Eeb Assignment - Inflation

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“Inflation & Its Impact On Automobile Industry”

GROUP DETAILS S .NO.

NAME

E-MAIL ID

SECTION

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

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“Inflation & Its Impact On Automobile Industry”

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Vidhu Jain

[email protected]

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 89% 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 areShoe 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