India’s auto retail industry priming for turnaround; EVs to be major growth factor

India’s auto industry, in May, has seen a slight 2 per cent decline compared to pre-COVID levels, but the overall retail figures point to brighter days for the industry. The industry, which grew 10 per cent year-on-year, has witnessed a resurgence in the 2W (two-wheeler), 3W (three-wheeler), PV (passenger vehicles), Tractor, and CV (commercial vehicle) segments.

“The 2W and CV sales did continue to face some challenges, recording high single digit setback of -8 per cent and -7 per cent respectively. Electric Vehicles (EVs) made impressive strides this month, contributing to 8 per cent of the total vehicle retail,” Manish Raj Singhania, president, FADA (Federation of Automobile Dealers Associations) said.

He added that this was buoyed by a surge in 2W EV sales that contributed 7 per cent and 3W EV sales contributing a substantial 56 per cent of their respective total sales. Rohan Kanwar Gupta, Vice President & Sector Head - Corporate Ratings, ICRA Limited said the recent amendments to the FAME II for electric vehicles have lowered the cap on demand incentive and the incentive per kWh of battery size, with the amendments coming into effect from June 1, 2023.

“The upfront price differential of an E2W vis-a-vis ICE (Internal combustion engine) vehicle is expected to increase materially, given the reduced subsidy benefits; the payback period for a premium E2W, which had declined to ~3 years post the amendment to FAME II guidelines in June 2021, would increase to ~5 years post the latest revision in FAME II benefits, in the scenario wherein the E2W manufacturers decide to completely pass on the subsidy reduction amount to the consumers in the form of price hikes,” he said.

He added that even as the Total Cost of Ownership (TCO) for E2W remains favourable, aided by substantial savings on running costs, the lower subsidy benefits are likely to curtail the segment’s growth pace over the short term and would exert pressure on the cost structure of Original Equipment Manufacturers (OEMs).

As far as the CV and PV categories are concerned, they also marked their presence in the EV landscape, with respective contributions of 0.5 per cent and 2.5 per cent.

“The 2W sales were positively influenced by seasonal factors like the marriage season, changes in the FAME subsidies effective from June, and the recovery of rural demand, which hint towards a promising future in the aftermath of the COVID-19 pandemic,” Singhania explained.

However, supply chain issues, demand-supply dynamics, and regulatory changes also play a role in shaping the auto retail outlook, he added.