Policy shocks hit vehicle sales in Karnataka

There was a massive drop in sales of two- and four-wheelers in Karnataka and five of its major districts due to “policy shocks” in the form of demonetisation, GST, changes in third-party motor insurance and BS-IV emission norms and not due to costlier bank loans, Reserve Bank of India (RBI) data has revealed. 

Vehicle registration data from Belagavi, Kalaburagi, Shivamogga, Mysuru and Bengaluru Urban districts, in particular, revealed that bank loans did not have any significant impact on consumers’ decision to purchase vehicles.

According to the district-level vehicle registration data, which accounts for actual sales (and re-sales) of vehicles, changes in third-party insurance norms last year marked a massive drop in sales of two-wheelers, which constitute roughly 80% of total vehicle sales, in the five districts .

Two-wheeler sales, which were growing close to 11.5% prior to demonetisation, began falling after note ban and dropped to nearly 8% in almost all the districts under review and also at the state-level.

The new vehicle insurance norms of July 2018 entailed a five-year upfront third-party registration for two-wheelers and three years for four-wheelers.

Similarly, four-wheeler registration data from the state as a whole showed that growth in sales of cars and other vehicles fell from 12% from 2016 to 8% in first four months of 2019.

The fall was about two percentage points due to demonetisation of 2016 and about 1 percentage point each after implementation of GST in 2017 and changes in third-party insurance norms in 2018.

The data showed that the impact of each of the “policy shocks” was severe on the growth in sales of automobiles, which never looked up after demonetisation.

“The sharp decline immediately in the period following the policy shock can be attributed to the shock itself, more so for the unanticipated shocks like demonetisation and insurance policy change. BS-IV change was also unanticipated to some extent because auto firms were unsure about the precise details of the roll-out,” the RBI said.

It said higher crude prices impacted vehicle sales in a big way but bank credit did not seem to have much impact.

Automobile sector is significant due to its weight in the country’s gross domestic product (GDP). The sector contributes to employment in a major way as it has a large labour-intensive ancillary sector attached to it.