India faces capacity glut

The Society of Indian Automobile Manufacturers (SIAM) forecasts that car sales in the third largest economy in Asia will be lower than 2.5 million in the fiscal year to March, citing a series of 13 hikes in interest rates since March 2010 and rising petrol prices which have resulted in a drop in demand. The expected decrease in car sales during the current fiscal year will be the first in 10 years and would leave an excess of about one million cars. “If everybody comes along with what they say they are going to do, we are definitely going to have serious surplus capacity,” said R.C. Bhargava, Maruti chairman. Lured by the 30% growth in sales during the past two fiscal years, carmakers in India pledged around US$6 billion which would almost double India’s annual production to six million vehicles. But with the decline in sales growth, there could be as much as 40% more production capacity than demand. “There is a lot of capacity build-up and that is against the market expectation,” said Michael Perschke, head of India operations for Audi, Volkswagen Group’s luxury brand. Analysts agree that the long-term growth prospects of the car market in India will improve because its 1.2 billion population is dominated by young people whose salaries are rising, and the country could become the second largest market in the world within the next 25 years. Although car sales in the fiscal year which begins in April are expected to rise 11% to 13%, SIAM says that much depends upon the central bank. (February 13, 2012)