India/Pakistan Sales and Production Commentary-Nov 2022

India/Pakistan sales

October 2022: +21.9%; 389,139 units vs. 319,108 units

YTD 2022: +21.4%; 3,836,223 units vs. 3,158,808 units

• The Indian subcontinent's light vehicle sales were up 21.9% in October 2022 compared with October 2021. Sales in the Indian automotive market in October surged 26.9% y/y, while In Pakistan, light vehicle sales dropped 47.7% y/y. The high growth rate in India was owing to the easing of component supplies (thus more production) and the festival fizz helped demand. In Pakistan, the drop in production was because of a shortage of components and completely knocked-down (CKD) kits, as the government tries to control the current-account deficit and thus restrict kits imports. In both markets during January-October 2022, demand outstripped supply and OEMs tried to reorganize models and trim plans to maximize production owing to the chip crisis. The ongoing conflict between Russia and Ukraine is affecting high-frequency indicators, such as the exchange rate, crude oil prices, and interest rates. Also, consecutive price hikes on account of annual inflation and increasing commodity prices are the biggest deterrents to growth going forward. The Reserve Bank of India (RBI) increased the repo rate by 150 basis points after May. However, it will likely take two to three quarters for the impact to be visible on consumer purchases. Another further hike of 75 basis points (total) is still assumed and incorporated in the forecast.
• India sales in January-October 2022 remained strong and the market was up 22.8% relative to the same period in 2021. The rising salaries in the IT and service sectors and accumulation of savings owing to the cut in expenses has boosted consumers' ability to cover the down payment on a vehicle. Although interest rates have started rising but they remain on the lower side. These lower interest rates and new model introductions by key OEMs are alluring customers to purchase a new car. Exchange rates may also put reverse pressure on costs as the rupee is continuously falling against the US dollar. Also, the chip crisis is easing, and production is in full swing. On the macro side, the Indian economic growth forecast should be strong in 2022 at about 6.4%. The preference for personal mobility, bookings, and low inventory in the network are the key drivers that will help the industry grow. In 2022, the Indian market will likely grow 21% y/y.
• In Pakistan, automotive sales dropped in October by 47.7% vs the same month in 2021. The drop was because of the unavailability of components and kits leading to shutdowns at most OEMs. The government's effort to control current-account deficit and save foreign exchange reserves led to a cut in the import of components and kits. In August, OEMs were allowed to procure 60% of the quota (quota is the average of imports in March-June) and 70% of the quota for September. This has disturbed the supply chains in Pakistan but import quota for kits have improved now. Meanwhile, the depreciation of the Pakistani rupee, coupled with supply chain interruptions, is further leading to price hikes across OEMs. However, despite heavy prebuying in 2021, sales continued to rise 0.6% YTD in 2022. This reflects the need for mobility is on the rise, and increased purchasing power will make people buy more cars. Also, the entry of new players and growing demand for vehicles have helped the industry rebound. However, in the medium term, a deterioration of macroeconomics is likely, but sales will rebound owing to pent-up demand created due to cut in import of kits in 2022. In the medium-to-long term, there is positive momentum for the car industry, and the government is focused on pushing the industry. Changes in private-sector policies will also help drive sales in the country.

India/Pakistan production

October 2022: +24.7%; 431,723 units vs. 346,105 units

YTD 2022: +24%; 4.49 million units vs 3.61 million units

• The Indian subcontinent's light vehicle production in October 2022 will likely record 431,723 units, a rise of 24.7% in production over October 2021. We expect its calendar year (CY) production to rise 20.6%, with over 5.29 million units built, mainly owing to the low comparison base of 2021 and expected strong recovery in the remaining part of the year.
• The improving preference for personal mobility and improved consumer confidence in rural and semi-urban markets has bolstered the Indian market, and it posted its best-ever production numbers in YTD 2022, even surpassing full production of CY 2021. Additionally, low dealer inventory rates have extended the waiting period from three months to twenty four months for best-selling models such as the Mahindra & Mahindra (M&M) XUV 700, Maruti Suzuki Ertiga, Hyundai Creta, Kia Seltos, and the Tata Nexon. However, the current inventory levels have been filled now. The waiting periods have started to come down to three to six months, and most of the vehicles are available within three months of booking. Even discounts are back with some of the carmakers. Dealers are also noticing a slowdown in booking rates and high cancellation rates in the Indian market. As expected, the pre-filled festive season inventory was consumed only by 5 days as the dealer's inventory reduced from 40-45 days to 35-40 days.
• Following the second wave of COVID-19 infections, the demand since July 2021 significantly improved as the dealership network was fully operational and helped carmakers revive demand. However, semiconductor shortages impacted the production lines starting August 2021.
• In October, automakers slowed production owing to the high amount of festive holidays. In November, we expect the market to continue its strong production output with a 20% growth rate. The supply chain is still disrupted and will likely impact Renault-Nissan-Mitsubishi and Volkswagen (VW) in the coming months. The mismatch in supply and demand will likely continue in the coming months; however, it may have a minimum impact—particularly in India. IHS Markit analysts noticed in 2021 how Tata Motors and Mahindra purchased semiconductors from the open market to run their production lines. We expect Maruti Suzuki will also buy semiconductors from the open market in 2022. The production schedules for Maruti Suzuki, Hyundai, Tata Motors, and M&M suggest strong production line rates in the coming months. According to the Federation of Automobile Dealers Association (FADA), India's average inventory for passenger vehicles ranges is 35-40days, which is a slight difference from the normal level of 40-45 days. Hence, we expect the carmakers will have another strong month to refill the inventory.
• The semiconductor impact at isolation peaked at 25% of production in third quarter 2021, while it was down to 18% of production in fourth quarter 2021, 7% in first quarter 2022, 5% in second quarter 2022, and only 3% in third quarter 2022.
• The Russia-Ukraine conflict brought another uncertainty to the commodity prices. With the price of Brent crude breaking USD90-110 per barrel—and possibly rising further and remaining high in coming months—this would lead to higher domestic inflation, a weaker rupee, and wider current-account and fiscal deficits. Additionally, we assume the price of Dated Brent crude oil will drop from an average of USD103/barrel in 2022 to USD87/barrel in 2023 and 2024 as constrained supply growth slightly outpaces sluggish demand growth. As expected, India raised (from 1% in January to 23% in September) its imports of Russian crude as steep discounts on Russian Urals seem highly attractive as the country battles with a surging crude oil import bill and elevated levels of inflation in the country. India reported a consumer price index (CPI) of 7.37% in September 2022, which breaches the Reserve Bank of India's (RBI's) range of 2-6%. In September, the RBI's Monetary Policy Committee raised the policy repurchase rate by 50 basis points to 5.9% in the scheduled policy meeting. It will continue to raise rates in the coming months as inflation pressures persist and global financial conditions tighten, with another 25 basis points anticipated in 2022 and 60 basis points in 2023. In 2023, we expect GDP growth will further lag from 5.5% to 5.3%, which incorporates the assumption of weaker external demand for India's exports and the impact of the RBI's monetary policy tightening on domestic demand. The recent excise duty cuts on petrol and diesel will also improve consumers' disposable incomes and pacify the CPI. Moreover, to keep the steel prices under control, the Indian government increased the export duty on steel manufacturers and reduced the import duty on raw materials of steel. This should lower steel prices in India for domestic consumption. The weaker rupee is becoming another hurdle for the economy, and it will remain under pressure through 2023, reflecting the large trade deficit and interest rate differentials with the US.
• The seasonally adjusted S&P Global India Manufacturing Purchasing Managers' Index® (PMI®) was up from the September reading of 55.1, posting 55.3 in October. October PMI® data from S&P Global indicated that economic growth in the Indian manufacturing industry remained robust, and price pressures were contained. Indian manufacturing companies bought additional inputs in October amid efforts to rebuild stocks and fulfil greater sales. Predictions of better sales and marketing efforts were among the reasons cited for upbeat projections.
• In this forecast cycle, S&P Global Mobility Analysts added the 50,000 units in comparison with the October forecast. Currently, we believe the Indian automotive light vehicle production scenario is in better condition compared with other global markets for CY 2022. We expect minimal disruption from another COVID-19 wave and better semiconductor supply for the remaining part of the year. We anticipate a slight slowdown in the current quarter compared with the previous quarter as we approach the year end. Indian carmakers de-contented, or reduced semiconductor content, in vehicles to keep the production line rolling, and this has resulted in new variants being launched in the market that have no infotainment systems, parking sensors, or connected features. Some of the carmakers have already launched vehicle variants in the market. The Indian market will likely post 5.06 million units, or 22% growth, in CY 2022. However, the continuous price hikes will likely discourage the light vehicle market's new demand. The high inflation prices, weaker rupee, and increased interest rate will likely hit the Indian market in 2023. We expect growth of 2.3% with 5.16 million in 2023. The long-term forecast remains consistent with the previous forecast with minor variance.

Pakistan

• In this forecast round, we revised down the Pakistani light vehicle production forecast by 6,000 units following the floods and owing to import restrictions in Pakistan. The recent political instability and removal of Prime Minister Imran Khan from his office brings fresh challenges for Pakistan on every front. The assassination attempt on the former prime minister can further disrupt the stability of the country, thereby further unsettling the market. The commodity price shock following the Russian invasion of Ukraine, a sharp rise in international commodity prices, particularly of liquefied natural gas (LNG), has led to procurement difficulties and power shortages in Pakistan, while also putting considerable pressure on its external accounts and inflation. The stalled USD6-billion International Monetary Fund (IMF) financing program was resumed in July 2022, following the government's removal of contentious fuel and electricity subsidies and the adoption of a new austerity budget for fiscal year (FY) 2023. This outcome paved the way for the IMF's approval of the seventh and eighth installments of the loan program, with around USD1.1 billion in financing made available in September. The program was also extended to June 2023, with an additional USD2.9 billion to be disbursed in the coming months. Inflation sharply accelerated in late 2021 and rose to 27.3% in August 2022 (the highest in 49 years) and eased to 23.18% in September 2022. With inflation and external risks further intensifying following Russia's invasion of Ukraine, the SBP raised the policy interest rate four times in April-July 2022 to 15%—the highest rate since November 2018. The SBP will likely continue tightening monetary policy through 2022 to keep real interest rates positive. Recently, Toyota (Indus Motors) and Pak Suzuki announced multiple shutdowns owing to the unavailability of parts amid import restrictions and exchange rate volatility. We expect production to slow down in Pakistan compared with the first half of the year, as it struggles for forex reserves. During the first half of 2022, production increased 33% with 143,000 versus 107,000 units in the first half of 2021, while IHS Markit analysts expect a decline of 33.0% in the second half of 2022 with 86,000 versus 129,000 in the second half of 2021. Hence, we now expect Pakistan's full-year 2022 production to decline 3.0 y/y, with 228,844 units, followed by an increase of 7.1% to 245,189 units in CY 2023.

This article was published by S&P Global Mobility and not by S&P Global Ratings, which is a separately managed division of S&P Global.