A customer negotiates with a sales person at a Tata Motors Ltd. dealership in New Delhi, India, on Thursday, July 26, 2012.

Indian car sales fell for the third consecutive month in January and are set to decline overall during this financial year, providing a further sign that weak consumer sentiment is holding back a wider recovery in Asia’s third-largest economy.

Domestic sales of passenger cars were down more than 12 per cent in the month to 173,420 units compared with the same period the year before, according to data from the Society of Indian Automobile Manufacturers, an industry trade body.

Siam has already twice cut its growth projections for vehicle sales during this financial year, lowering its forecast from a more than 10 per cent expansion to one in which the sector is unlikely to expand at all.

Sugato Sen, senior director at Siam, told the Financial Times: “In our last quarterly update, we said that the industry would expand by between 0 and 1 per cent for the year, but now it looks like it is going to shrink overall. It is a tough time for the industry.”

Last week India’s government also cut its wider economic growth forecast to just 5 per cent for the year to March, its lowest in more than a decade, underlining the depth of the nation’s slowdown.

Weakness in India’s industrial and manufacturing sector is also reflected in declining sales for vans, which fell 5.9 per cent year on year, and commercial vehicles, down 9.5 per cent year on year.

High fuel costs and elevated interest rates have helped to damp demand for vehicles in nearly all categories over the past year, while the slowdown in the wider economy has hit consumer sentiment, analysts say.

“In India, the purchase of a car is an emotional event,” says Deepesh Rathore, managing director of IHS Automotive in New Delhi. “You could need a car, but if there are negative signals in the economy and a person isn’t confident about his wages, it is quite possible they will delay the purchase.”

However, seasonal factors are also playing a part, given a knock-on effect following disappointing car sales during India’s “festive” season of annual religious holidays, which occurs towards the end of each calendar year.

“People want to purchase cars during the festive season as it’s considered auspicious, so there is a build-up of stock at the dealer level at that time,” Mr Rathore said. “But if sales are disappointing then that stock needs to be discarded.”

Sales of sport utility vehicles provide one bright spot amid the gloom pervading India’s auto sector, with sales increasing by 41 per cent year on year in January.

SUVs have become increasingly popular with urban Indian consumers, aided by that fact that most run on diesel, which is treated favourably by India’s tax system, making it significantly cheaper than petrol.

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