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India’s auto market struggles to find next gear

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There are almost four times more people in India than the U.S., but last year there were almost eight times more cars sold in America. In spite of the potential, India's car market has gone into reverse. The 1.9 million cars sold there over the past 12 months was down 7 per cent from a year earlier, the country's auto industry body said on Wednesday. It expects car sales in the world's seventh largest car market to pick up by 5 per cent at best this year. But then a year ago it was predicting growth of 10 per cent.

For every 200 people in India there are only three cars, this compares with over 200 cars in the U.S. But there are some serious potholes in the way of growth. About 70 per cent of cars are bought on finance in India, which makes sales vulnerable to the country's high interest rates. With rates as high as 14 per cent a year on car finance, interest payments can total about a fifth of running costs. While inflation remains near to 7 per cent, those interest rates are not expected to fall dramatically soon. And the price of fuel in India remains high.

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But on top of these challenges lies weak sentiment which counts for a lot among India's potential car buyers. With economic growth slowing, wage inflation over the past year has not kept pace with rising food prices. Barclays estimates that when average incomes reach $3,000 (U.S.), consumers once reliant on two-wheeled vehicles upgrade to four-wheeled cars. The average income per capita in India is still $1,400 and there is little confidence in the short term that this will rise sustainably.

All that has left car makers in India grappling with mounting inventory. The largest producer, Maruti Suzuki, saw sales volumes fall 5 per cent from a year earlier in March. Only by shifting to sales of diesel cars has it been able to protect margins. Hyundai and Ford may struggle to support margins as sales fell 14 per cent and 42 per cent respectively in March. Under current conditions, India's car market will be lucky to move beyond first gear.

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