In January 2008, India’s Tata Motors unveiled the cheapest car in the World. Tata Nano with its 65 miles per hour capacity and selling for only U.S. $2,500 is a safe, cheap alternative for the risky motorbike commuters. “Nano” promises to fulfill India’s and European emission standard and also is fuel efficient. The growing Indian middle class could not have wanted anything better. Sales of passenger cars had been on rise in recent years. In 2007-2008, 1.5 million passenger cars were sold in India which is over double the number sold in 2001-2002. It is not surprising that an affordable car, such as Tata Nano is expected to increase the demand for passenger cars manifold. Such a spurt in demand not only will boost up the economy, but its main advantage is expected to be manifested in reduction of traffic accidents. India had approximately 59 accidents per thousand vehicles and 12 person killed per thousand vehicles in 2004, majority of which involved two wheelers. Although passenger cars are increasing in Indian roads, two wheelers are still more popular means of transport among majority of people. In 2007-2008, 7.2 million two-wheelers were sold in India. Tata Nano is expected to shift demand from two wheelers to cars and hence help reducing vehicular accidents.

A chance of commuting in cars is more appealing and safe for the growing middle class. The big question now is whether India is ready to tackle this immense increase in cars on her roads? What are the repercussions of introducing such a low-cost car?

 Traffic Congestion

India’s road network already carries 65% of freight and 80% of passenger traffic. In already congested roads, a spurt in cars will bring traffic to a standstill. Commuting for work and other commitments on time will be a nightmare. Hence, India should drastically improve its roadways. In recent years, Government of India started addressing the problem of physical infrastructure and had been spending immensely in connecting major cities (golden quadrangle). New bridges and roads are being constructed within the big cities. Satellite cities are more planned and their infrastructure is better compared to many small cities. Still, a lot needs to be done, specially connecting smaller cities. However, building new roads and highways is only a part of the solution. A Utopian India might build enough roadways it needs, but still driving can be as chaotic as it is now in most cities. India must follow stringent traffic control and safety rules. Traffic control authorities should be more vigilant to maintain stricter traffic safety guidelines. Instances of disobeying traffic rules will subside when consequences are severe and followed systematically. It is time to think seriously about ways to improve traffic regulations. 

 Pollution

More congestion in roadways goes hand in hand with increase in air and noise pollution. India is already struggling with deteriorating pollution levels. An increase in the number of vehicles will intensify the already existing high levels of pollutants. Levels of sulphur dioxide (SO2), oxides of nitrogen (NO2) and Suspended Particulate Matter (SPM) had been high and sometimes critical in most cities. Moreover, there had been concerns by the Asian Development Bank – “In 2005, Indian vehicles released 219 million tons of carbon dioxide, the leading greenhouse gas blamed for global warming. By 2035, that number is projected to increase to 1,467 million tons, due largely to the expanding middle-class and the expected rise of low-cost cars”. Tata Motors promises to ensure that the car meets Indian and European emission standards. However, critics are skeptical. They believe that even though these standards are met, they are not up to the par. What is the solution? Should more cars be run on alternative energy sources? Should the guidelines for emission levels be revised? What should be appropriate strategies to deal with this problem?

Credit Market

We need to address the effect of Tata Nano on the credit market. India’s credit penetration rate in 2005 was only 38%, much below the regional average (87%). Hence, there is a massive growth potential for credit market in India. Moreover, India’s share of non-performing loans had been decreasing- dropped from 10 percent in 2001 to only 2.6 percent in 2006. This is an indication of healthy and thriving banking sector, a necessity for sustaining India’s economic growth. It is more likely that majority of “Nano” cars will be purchased through car loans. Hence, it is important to focus on the approach adopted by banks to handle this increase in demand for car loans. Loans for retail finance that includes auto loans had been increasing in recent years. In the fiscal year ending March 2008, ICICI bank, one of the largest banks in India, offered INR 1,347.5 billion, or 58.6% of their loans for retail finance. Moreover, 13% of their retail finance loans consisted of auto loans. It is expected that Tata Nano will boost up the demand for auto loans. Although, this will increase credit penetration rate and can be perceived as good for the economy, concerns about higher risks of default should not be overlooked. Again, for the ICICI Bank, retail finance loans had the highest share among non-performing assets (71.8%) in 2008. ICICI bank being one of the strongest banks in India, there are chances that the rate of defaults among other banks might be higher. A major hindrance for many commercial banks is lack of proper guidance for loan sanctions. Banks need to be more vigilant about following guidelines in approving loan requests. Recently, many banks are considering risk assessments by the Credit Information Bureau India Limited (CIBIL). Still, the manner followed by most banks to give out loans to “as many people as possible” does not follow stricter risk assessments. In case of huge amount of defaults, the non-performing loans might start growing. Moreover, instances of bank-hired collection agencies following illegal means to procure money from defaulters have been rising. In fact, defaulters have complained of being physically and mentally traumatized by collection agencies. Hence, for betterment of both the economy and its citizens, this problem should be addressed before it gets too late.

This article was written in April 2008. Things have changed drastically around the world since then. Readers are advised to read with concern, specially the credit market part. The problem involving credit is a bigger concern now than before. So, banks should be more skeptic while giving out loans in today’s world.