Impact of recession
In this article we assume recession as significant decline in economic activity of a nation for considerable amount of time based on parameters such as production, demand, employment, real income and real GDP.
In this part we try to argue position of Indian four wheeler auto sector in effect of global recession around 2008 and current recession (2012-13) caused by local macroeconomic issues.
Global recession (2008 onwards)
Though global recession took roots in 2007 itself, Indian auto industry could see its real impact only in 2008 quarters. Global auto industry was in tatters due to loss of credit and reduced liquidity. US sales were fallen by 32%. In India, though the situation wasn’t as grim as US, passage care sales dropped from 1,15,481 in 2007 to 1,13,822 in 2008. Some of the reasons of these impacts were high finance cost and fuel prices. Looking on the lines of industry growth in previous years, Indian auto players were investing in increasing production facilities. Where sudden recessionary situation forced SIAM (Society of Indian Automobile Manufacturer) to reduce growth forecast from 12.5% to 9.5%. The result was to run the auto manufacturing plants on low production capacity than installed, increasing overheads and reducing margin.
Impact in India was not as severe as it was in US and European markets. Mainly because local Indian macroeconomic indexes were still in good shape plus government act quickly to lower the interest rates and infused liquidity in the system.
Current Recession (2012-13)
This slowdown in the economy is due to local macroeconomic conditions. Main reasons are high petrol prices, inflation on demand side and increased raw material cost, high cost of raising capital and volatile exchange rate on supply side. Here factors such as interest rate are affecting both Visible impact can be seen in companies like Maruti, Tata Motors where these companies had to not just lower the production levels but shut the plants themselves for few days. Inflationary pressures affecting real wages resulting into labours demanding more salary. Companies like Maruti (Manesar plant, Gurgaon), Bajaj (Chakan plant, Pune) were/are facing labour union problems.
If we have to compare the 2011-12 dara with that of 2012-13, domestic sales of cars and utility vehicles grew by mere 2 percent and this in spite of the fact that year 2011-12 already had the lower base. Weak consumer sentiment and high cost of borrowing still putting pressure on auto industry.
Let us look at some trends which justify these observations.