Contending with the Slowdown Pradip R Kamdar Dear friends, You will agree with me that auto scenario is not enthusing to say the least. Macroeconomic fundamentals prevailing at present also do not inspire much confidence. There is a glimmer of hope, though, in the form of softening of crude oil prices in the international market. While oil prices are still ruling at uncomfortable level of $113/barrel, the downtrend does provide succour nonetheless in the context of wild predictions of oil reaching $170/barrel in near future. Barring some comfort on oil price front, other developments cannot be deemed as positive for the auto market. Inflation has hit the 12% mark and is not showing any sign of abating. To curb liquidity in the market and thereby inflation, RBI has again hiked the Repo rate and CRR by 50 bps and 25 bps respectively - third increase in two months. This will suck out Rs. 8,500 crore of liquidity from the system. At 9 per cent, CRR is highest since October 1999 and the repo rate the highest since October 2000. The twin moves by the Central bank are expected to make home and auto loans more expensive besides impacting the growth targets and fresh expansion plans by the industry. The move by some of the banks to reduce their exposure or withdraw from the auto financing, particularly in the two-wheeler segment is certainly not music to our ears. This drives home the message that the credit crunch is here to stay. At our interaction with the bank representatives at Ahmedabad recently, it transpired that the banks are concerned over rising delinquency. The Supreme Court order regarding repossession of vehicle on default has made the financiers choosy and risk-averse. Even while the banks contend that in spite of hike in CRR there is enough liquidity for retail finance, the finance availability is a challenge for the industry and trade. The outlook is, therefore, none-too-rosy. However, we can take heart from the fact that while IIP data brought out by the Government indicates the slowdown in industrial production, the business confidence is certainly not as downbeat as the IIP numbers suggest. This has been amply brought out by the surveys conducted by two apex chambers of commerce and industry, namely, FICCI and CII. The long-term outlook of producers remains optimistic, and significant investment activity as well as mergers and acquisitions is taking place as a result. Further, the effects of boom of the past few years persist. The demand for high-end consumer products remains robust on the back of rapid growth of incomes during these years. Further, according to a new study by NCAER and Future Capital Research, 20 cities, which already account for 60% of the surplus income (income minus expenditure) generated, are projected to have their household income grow at 10% annually over the next eight years. By 2016, the share of middle class households ($6000 to $30,000) in these boom cities will rise from the current 39% to 55%. This portends well for the auto market in India in the long run. I am also optimistic that the current slowdown is transitory and the Indian auto market will regain its buoyancy in due course, However, we may find the going tough in the current year, given the high level of inflation, current tighter monetary policy regime and slowdown worldwide. We have to be geared to face the reality. Coming to the activities of FADA since my last page, we are busy finalising the date and venue of our next AGM, as also our chief Guest on the occasion. The information will be published in the Journal once the programme is firmed up. The AGM is expected to take place some time in the latter half of September 2008. Members are cordially invited to attend the AGM. With best wishes, Yours sincerely, Pradip R Kamdar