Expected impact of the Rs. 500/1000 note ban on car industry

In a surprising and bold move, the Government of India has cancelled the legal tender of higher denomination notes of Rs. 500 and Rs. 1000 from the midnight of November 8. This will likely take a toll on the parallel black money economy that has been prevalent in the country from a long time. Once this black money is eradicated, the two majorly affected segments will be real estate and automobiles.

Talking about the effects of demonetization on the automotive sector, the used car market will be the most affected segment, owing to its heavy reliance on cash deals. Till now, people that used to illegally stock up cash often paid for used cars using black money, without notifying the purchase to concerned government authorities. Dealers too were happy to sell a car against full/partial cash payment as they could avoid taxation on this value.

However, since the cash reserve will now go out of the system, there will be a sudden drop in sales of used cars. This would pile-up inventories for used car dealers across the country. Added pressure from low sales will force dealers to start offering discounts on existing cars in order to drive revenue. This will come out as a blessing in disguise for those who have been paying their taxes loyally as per the government guidelines.

A similar sales slump will also be seen on the new car segment. Though black money isn't a prominent player in the new car market, anyone who's affected by the note ban isn't exactly in the mood to buy a new car. Used car sales also have an indirect effect on this industry. Someone who is planning to replace his old car with a new one will be forced to postpone the purchase due to low valuation of his old car in the used market. A slump in new car sales has a high probability, especially in November & December. Dropping sales might also result in some offers and deals coming in the new car segment in the next few months.

All-in-all, those who have been aptly declaring their income over the years might get their hands on some great deals and offers in the new as well as used car market. Honest tax players are in a win-win situation at the moment.

However, this effect is expected to be at a limited extent. Once the economy stabilizes in the coming months, things will likely be back to normal in the new and used car market.