To the surprise of few, but to the grievance of many, sales including commercial vehicles and tractors have slashed by nearly half in the four months ending FY20. It is not surprising because the bleeding started some time ago—most recently in the passenger car segment but since start of FY19 in other automotive segments such as light and heavy commercial vehicles.

In 4MFY20, the visible decline in certain segments of passenger cars is even steeper than the decline experienced by commercial vehicles. For instance, higher end 1300&above cc car segment saw sales shrink by 65 percent, while 1000cc cars saw sales drop by 60 percent. If it hadn't been for the launch of Suzuki Alto, overall passenger car sales would have dropped by much higher than 44 percent during the period.

Multiple factors have come into play. The rupee depreciation and the increased FED led to a sharp increase in car prices. But these price hikes evidently led to a trade-off with a loss in demand for the three major automakers. They chose to sell off less units than to sell more at previous prices, though demand dynamics have also changed due to the economy screeching down to a halt.

Higher taxes and massive inflationary pressures without a subsequent increase in incomes have reduced the buying power of most consumers. Empirical evidence suggests that car demand tends to be sensitive to a decline in income and both tend to move in the same direction I.e. falling incomes do not bode well for car demand in Pakistan.

Other factors such as higher cost of borrowing – in the case of an overwhelming number of recent car buyers that were going for car financing- is another factor for reduced demand. But if motorcycle sales decline of 18 percent is any guide where financing is generally available at no mark-up, rising interest rates may just be one of the many factors. It is also important to distinguish between high income, middle income and mid to low income car buyers.

In general, middle income buyers are more likely to buy a car today if they are thinking of putting these cars toward productive means like driving for on-demand car services. Since cars are substantially more expensive, and all other necessary goods are also becoming costlier, folks are more likely to save than spend, if they can. Spending their saved money toward a substantially costlier car in this economy seems imprudent.