Sales in the auto sector and in related industries have fallen considerably in India. Maruti-Suzuki, the country’s leading car manufacturer, has reported a 32.7% decline in its total vehicle sales. There is a similar situation across the sector, including the two-wheeler industry. The sector has already lost over 300,000 jobs.
What explains the massive slowdown in the auto sector in a short span of time? The usual explanations run in terms of factors like the general slowdown in the economy, the disruption caused by the Ola and Uber facilities, difficulties in getting a loan for purchasing a car or two-wheeler in the aftermath of the IL&FS crisis (and more generally in the NBFC sector since then), the competition from electric vehicles in the coming years and the confusion around BS6 emission standards.
There is indeed merit in such explanations. But they cannot explain the severity of the problem. Indeed, it is all very intriguing.
Why then has so much happened so quickly?
The answer possibly lies in something which has escaped our attention for sometime. It is the massive growth in the affordable housing segment under the Pradhan Mantri Awas Yojana (PMAY) in the last few years. On one hand, spending in the auto industry has declined. On the other hand, spending on affordable homes has gone up substantially. There is some reason to believe that spending has shifted to a significant extent from purchase of cars and two-wheelers to affordable homes in India in the last few years.
In a normal course of events – that is, in the absence of a big slowdown – consumers would have spent on cars or two-wheelers. Given that the slowdown has occurred, it is important to ask the question – what did people spend on, if not in the auto sector? In this context, it is also reasonable to consider spending on the down-payment for getting a loan for affordable housing (some data is provided later).
This is not to say that cars and affordable homes are substitutes. That is obviously not the case. However, if a low-income person needs to shell out, what is for her, a large sum for housing (or for the downpayment to qualify for a home loan), it is likely that there will be a cut in, what is for her, a bulky expenditure on a car or even a two-wheeler. It is the budget constraint at work. But of course, consumer preferences matter too. Let us consider these next.
Though ownership of homes is emphasised in many parts of the world, it is particularly important in a country like India. So long as ownership of a home is out of reach, a household that is otherwise well-to-do by Indian standards may comfortably spend on ‘comforts and luxuries’ like cars, including relatively expensive cars. This is particularly true where we have male dominance in main budgeting. However, once an affordable home is in sight, then the emphasis within a household can unanimously and quickly shift from the auto sector to the housing sector.
In 2015-16, the Government of India (GOI) launched PMAY. This includes PMAY-urban and PMAY-rural. Under PMAY-urban, the number of houses sanctioned is 85 lakh, number of houses under construction is 50 lakh, the number of houses completed is 26.30 lakh. The total investment in the scheme is 5.03 lakh crore, and central assistance released is Rs 51,611 crore. The goal is to achieve housing for all by 2022. While some of these claims may be exaggerated, there is nothing short of a boom in the affordable housing segment.
It is true that there has been a serious recession in, what is usually viewed as, the real estate sector in India for a while. This may appear to contradict the idea that there is a boom in the housing under consideration. However, the affordable housing segment under PMAY is very different and, in a sense, new. It is interesting that there is a big boom in India in this (subsidised) segment alongside a recession in the other parts of the real estate industry. The dominant theme in the media, policy circles, business meetings, chambers of commerce, academic seminars and financial markets is the recession in the real estate sector other than the affordable housing segment. Such views tend to ignore the boom in the affordable housing segment of the real estate sector.
It is interesting that while the boom in the affordable housing segment is not well known, the recession in the auto sector is all too familiar. This may be due to the organised voice that the auto sector has in Mumbai and Delhi. This is in contrast to the scattered beneficiaries of affordable housing. These beneficiaries include the ‘aam aadmi’. Even the real estate firms engaged in the affordable housing business tend to be relatively small and low profile ones.
Returning to the auto sector, it is important to note that the slowdown in the automobile sector was not as sudden as it is usually made out to be. The slowdown has been happening for a little longer. It is just that it did not show up because the manufacturers were continuing to sell to the distributors who were piling up inventories for a while. Having said this, it is important to add that it was indeed a quick change, even if it was not a sudden change.
The question is – did the recession in the auto sector go hand in hand with the boom in affordable housing segment under PMAY? It did not quite happen that way but the substantive point above about why the recession happened in the auto sector remains. Let us see how.
Though PMAY was officially launched in 2015-16, naturally it took some time before it could take oﬀ. Even after it took oﬀ, it is possible that initially it was the people who had relatively comfortable money and/or better awareness who bought affordable homes. These people did not need to cut down on spending on cars/two-wheelers in a significant way. So, there was no recession in the auto industry in the early stages of PMAY.
Subsequently, other less affluent people saw the possibility more clearly and cut down spending where they could meaningfully; this was the spending on cars/two-wheelers (and possibly other things as well). They used their money (and possibly some money borrowed from family/friends) on affordable homes or on the downpayment in case of a home loan. So, this can explain why the slowdown in the auto sector lagged behind the official launch of and even the initial boom in the affordable housing sector. Once it was realised on a somewhat large scale that it was a good idea to shift from the auto sector to affordable housing, the change was quick.
Prices are obviously low for affordable homes under PMAY. For example, in September 2019, a project by Signature Global was launched at a price of Rs 4,000 per square foot, and the starting price of a unit is Rs 20 lakhs. The downpayment for getting a housing loan, even if it is 20%, in this context is easily comparable to the price of a car.
To conclude, there has been a massive slowdown in the auto sector. However, there is also a big boom in the affordable housing segment. So, is this merely an issue of a change in output mix rather than an issue of the level of aggregate output, or is there more to it? Could the policy towards affordable homes have been different? That could be an altogether different story.
Gurbachan Singh is a visiting faculty member with the Indian Statistical Institute (ISI), Delhi Centre