(Bloomberg) -- Industrywide demand for passenger vehicles in India will be depressed for a few months after Prime Minister Narendra Modi’s unprecedented cash clampdown, according to senior executives at Tata Motors Ltd. and Honda Motor Co.
The cash crunch, following the withdrawal of high-denomination banknotes, has hurt consumer sentiment and is expected to continue through March, Mayank Pareek, president of passenger vehicle business at Tata Motors, said in an interview. Customers who have deferred purchases may come back in a few months depending on the economy, Jnaneswar Sen, senior vice president at Honda’s India auto unit, said without elaborating.
Passenger-vehicle sales expanded at the slowest pace in nine months in November just as automakers were expecting a good monsoon after back-to-back droughts to boost rural incomes and spur demand. Sales of motorcycles and scooters, where about 65 percent of purchases are paid for in cash, fell for the first time in 11 months.
The hit to big-ticket purchases like autos is the latest in a string of knock-on effects from the government’s Nov. 8 decision to withdraw old 500 rupee and 1,000 rupee banknotes in its biggest crackdown against corruption and to boost digital payments.
The move resulted in a rush to deposit or exchange the notes with long queues outside banks across the country. The Nikkei India Services Purchasing Managers’ Index last month was at its lowest since December 2013 and indicated a contraction, with activity declining in three of six services sectors monitored and order backlogs climbing due to delayed payments from clients.
“Vehicle purchase is more of a discretionary spend and not a necessary spend therefore customers will postpone their buying decision,” said Abdul Majeed, partner at Price Waterhouse. “Automakers will cut production, focus more on exports and give discounts to clear inventory at dealers till such time normalcy returns.”
Honda’s auto sales in India fell 45 percent in November, the steepest decline since December 2013. At Tata Motors, sales slowed from October even as new models like the Tiago hatchback helped the carmaker post a 14 percent jump in deliveries. Industrywide deliveries rose 1.8 percent to 240,979 units.
“Last month we saw bookings fall even though there were enquiries and this month too, enquiries have risen but bookings are still not picking up,” said Honda’s Sen. “What this means is that people are interested in buying cars but they have other priorities at the moment.”
India’s largest SUV maker Mahindra and Mahindra Ltd. saw sales slide 22 percent in November. A slump in discretionary purchases was worsened in November by banks and other finance companies disbursing loans at a slower pace, said Pravin Shah, the president and chief executive for automotive at the company.
“In the mid- to long-term, we expect rural demand to pick up and the overall sentiment to bounce back,” he said. “While the impact will continue in December, we hope that the situation will be eased and the cash crunch will be curtailed with adequate steps being taken by the government,” Shah said, adding that January should be a better month for sales.