India’s auto sales drop as onion prices rocket

India autos Feb13.pngUnrealistic expectations lead to disappointment. That seems to be the learning from developments in India’s economy in recent years. Its car sales provide a good illustration of the problem, as the above chart shows:

• Sales took off in 2010-11, as stimulus measures supported the ‘Incredible India’ media hype
• But by 2012 (green line) they were slipping as over-heating led to interest rate rises
• Now 2013 sales (red square) have fallen back to 2010 levels

India’s auto association is clearly shell-shocked by the news. Its website headline ‘Auto industry to miss all growth targets’ makes their feelings clear. It is also no longer forecasting future demand levels. Only last month it had cut its forecast to 1% annual growth from 1%-3% in October, after its original forecast of 9%-11% proved over-optimistic.

The problem is simple – lack of income. Too many people came to believe the myth that India had suddenly become a ‘middle class’ nation. Whilst credit was easy, anything seemed possible. But its ‘dash for growth’ led to inflation of 10.8% in January. The problem is the same as in China, easy lending can’t replace low incomes:

• Latest data shows the 81m urban households had an income of just $4350/year
• The 171m rural households had income of just $2k
• Even more strikingly, the top 1% of households had average income of only $18.6k

Food prices are the key to what happens next. They are vitally important for poor people, who spend over 50% of their income in this area. In India, onion prices are the critical factor, as they are the basis for biryani and bhaji. And today, prices have soared to 35 rupees ($0.65c) versus 10 rupees in November.

Today’s slowdown does not mean the end of India’s economic rise. Rather, it just means that expectations will have to become more realistic. Companies who try to sell western-priced goods will find the going very tough for the next few years.

But anyone willing and able to meet Indian’s needs for food, water, mobility, health and shelter will find a good market, as we describe in chapter 4 of Boom, Gloom and the New Normal.

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