Indian car market sales growth heads below 5 percent for FY 2011 unless Maruti Suzuki labor unrest is solved immediately

Sales in the Indian car market are headed towards a below 5% growth, the slowest in a decade. Increasing fuel prices and costlier loans have triggered the car sales slump in India. Crisil says domestic car sales in India are now predicted to be pegged at a 3% growth rate for the current FY ending in March 2012. It’s a slowdown from the earlier forecast of 8-10%.

Domestic car sales in India in 2010/11 recorded a sales growth rate of 30%. Back home, the Indian Automobile Manufacturers (SIAM) expects sales growth to be 10-12% for the year but have said the estimate could be revised to reflect a lower sales growth rate. Inflation in India has also resulted in significant increase in input and critical auto component parts’ costs. As such, though auto manufacturers have tried to absorb some of the cost, most have had to revise car prices on an ongoing basis.

The Indian car market recorded 10% decline in sales in August 2011. This is resultant of the fact that the aspiring middle class, which depends on bank loans for car purchases. RBI has revised interest rates 12 times in the past 18 months in trying to combat the near double digit inflation in Indi. The move has seriously affected credit based purchases. Another crucial point that Crisil mentions is the need for immediate way out of the ongoing labor dispute resulting in massive production loss at Maruti Suzuki (MSIL). This is vital for sales growth in the Indian car market as Maruti contribute to approximately half the cars sold in India.

A note from Crisil reveals the following. “We have revised our forecasts downwards on account of a rise of 3 rupees in the petrol prices and a 25 basis points increase in interest rates. This would be only the second time in the decade when industry will grow at sub 5 per cent.” “While automobile financiers have not fully passed on the increased rates to end users, uncertainty regarding their decision to pass on the rate hikes, coupled with the burden of EMIs (equated monthly installments) of other loans would impact demand for cars.” If production remains constrained at Maruti, which accounts for roughly half the cars sold in India, industry growth will be “severely impacted.”