Demonetisation - A year later. Long road for trucks, two-wheelers

Demonetisation, with the cash crunch and resultant slowdown, hit most industries hard, and among the biggest sufferers initially was the auto industry.

From November 9 last year, automobile dealerships wore a deserted look for several weeks. While salaried customers could go ahead with their purchases, others, such as the self-employed and small traders, found it tough to make the initial payment in cash.

Dealers in small towns and rural areas in particular took longer to overcome the effects of demonetisation.

The currency ban disturbed overall auto volumes, which declined 4.2 per cent in November 2016 (against November 2015). While the car segment managed to retain volumes (supported by Maruti), all the other segments reported a decline in sales. From November 2016 to January 2017, the car segment grew 5 per cent y-o-y, not taking too big a hit.

It was the commercial vehicles segment that bore the brunt of an acute crunch, as a significant portion of its operational costs is cash-driven.

More than 20 crore people are associated with the transport sector. “The commercial vehicle user group (transporters) is one of the largest unorganised cash-based sectors in the country. It, therefore, experienced major operation hassles,” said RT Wasan, Head - Sales & Marketing, Commercial Vehicle Business Unit, Tata Motors.

Tata Motors saw sales of light and small commercial vehicles drop 13 per cent in November 2016, against the previous year period. MH & ICV (medium heavy and intermediate commercial vehicle) cargo sales saw a drop of 28 per cent last November, with long-haul cargo operators severely impacted by the cash crunch and deferred purchases.

“A transporter uses cash primarily to pay the driver’s salary, tolls and fuel expenses, which together constitute around 65 per cent of total expenses. Because of demonetisation, transporters faced difficulties in meeting operating expenses. However, the government's decision to stop toll collection and allow old currency notes at petrol pumps offered some temporal relief,” said Binaifer F Jehani, Director, Crisil Research.

Motorcycles, which contribute close to two-thirds of the total two-wheeler industry, was severely hit as the majority of sales happen in rural areas, where the cash crunch was felt the most. “Yes, the big impact was in rural areas where vehicle purchases, particularly bikes, are cash-driven,” said a senior official of a leading two-wheeler company.

However, auto companies and dealers later on started coming out with cashless schemes such as 100 per cent funding for vehicle purchases and payments through e-wallets.

The scooter segment recovered after February. But motorcycles struggled to pick up as the liquidity situation had still not improved in rural and semi-rural areas.

The impact of demonetisation on commercial vehicles started to abate from February and sales picked up, especially since people advanced purchases with an eye on BS-IV implementation.

“The auto industry got a boost in anticipation of the ban on sales of BS-III vehicles post April 1, 2017. Dealers across the country offered high discounts to liquidate old BS-III stock. This regulatory announcement offset the negative impact of demonetisation to some extent,” pointed out Crisil Reasearch’s Jehani.

But the note-ban has brought in some benefits, too. Cash purchases have reduced significantly, according to automakers and analysts.

Transporters have realised the need to adopt digital payments to buy fuel, pay drivers, toll fees, etc.

Overall, it was a mixed bag for the auto sector with three major disruptions — demonetisation, BS-IV migration and implementation of GST. All these had short-term impacts, but the sector bounced back in the following quarters, helped by pent-up demand, improved sentiments and a good monsoon across India.