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“Inflation & Its Impact On Automobile Industry”

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IIPM ---- ECONOMIC ENVIRONMENT FOR BUSINESS ---- PROF. SANJAY KUMAR ---- F12 ---- FW
2007-09
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“Inflation & Its Impact On Automobile Industry”

1) Vidhu Jain vidhu87_jain@yahoo.co.in F12

INFLATION
Inflation means long term continuous rise in general price level of a
country. General Price level here means a weighted average of prices of
various things bought and sold in an economy during a period by consumers
producers etc. Weighted average means an average which is calculated
taking into count the proportional relevance of each component rather than
treating all the components equally.
TYPES OF INFLATION
On the basis of rate inflation is categorized in the following –
1) Moderate Inflation – a. creeping inflation (less than 10 % per
annum). B. walking inflation 10 % per annum)

IIPM ---- ECONOMIC ENVIRONMENT FOR BUSINESS ---- PROF. SANJAY KUMAR ---- F12 ---- FW
2007-09
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“Inflation & Its Impact On Automobile Industry”

2) Running Inflation - ( more than 10 % up to 20% per annum)
3) Galloping Inflation - ( more than 20% up to triple digit per annum)
4) Hyper Inflation - (More than 1000% per annum). Hyperinflation
notably took place in Germany in 1920-1923. The German price index
rose from 1 to 10, 00,000,000 during January 1922 to November 1923.
Zimbabwe these days is facing the same problem.
Example- An investment of 1000 Rs done in a bank will turn into
1080 if the bank is giving you 8% per annum. In the same period if the rate
of inflation in the economyis 12.34 percent it means that the value of Rs
1000 Rs has fallen by Rs 120.34 Rs thus on net basis you have a loss of
1080- 1120.34 = 40.34 Rs per annum per 1000 Rs. This means that if you
have made an investment of 1 lakh in bank you lose 4034 Rs per lakh per
annum.

EFFECTS OF INFLATION ON INDIAN AUTOMOBILE SECTOR

The growth in the car market has shown declining results as a result of
the inflation. The effect on inflation has affected every sector which is
related to car manufacturing and production. The increase in the price of fuel
and the steel has led to a slower growth rate of the car industry in India. The
production of Indian cars has been brought to a noticeable halt for inflation.

It has also been noticed that leading car manufacturer in India like
the Tata Motors, Maruti, Hyundai and Honda are trying hard to boost their
production and sales of the cars in a scenario where the stock market is on a
slow rise. Due to inflation it has also been noticed that the sales of car are
being motivated by the discount offers that the automobile companies are
IIPM ---- ECONOMIC ENVIRONMENT FOR BUSINESS ---- PROF. SANJAY KUMAR ---- F12 ---- FW
2007-09
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“Inflation & Its Impact On Automobile Industry”

offering to the buyers. Some car manufactures have gone to the extent of
giving exchange offers to the consumers and some have introduced a
competitive finance rates. The effect of inflation has taken the rise in the
price rate of the cars by 3-4% which in turn suffices the need to meet the
rise in price of the raw materials to build a car.

The effect of inflation has affected not only the production and sales
of Indian cars but also has significantly affected the car dealer, officials and
car financers. Research and observations have led to the conclusion that in
the year 2008, the car market and the car industry is expected to witness 8-
9% fall.

The effect of inflation on the car manufacturers have in turn affected

the dealers in a way where they are being pressurized to push the sales
graph higher and keep a high profit margin. The financers in the cycle are
pressurized by both car manufacturers and dealers to pay the consumers a
cent percent financial assistance by reducing on the loan interest rate.

Inflation can also cause a disruption of business planning –

uncertainty about the future makes planning difficult and this may have an
adverse effect on the level of planned capital investment. Example – rise in
the price of steel can have an effect on the price of Nano and it may not
remain a one lakh car as planned. Rise in inflation rate may cause higher
interest rates and this may compel businessmen to keep their investment
plans on hold.

This mean that investment rate in the economy may fall this damages
long-run economic growth and productivity. Cost-push inflation usually leads
to a slower growth of company profits which can then feed through into
business investment decisions.

IIPM ---- ECONOMIC ENVIRONMENT FOR BUSINESS ---- PROF. SANJAY KUMAR ---- F12 ---- FW
2007-09
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“Inflation & Its Impact On Automobile Industry”

Going forward, even the much-awaited festive season, which will see
several new launched including Maruti A-Star and Tata Nano, is not expected
to boost the sales in a big way if interest rates and commodity prices do not
ease up.

Two further costs of inflation for automobile industry are-

Shoe leather costs - when prices are unstable there will be an increase in
search times to discover more about prices. Inflation increases the
opportunity cost of holding money, so people make more visits to their banks
and building societies (wearing out their shoe leather!).
Menu costs – menu costs are the costs to firms of updating menus, price
lists, brochures, and other materials when prices change in an economy.
Volatile inflation may cause menu cost to rise. This can be important for
companies who rely on bulky catalogues to send price information to
customers.
The country's over 96 lakh unit automobile industry is in for a major
slowdown, thanks to high interest rates and double-digit inflation, which are
expected to continue even in the second half of this year. This has compelled
analysts to lower the overall growth projection for the domestic automobile
industry from a conservative 8-9% earlier to 5-6% now for the current fiscal.

The central bank is tightening interest rates to bring down inflation.

Since 85% of two-wheelers and small cars in India are purchased on finance;
there will be a slump in the industry in next one-or-two quarters. As such the
growth is likely to come down to single digit. Even financial companies are
keeping away from finance as high inflation may lead to higher defaults and
hence an increase in their non-performing assets.

As per the revised projection of Angel Broking, the overall auto

industry is now expected to grow at a mere 5-6% instead of the earlier
IIPM ---- ECONOMIC ENVIRONMENT FOR BUSINESS ---- PROF. SANJAY KUMAR ---- F12 ---- FW
2007-09
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“Inflation & Its Impact On Automobile Industry”

projection of 8-9%. While growth in sales of passenger vehicles has been
lowered to 5-6% from 8-9% earlier, sales of commercial vehicles is expected
to remain flat as compared to the earlier growth estimates of 3-5%.
However, two-wheelers are expected to register a growth of 6-7% as it is on
a lower base last year when the segment witnessed a decline of 7.92%.

After a healthy 13.67% growth in 2006-07 at 1,01,23,988 units, the

Indian automobile industry witnessed a 4.7% dip in sales in 2007-08 at
96,48,105 units due to over 9% decline in sales of three-wheelers and 7.92%
dip in sales.

Overall it has been noticed that the automobile market in India and
specially the car market in India have experienced a downtrend with the
inflation affecting almost every industry to which the car market is
essentially related.

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IIPM ---- ECONOMIC ENVIRONMENT FOR BUSINESS ---- PROF. SANJAY KUMAR ---- F12 ---- FW
2007-09