How the West Asia conflict could impact India’s auto sector

Highlights

• Rising crude oil prices due to the West Asia conflict could push fuel costs higher, potentially weakening demand for two-wheelers and passenger vehicles in India.
• A slowdown in the gig economy, particularly food delivery services, may impact two-wheeler sales as delivery riders form a key customer segment.
• Supply disruptions in LNG, helium and key inputs could affect fuel availability, semiconductor production and vehicle exports to the Middle East region.

The Indian auto industry has had a great run in recent times and the reduction in GST levies was a huge sentiment booster in the market.

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As the war in the Middle East rages on with alarm bells already ringing in India on the shortage of cooking gas, the million dollar question is when will all this end.

Right now, Iran is in no mood to call it quits and neither is its adversary, Israel, while the US claims that the closure is imminent. As in most parts of the world, India is between a rock and a hard place with the coming days, weeks and months set to test its resilience even further.

Specifically, for the auto industry, no immediate impact is being felt right now except that the cooking gas crisis is leading to closure of restaurants and could seriously affect the takeaways segment too in the near term. This would mean that the likes of Zomato and Swiggy will face the pressure too with orders drying up and their workforce becoming redundant as a result.

If this actually does happen, hundreds of thousands of people will turn jobless and a critical component of the two-wheeler business will also suffer as a result. Gig economy workers use bikes and scooters to deliver food orders and if they were to lose their jobs, demand for new vehicles will also dry up.

The other fear of a long war lies in coping with high fuel prices. Crude oil prices are already over $100/barrel and could skyrocket to over $150 in just a matter of days. “Oil is largely a political commodity and could flare up in times of war and political unrest,” a top industry executive said.

Huge price spiral

This was, in fact, apparent during the beginning of the war when crude was trading at a little over $70/bbl and skyrocketed by nearly 50 per cent in a week following the Middle East bombings. Now with Iran turning particularly belligerent, the chances of a crude price spiral are very real.

In a way, this is reminiscent of the 2008 global slowdown period following the Lehman crisis when oil prices zoomed to nearly $150/bbl. In India, the public sector oil companies had their backs to the wall since they continued retailing fuels at subidised prices with the Centre compensating them much later.

Thanks to this generous subsidy element, especially on diesel, consumers had no reasons to complain. Demand for diesel-driven cars soared while petrol, generally perceived as the rich man’s fuel, was relegated to the sidelines. In later years, as global crude prices began cooling off, the subsidies on auto fuels were eliminated as market-driven pricing set in.

When this happened, the craze for diesel begin waning too as customers realised that it was just not worth their while anymore to pay more. SUVs and commercial vehicles still use the fuel but overall, diesel consumption is barely 15 per cent across India.

Politics dominates economics

While an era of market-driven pricing technically means that pricing is left to the individual oil companies, seldom is this the case. After all, the Centre remains their single largest shareholder and takes a call on fuels pricing especially during challenging times — when politics dominates economics.

For instance, this year will see crucial assembly elections happening in Tamil Nadu, West Bengal, Kerala and Assam. As an oil industry official said, “There is just no way prices of petrol and diesel will be touched when elections are underway. It is the easiest way to anger voters and will only happen when the exercise is complete.”

The other big worry will be availability of compressed natural gas at fuel stations with Qatar shutting down LNG operations and supplies being hit as a result. India is a significant importer of LNG and, even as it looks for alternative sources across the world, will be hard-pressed to make CNG freely available at fuel retail outlets. The fuel is largely available in Delhi, Maharashtra and Gujarat.

According to industry experts, the other challenge is supply of helium which can affect production of semiconductors. The chip crisis first hit the headlines during the time of the pandemic ix years ago. “This time around, it is back to COVID along with a generous dose of inflation,” said an auto industry veteran.

The inflation worry

It is the spectre of inflation that will be a big concern for Indian policymakers. LPG prices have already been hiked and fears of a shortage in the coming days has led to hoarding and black-marketing. This has led to a further surge in prices as panicky customers begin to stock up cylinders at their homes and restaurants.

The next big shock will come when diesel prices are hiked and truck freight charges go through the roof as a result. This will have a cascading effect on prices of vegetables, fruits and other essential commodities and burn a bigger hole in household budgets.

During these trying times, will the average middle-class customer be inclined to buying a two-wheeler or car? His/her top priority would be to ensure that the family is being fed first instead of worrying about mobility. The trend will start getting evident from April onwards unless the Centre directs the oil companies to absorb the price shock and not pass it on to consumers.

It will also be interesting to see if electric vehicles will get greater traction in the market as petrol and diesel become more expensive. Even here, it is not entirely clear if there will be added pressure on sourcing parts in a war-like situation and if availability and price will remain a challenge too.

Riding on GST 2.0 tailwind

The Indian auto industry has had a great run in recent times and the reduction in GST levies was a huge sentiment booster in the market. Manufacturers were confident that FY27 would be a good year too with the tailwind in place except that the Middle East crisis has ended up being a huge setback.

For now, the immediate impact will be felt on shipment of vehicles to the region which has effectively stopped. The next worry will be on fuel prices, especially diesel, which can affect growth of trucks and SUVs. Customer sentiment will clearly be badly hit at a time of inflation with the stock markets going through a roller-coaster ride too.

The optimists will be hoping that the US is right about the war ending soon. Unlike the Russia-Ukraine strife which is confined to a specific territory, the Middle East conflict is threatening to engulf large sections of the world. And that is clearly not a pleasant thought.