Falling Rupee Puts Brakes on India’s Auto Industry

Amit Dave/Reuters Renault cars parked at the company stockyard on the outskirts of Ahmedabad, Gujarat, on June 11.

NEW DELHIâ€" When top executives from India’s automobile industry gathered on Wednesday for the Society of Indian Automobile Manufacturers’ annual convention at the Taj Palace Hotel in New Delhi, the mood was somber. The shadow of the Indian rupee’s cataclysmic fall and the announcement of the lowest quarterly growth figures in four years hung over the gathering.

India’s gross domestic product growth in the April-June quarter of the 2013-14 financial year, slowed to 4.4 percent compared to the same period last year, the smallest growth since 2009. On Wednesday, the Indian currency was hovering above the 67-rupee mark against the U.S. dollar, having hit a record low of 68.85 the week before.

“This sudden see-saw is not good for any economy,” Praful Patel, minister of heavy industries and public enterprise, said at the conference, referring to the disruptive exchange rate fluctuations, which have brought focus on the Indian economy’s weakening fundamentals. “This completely throws everything off balance,” he said.

Describing it as a “testing time” for the nation and the industry in particular, Mr. Patel said that immediate steps were required to arrest the “decline.”

“There is a case for a stimulus package,” for the industry, he added.

He offered hope to the representatives of about 50 vehicle and engine manufacturers, present at the conference, who have been pushing the Indian government to implement stimulus measures, just as it did after the 2008 global financial crisis.

The auto industry, which contributed 7 percent to India’s gross domestic product and attracted 6.7 percent of the foreign direct investments in the 2012-13 financial year, has been hit by sluggish domestic demand as economic growth slows, and costs of imported auto components rise with the rupee’s depreciation.

The Automotive Component Manufacturers Association of India, a trade group, reported that auto components worth $13.1 billion were imported in 2012-13.

Bigger manufacturers like Tata Motors have also been affected because they have foreign currency-denominated debts.

Problems at home are also worsening the industry’s outlook. Car sales in India have fallen for nine months straight, from November last year to July, the first time the industry has seen a decline since the global financial crisis.

Many auto makers are exploring the option of raising prices to cope with the stress on their margins. But a price increase, coupled with rising fuel prices and possibly higher interest rates, does not bode well for companies or consumers in the upcoming festive season, when sales usually pick up.

“Industry sentiment is at an all-time low, with underutilized capacity, production cuts, a slowing down of expansion plans and [more recently] layoffs,” a Society of Indian Automobile Manufacturers release noted.

The sector currently employs 2.2 million people directly and another 17 million indirectly, one of the largest employers in the private sector, according to the organization’s estimates.

While the faltering economy is not good news for Indians, a weak rupee is not all bad news, even for the automobile industry, because it makes cars and auto parts produced in India cheaper when sold in overseas markets.

Foreign players like Ford that have entered the Indian market, after declining fortunes at home, continue to express optimism about India, both as a market and a production base.

Speaking at the conference a day after his inspection of an under-construction plant at Sanand in Gujarat, David L. Schoch, president of the Asia-Pacific region at Ford, outlined the company’s growth strategy in India. “We are very bullish about exporting out of India,” he said. The company hopes to target export markets in 50 countries.

Ford currently has an installed capacity 200,000 vehicles, which would grow to 440,000 when the Sanand plant becomes operational next year, according to Ford India.

Mr. Patel called for greater investment in India as a way to the stem the industry’s decline, with a focus on localization, which means less dependence on imports and increasing capacity to cater to both domestic demand and more exports.

S. Sadilya, president of the Society of Indian Automobile Manufacturers said, “India’s growth story remains intact” in the long term. India has one of the lowest automobile-penetration in the world according to the organization, and a huge potential domestic market and rising disposable incomes may save the sector.