to reimburse the money they have loaned from regular banks, a financial crisis is only months away.

Digging holes to fill holes

The Indian car industry is insisting the Finance Minister to lower the sales tax on cars from 28% to 18% in order to revamp the demand for new vehicles. In addition, the Government has already launched several other tax cuts, hoping to overcome the banking crisis and incentivize consumption. Unfortunately, this will not address the structural weakness of the Indian banking system and the hesitation of the Government to install oversight measures. A repeat of the 2018 crisis is well underway and its impact on the country’s economy might very well be bigger than expected.

Authored by: Yves Helven