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Demonetization – A Blessing In Disguise Or A Catastrophe?

  • Jan 17, 2017
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The used car market in India is a cash-driven business sector, and a move like demonetization has the potential to cripple such a market. Things changed dramatically post demonetization and the focus of the masses shifted from luxuries to necessities. As a result, the demand was almost nil in the days following the termination of the high-value denomination as legitimate currency and business went kaput.

Used car dealers in India haven’t been able to get back to normal working since then as buyers are still shying away from investing in a car owing to the cash crunch. The market sentiment will only improve with the increase in cash liquidity, which is still a long time away. So, will the used car market continue to face the effects of demonetization for an extended period or will there be a radical market shift to counter these problems from any such policy in future? As India goes cashless, we try to find whether the demonetization cloud has a silver lining for the used car market.

Did demonetization hit the used car market as bad as it looks?

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It’s a given that demonetization has had a significant impact on the used car market. Owing to the cash crunch, buyers have postponed their decision to buy a car. The market sentiment has even influenced the customers who were considering to get their car financed, waiting for the market to settle and liquidity to improve. However, the decision of buying a car has only been delayed, and not completely stopped.

A recent market report claims that demonetization led to a 42% drop in sales volumes in November 2016, which is significant but at the same time hints that majority of buyers (considering the sales to be flat otherwise) went ahead with their decision to buy a used car despite the cash crunch. Which brings us to the first silver lining for the used car market - Buyers who are needful of a car will continue with their purchase decision despite the cash crunch.

So, while we can say that demonetization impacted the used car market badly, but it has also filtered the buyers. So, only those buyers who desperately need a car are out there shopping for the wheels.

Learning from the 2007-08 recession

TSM Chennai Used Cars

Demonetization may have impacted the Indian buyers a lot, but the scale of 2007-08 recession was unprecedented and worse in terms of scale. However, the used car industry in America not only sustained the recession, but it also came out of it relatively quick. Manheim Used Vehicle value index for Nov 2016 shows that the US saw a sharp decline in car sales in the month of January of 2009 however within just one year, the industry picked its pace and in fact the January of 2010 turned out to be one of the best months for the market ever. IBB sees the Indian used car market coming out of the clutches of demonetization in the same manner. So, we can expect the market to not only improve in the coming months but also get into upward progress within a year. Which brings us to our second ray of hope for the used car industry – The used car market of India is expected to regain the lost ground and come back to normalcy within one year.

Until now, we saw demonetization as a calamity for the used car market, it has hindered growth and made the conditions worse for used car dealers. However, there is hope for those who are willing to change the way they work - there is a positive side to demonetization.

1. Survival of the fittest – The demonetization episode certainly broke a lot of backbones, however, those who maintained a consistency in their business pattern have suffered the least. A New Delhi-based used car dealer tells us that he has always invested in used cars from different segments so that he could cater to different buyers. So, the used car dealers who have a broad portfolio are the ones who are still managing to remain in the business.

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2. The growth of organised and partially organised used car sector – Players in the organised used car space like Mahindra First Choice, Maruti True Value and others are expecting the organised used car industry to take the lead as and when liquidity improves in the market. In fact, an IBB report also suggests that the semi-organized used car dealers will also benefit in the long run because of various factors like reduction in loan rates, more finance schemes and offers, etc. The government’s drive to make India go cashless also appears to be going down well in the organised and semi-organized space considering these used car dealers are in a better position to adapt to the change in nature of the transaction.

3. Better finance options and new avenues of growth – The used car market faced a huge setback post demonetization because it is a cash-driven market. In the current situation, only 15% of buyers opting for a used car get their cars financed. However, a report on IBB hints that as many as 25% of the customers will prefer to get their used car purchases through various finance options within one year. Considering car financing is one of the primary revenue sources for new car dealers, it may open an entirely new avenue of income generation for the used car dealers as well in the long run.

4. Market size – The used car market is touted to be a 3.3 million unit per annum market in India as of 2016, which is massive. Better finance options, more technically sound cars and ambitious buyers will result in an increase in used car market size and demonetization has only stepped up the pace of the market reform. The used car market offers buyers to leapfrog multiple car segments without making as big a dent in their pockets as a new car of the same segment, which attracts customers towards itself. Also, since the government is getting stricter on removing old cars from the road, the used car segment could very well come to the fore offering replacement vehicles at a significantly low exchange rate.

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Summing it up, demonetization certainly held the market back and hampered progress. Its aftereffects will be harsher on the majority of the market. However, demonetization has given the unorganised and semi-organised sector a chance to come to terms with the players in the organised sector before they become too big and take the market by storm. The youth-driven market was already gearing up for a change in the way the transactions take place and in the way the market is operated, demonetization has only stepped up the pace of the reformation of the market. Demonetization’s ill aftereffects will lessen in time as market liquidity improves and the business may get back to normal in a year, but the Indian used car dealers will become better at adapting to any such reform in future and will be more prepared to handle any tough times that the market will present in future.
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