Transport industry concerned over demand shrinkage

By Umesh Revankar, Managing Director, Shriram Transport Finance Company

The Indian economy has experienced its worst-ever slowdown in nearly a decade on the back of global contractionary headwinds, domestic Sarveshwari-Goel-picmacro-economic imbalances and policy reversals on the fiscal front. The year 2013-14 started with news that the previous fiscal’s fourth quarter GDP had dropped to 5.5 per cent. That, coupled with low growth, macro-economic issues such as high fiscal deficit, expansionary subsidies and worsening current account balance, has added to the slowdown. At present, the expected current account deficit pegged by RBI is $56 billion at less than three per cent of GDP.

In the second half of the fiscal, the Government proactively intervened with phased reforms to stabilize the economy. Measures were taken to reduce subsidies (oil, fertilizers) and restrict gold imports which would in turn lower the fiscal deficit. The Government also took concrete steps to attract foreign direct investment (FDI) and strengthen the rupee. Still there are concerns over the current account deficit scenario, prevailing supply side constraints, inadequate infrastructure investments and long-term policy directions. With phased reforms to stabilize the economy, measures were taken to reduce subsidies (oil, fertilizers) and gold imports which would in turn lower the fiscal deficit.

The data published by the International Monetary Fund (IMF), in its latest report on the global economy brings out very clearly that India is perhaps the most vulnerable among its peers. In October, IMF lowered growth forecast for India to 3.75 per cent from the earlier 5.7 per cent. This is the steepest cut by IMF among BRICS. The sharp slowdown has been accompanied by some of the highest rates of consumer price inflation among emerging economies, and about twice the average rate for emerging Asia. There is a similar story on the external front, with India having one of the biggest current account deficits.

Transport industry

STFC-pic-1The road network in India has been expanding consistently. The Government is very particular about the development and maintenance of India’s huge road network, more so because the number of vehicles in the country has been growing at an average rate of 10.16 per cent per annum over the last five years. Thus an efficient and world-class road network becomes necessary for smooth transport of goods and services.

The administration awarded about 2,000 km worth of new road construction contracts in FY13. FDI received in the construction development sector from April 2000 to July 2013 stood at $22.44 billion, according to the Department of Industrial Policy and Promotion (DIPP).

Continuous increase in fuel prices is challenging the profitability of transport business and thereby the financiers. As we look ahead, inefficiencies will have to make way for innovation and new technology. New fuel efficient and comfortable vehicles would come to be demanded as the growth in the economy picks up. This would give an opportunity to vehicle manufacturers to increase their sales and thus compete for a healthy market share.

Continuous tightening of liquidity by RBI to reign in Inflation has impacted the cost of funds, The Interbank rates rose to a maximum of 12.02 per cent in August. This affected the funds flow to the market. This can be seen from the fall of sales of new commercial vehicles by 15.97 per cent as compared to the number of vehicles sold in April-October of the previous year.

Market scenario

The IIP figures reflect the pessimism in the market. The expected industrial production YOY stands at 2.75 per cent. Manufacturing production is expected to grow YOY only by 0.49 per cent. Slowdown in the manufacturing and construction industry, mining sector, etc., have impacted the small-time truck operators, Availability of load has gone down considerably, affecting the repayment capacity of the trucker, and this is in turn reflecting on the delinquency of financier’s portfolio.

The overall transport industry looks bearish due to continuous shrinkage of market volumes across products and services. The fact that the entire country is concerned over the uncertainty related to the forthcoming election results also deters everyone from taking any long-term position in framing of policies, and passing bills does little help to rebuild confidence levels within the industry.

However, the good rainfall and the expected good harvest should make the rural market very attractive for freight availability, increase in freight price and demand for commercial vehicles. The rural market has already become very potential in the last four-five years due to the boom in road connectivity, the growth in rural teledensity, the dramatic increase in land prices in rural India, the rise in blue-collar wages and the increase in social spending both by the States and the Centre. The financiers who have a good network and presence in the rural market would benefit in the present circumstances.