Megha Jain, Tata Motors examines the strengths and shortfalls of the Indian automobile sector.
The automobile sector in India has advanced due to the surge in investment since the late 1980s. The country is now the second fastest flourishing market for automobiles and autocomponents in the world, after China. The government fosters foreign investment in this sector by allowing 100% FDI under the automatic route. Additionally, various initiatives by the government and the key automobile players in the Indian market are aimed at making India a world leader in the twowheeler and four-wheeler by 20201.
Worldwide, the motor vehicle industry (four-wheelers) contributes 5% to the total manufacturing employment. In India too, it is one of the strategic drivers of manufacturing growth and employment opportunities. The Indian automobile industry has realized splendid achievement in recent years—from two-wheelers to multi-utility vehicles to commercial and luxury vehicles. It contributes to 7.1% of the country’s GDP. With nearly 81% market share, the twowheeler segment is the leader of the Indian automobile market owing to a growing middle class and young population.
Presently, India is the world’s largest maker of tractors, second largest maker of two-wheelers, and the fifth largest manufacturer of commercial vehicles. It is also the fourth largest passenger car market in Asia, and is home to the world’s largest motorcycle manufacturer. From FY 2006-2016, the production of automobiles in the country increased at a CAGR of 9.4% 2. During the same period, the passenger vehicle segment witnessed the fastest growth at a CAGR of 10.09%, followed by the two-wheeler segment that grew at a CAGR of 9.48%. Automobile exports grew at an average annual rate of more than 55% between 2001-02 and 2005-06, while auto-components exports grew at 21%. Two-wheeler exports have expanded at an annual average growth rate of 27%, passenger car exports have grown at 80%, and commercial vehicles at about 55%.
From FY 2006-2016, the production of automobiles in the country increased at a CAGR of 9.4%.
multiplier and linkage effect
The automobile sector is considered pivotal for growth because of its deep economic backward and forward linkages. Since it generates demand across sectors—from raw materials and components to transportation and other services—it has a strong and positive multiplier effect that propels the country’s growth. The efficiency of the automobile sector not only impacts production and consumption directly, but also creates indirect positive impact. For instance, the industry creates ten extra employment opportuinity for each auto factory job through its backward and forward linkages.
India’s automobile sector mainly depends on duty protection. The allowance of 100% FDI in this sector will provide the muchrequired impetus to the manufacturing sector, in the long run. This will further boost its multiplier effect for overall economic growth. Presently, 21 domestic and 18 foreign automobile manufacturers are functional in the country, manufacturing vehicles of different segments.
The Department of Heavy Industry, under the Ministry of Heavy Industries and Public Enterprises, is the chief agency in India for fostering growth and development of the automotive industry.
01 In an endeavor to accelerate and sustain advancements in the auto sector, the department announced the ‘Auto Policy’ in 2002. It was aimed at establishing a globally competitive automotive industry in India and double its contribution to the economy by 2010. This policy sought to promote R&D so as to ensure continuous technology upgrades and build better designing capacities.
02 Another landmark initiative has been NATRIP (National Automotive Testing and R&D Infrastructure Project) which aims at creating central global competencies in the auto sector and facilitates its integration with the world economy.
03 The ‘Automotive Mission Plan’ (AMP) for the period 2006-2016 proposes to make India a global automotive hub.
While Indian roads are some of the most dangerous, Indian cars are among the least safe in the world. Unlike in the West where manufacturers constantly update safety features themselves, in India companies often tend to defy strict laws. The country has still not mandated crash safety tests as companies have been averse to embracing them. Also, many cars (especially small models) do not even have the basic safety features such as anti-lock braking system and airbags even as optional features. Additionally, external factors such as fluctuating fuel prices, weakening rupee, and high interest rates have made matters worse in the recent months.
The last couple of years have seen the market fall for the Indian automobile sector, globally. Environmental sustainability concerns, primarily driven by the fuel efficiency of the vehicle, remains an area of concern.
Many regulations have been imposed on road transport, ostensibly to help it develop. However, the reality is different—these have only retarded growth. Further, over the years, the tax levied per vehicle in India has been rising steadily and it is now one of the highest in the world. This is a major factor that restricts the growth of road transport in the country.
the road ahead
In the coming decade, the Indian automotive industry need to revisit the technology it uses and equip itself to produce efficient green vehicles, in the context of rising costs and fuel consumption and increased awareness of environment issues. There is a need for creating a more promising ecosystem, epitomized by an increased thrust on IT, R&D, creation of more value-added products, incentives and policy support from the government, testing and validation centers, and appropriate training infrastructure to strengthen the human resource base. This will go a long way towards placing the Indian industry on the global automotive map.
The rollout of the Goods and Services Tax will certainly accelerate growth of the automotive base of the economy. This is, however, easier said than done. Nevertheless, for India to achieve or even come close to attaining this ambitious goal, it will need to considerably develop on its competitiveness across various parameters. ■
The Indian automotive industry need to revisit the technology it uses and equip itself to produce green vehicles.