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| India Infoline Sector Reports | Thu, 11-Dec-2003 11:57:29 IST (GMT+5:30) | |
| Automobile - Cars | ||
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Annexure 4 : Potential Demand For Cars We will attempt to show how the twin factors of rising income and finance schemes have made it all the easier to buy a car and try to estimate likely demand levels in the future. First take income levels for instance. Ten years back, the country embarked on a policy of economic liberalization. Since then it has been seen that households have moved up the income ladder with the number of households in the lower income groups actually declining. According to the NCAER, from FY93 to FY96, the proportion of low-income households has declined rapidly than in the pre-reform period. In absolute terms, 10mn households graduated outside the low-income group. At the same time, the proportion of households in the high-income group went up. If we look at the table below, we can compare the distribution of households (%) in the various income groups in the pre-reform and post-reform periods.
Source: NCAER Assuming that a household will save 35% of its income to pay for annual loan installments, fuel and maintenance charges, then the following table suggests that the annual income will have to be around Rs260,000 for a new car and Rs150,000 for a second-hand car. According to NCAER Market Demographics Report of 1998, the number of households under these two income brackets was 1.4mn and 3.1mn respectively in FY96. These income categories grew at a CAGR of 17% and 15% between FY93 and FY96. If we assume, that the growth rate in the last two categories falls by half to 8.5% and 7.5% respectively, then the number of households affording a new car will go up to 2.1mn and those able to afford a used car will go up to 4.4mn.
Note: The car is a Maruti 800 (AC). The used car is of 1996 vintage. Finance scheme is of Maruti Countrywide. As and when the prices of second hand passenger cars drop, a larger number of households will become eligible for owning a car. For example, if prices come down to around Rs75,000 levels, then a further 1mn households will become potential customers. In March 1998, according to ACMA, the estimated number of registered passenger cars was 3.87mn. So one can gauge the potential for car sales, which exist in this country at present. Coupled with it the fact that several financial institutions have come to offer car loans, which have been lapped up by potential customers. However, the household penetration technique has three limitations. Firstly, the threshold income level for a household to own a car is unclear. In addition, in the context of an economy, where nearly one-third of economic activity is unaccounted, there are no precise estimates of household incomes which factor in black money. Secondly, there are no estimates available about the pattern of car ownership, in terms of the number of cars per household. This aspect has a significant impact on demand estimate for luxury cars as such buyers normally upgrade their cars. Thirdly, the validity of the household penetration technique is debatable given that corporate institutional buyers account for a significant proportion of total car demand. |
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