INDIA’s automobile industry, which was zooming ahead on the fast lane for the past five years, has abruptly slowed down, rattled by the global financial crisis.

The sharp deceleration in the industry has come at a time when the hazard lights are on for overall economic growth in India.

The terror attacks on Mumbai on November 26 has added to the woes of the sector, which has been plagued with problems caused by declining sales, a pile-up of inventories and the liquidity crunch.

Automobile majors are planning to cut down production as inventories are piling up with dealers. Leading Indian auto firms including Tata Motors have announced a shut down of plants for routine maintenance, but workers would not be paid for the downtime.

Many manufacturers have started offering hefty discounts – ranging from Rs50,000 to Rs100,000 or even more per vehicle. Yet, consumers are offering stiff resistance, reluctant to buy a car or a sports utility vehicle (SUV) in these days of uncertainties.

Worried about the impact the sharp slowdown will have on the country’s gross domestic product (GDP), the Indian government is trying to hammer out a package to revive the fortunes of the sector. This could be by way of reduced excise duties, further cuts in interest rates and a slew of other measures.

Overall vehicle production in India fell by over 12 per cent in October. The worst affected was commercial vehicles, whose sales dropped by over 35 per cent, according to figures released by the Society of Indian Automobile Manufacturers (SIAM). Passenger car sales dropped by almost 10 per cent during the month.

According to Dilip Chenoy, director-general, SIAM, the industry is facing its worst-ever crisis in over a decade. India’s automobile sector was expanding at a brisk clip of about 15 per cent over the past few years. SIAM had projected the industry would continue to grow at a compound annual growth rate (CAGR) of 12 to 14 per cent till 2016.

However, 2008-09 – the current fiscal ending March 31, 2009 – will see sharply lower sales. Chenoy expects the industry to grow at single-digit rates, the first time in several years. The first-half figures – April-September – indicated that the industry might grow by about 10 per cent, but sharply declining sales in October and November have brought gloom to the industry.

“Given the current trends, we will be happy if we manage a high single-digit growth,” says Chenoy. However, the trend could be reversed if interest rates for auto loans come down and there is adequate liquidity, adds the SIAM boss.

ALMOST six million vehicles – passenger cars, two-wheelers and commercial vehicles – were sold during the first seven months of the current fiscal (April to October), a 5.6 per cent growth over the same period in the previous fiscal. Exports, however, shot up by almost 30 per cent, mainly because of a huge increase in the overseas sales of cars.

TVS Motors saw a doubling of exports of two-wheelers, while Bajaj Auto – another leading motor-cycle maker – saw a 46 per cent rise in exports. Maruti Suzuki saw exports shoot up by 12 per cent in November.

Companies like Hyundai Motors and increasingly Maruti Suzuki, have made India a hub for auto exports. The Korean major has a sprawling manufacturing base near Chennai, from where it exports cars around the globe.

But domestic car sales have plunged in November. Maruti Suzuki, the country’s largest automaker, saw a nearly 25 per cent dip in sales to 52,711 units in November. Tata Motors – which plans to launch the world’s cheapest and smallest car, the Nano, early next year – saw a 30 per cent fall in sales to 32,696 units.

Mahindra & Mahindra witnessed a record fall in both domestic and export sales – from 18,553 units to 10,955 units in November. Tractor sales dropped by over 30 per cent.

Two-wheeler makers – Hero Honda, Bajaj Auto and TVS Motors – also saw November sales fall by between five per cent and 30 per cent.

The main reason for the sharp fall in passenger car and two-wheeler sales is the high rate of interest in auto loans. Auto loans were available freely in early 2007 with interest rates of around eight per cent. Today, they are dearer by 10 per cent and consumers are fiercely resisting going in for loans with 18 per cent interest to fund their vehicles.

The industry expects banks to cut rates by 100 to 150 basis points in auto loans, following the move by the Reserve Bank of India (RBI), the country’s central bank, to reduce rates.

Besides interest rates, most of the raw materials were also sourced by the automakers from producers when metal and other commodity prices were at their peak. Analysts expect the benefits of lower global commodity prices to be reflected in the next quarter.

The Indian government is also expected to cut the price of petroleum products, including petrol and diesel, over the coming days. Petroleum Minister Murli Deora had announced a cut in prices a few days ago, but was criticised for making the announcement even before polling could be completed in a few states.

THE worst affected by the slowdown in the automobile sector are makers of commercial vehicles. Ashok Leyland, which is controlled by the London-based NRI business group of Hindujas, saw a massive 67 per cent per cent fall in domestic sales of its heavy vehicles in November. Its bigger rival, Tata Motors, reported a 40 per cent fall in commercial vehicle sales in November, and an even bigger 60 per cent drop in the sale of heavy vehicles.

The economic slowdown in India – with GDP expected to grow by a little over seven per cent, as against a 9.5 per cent growth every year over the past four years – is hurting industries like infrastructure, real estate and manufacturing, resulting in far lower demand for medium- and heavy vehicles.

According to SIAM, sales of medium- and heavy commercial vehicles dropped by over 50 per cent in November, while sales of light commercial vehicles dipped by 20 per cent.

The stock price of all the leading automakers has fallen significantly, between 40 per cent and 70 per cent this year.

The government is under pressure to slash excise duties on commercial vehicles, to boost demand. Currently, buses attract an excise levy of 12 per cent and trucks of 14 per cent. However, the industry feels that a marginal five per cent cut in excise duty will hardly make much of an impact.

The liquidity crunch has also hurt several leading players, including Tata Motors, which earlier in the year had gone in for an expensive acquisition of luxury brands Jaguar and Land Rover from Ford Motor Company.

The company has to repay a $3 billion bridge loan that it had taken when liquidity was not a problem internationally. It is now planning to raise $540 million from the public through term deposits, offering lucrative interest rates of 10 to 11 per cent.

In October, Tata Motor’s $850 million rights issue also flopped, forcing the leading business group to rustle up the money to subscribe to the issue.

The Indian automobile industry, which was racing on top gear all these years, is suddenly being forced to make several painful adjustments to adapt to the new ground realties.

It will indeed not be a smooth ride for the industry for the next few months, perhaps even a year or two.