Why SUVs are everywhere while cheap cars continue to slide

The most powerful explanation for the decline in entry-level vehicles is that people are no longer moving up the income scale to a level where they can aspire to own a car. However, there are some factors that may qualify such an explanation.

One is from the supply side – from the manufacturers. Given the relative scarcity of the chips needed to manufacture the cars, manufacturers could prioritize the production of high-margin SUVs over entry-level cars and thus cut down on the supply of entry-level cars. This would naturally result in slower sales of entry-level cars.

Second is the change in financing options for automobiles. In March 2022, an outbreak of inflation began and central banks around the world began raising policy rates of interest. Banks in India were flush with funds and there were few corporate takers for loans, at least in the early part of the financial year. They were hunting for retail customers and extending all types of loans to customers with credible risk profile.

Access to easy financing could persuade many first-time car buyers to borrow a little extra and opt for an entry-level SUV instead of an entry-level hatchback. It was in 2020-21 that car makers started aggressively launching and marketing compact SUVs as entry-level vehicles that are superior to hatchbacks.

But there was one factor that should have increased sales of entry-level vehicles. Uber and Ola, which have been expanding their footprint, have stabilized their operations and attracted a large number of drivers. Uber, for example, buys entry-level cars and leases them to drivers who can’t afford their own vehicles. Along with this, sales of entry-level vehicles have declined. So we are back to the most obvious explanation – the dysfunction of India’s prosperity engine.

The pandemic dealt a severe blow to the informal sector. The flight of migrant workers from the cities back to their villages deprived the small-scale sector of workers. The bulk of Indian cargo moves by trucks that are operated and cleaned by migrant workers. Their absence crippled the logistics infrastructure for a long time. Smaller garment exporters who managed to secure orders and find workers after a hiatus faced transportation bottlenecks.

While the government and RBI announced schemes to support micro, small and medium enterprises (MSMEs) with bank finance and pushed liquidity into banks, it did not reach the targeted enterprises. Only around 15-20% of MSME financing is met from formal sources. And official schemes did not increase finance for suppliers of informal credit to MSMEs.

Global inflation and policy-rate increases coordinated by the world’s central banks disrupted economic activity everywhere. Rising rates and a reversal of quantitative easing sucked liquidity out of the system, corroding stock markets, further shaking the confidence of economic agents. Layoffs made it into headlines day after day, further shaking business confidence. Only those with stable jobs were able to take loans and buy vehicles. It also excluded most of the informal sector and parts of the formal sector.

The saving grace is that the worst is behind us. The economy is now definitely on the mend in India and China, and with the US economy still in good health after the Fed’s rate hike spree, which saw interest rates rise by 5 percentage points, confidence is likely to remain Is.

Government’s budgeted increase in capital expenditure 13.7 lakh crore – counting the grants made specifically for capital expenditure in states – and is expected to attract private investment, boost demand and restore economic momentum. Migrants have started their return to cities in view of the decline in demand for work under the Mahatma Gandhi National Rural Employment Guarantee Act from December 2022.

This should reinvigorate the informal sector and re-energize the prosperity machine of the Indian economy. Next April, we should see more robust figures for entry-level passenger vehicles.