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Automobile sector: Looking ahead to 2020

• Two decades of robust growth have propelled India from a net importer to a prominent exporter of automobiles. 
• Indian automobile exports witnessed strong double-digit growth of 14.5% in 2018 to reach 4,595,000 units.
• All sectors within the automobile sector reported a positive growth in exports during 2018 excluding passenger vehicles
• The slowdown in demand and production of automobiles is expected to be temporary, and the sector is projected to pick up with improvement in the economy.

At the beginning of the 21st century, the Indian automobile sector was at its nascent stage. It is now recognized as one of the main pillars of the Indian economy. The industry contributes majorly to the growth and development of the Indian economy and provides direct as well as indirect employment for both skilled and unskilled labour.

The Indian automotive industry has undergone a significant transformation in terms of profitability and sustainable growth. Currently, the industry contributes around 7.5% in the country’s Gross Domestic Product (GDP) and this contribution is projected to increase to 12% by 2026 and generate an additional 65 million jobs as per the Automotive Mission Plan (AMP) 2016–26. The key factors which have contributed to the industry’s growth include rise in aftermarket sales, improved consumer sentiment, easier access to credit and rising exports.

Two decades of robust growth have propelled India from being a net importer of automobiles to a leading manufacturer and exporter of vehicles and components. In India, the growth of the automobile sector is also attributed to strong government support. Initiatives like Make in India, NATRIP, FAME and other conscious policy interventions over the past few years have helped the Indian automobile market in becoming competitive, brought several new players, increased the capacity of the industry and have elevated India’s position in the global automobile market. The Indian government encourages foreign investment in the automobile sector and allows 100% FDI under the automatic route. According to the Department for Promotion of Industry and Internal Trade (DPIIT) data, the automobile industry has received FDI worth US$ 21.38 billion from April 2000 to March 2019.

Currently, the automobile industry manufactures nearly about 25 million vehicles out of which 3.5 million vehicles are exported. Globally, India being the largest manufacturer of the tractors, the second-largest manufacturer of buses and third-largest manufacturer of heavy trucks, holds a strong position in the international market. Indian automobile exports witnessed strong double-digit growth (14.5 per cent) in fiscal 2018, exporting a total of 4,595,000 units. The growth was mainly driven by commercial vehicles and three-wheelers. Automobile exports account for 4.3% share in India’s total exports. The overall automobile exports have increased from 4.04 million in FY 2017-18 to 4.63 million in FY 2018-19. Due to factors like low-cost steel production and availability of skilled labour, India is able to produce automobiles at low cost and has become one of the major automotive export hubs in the world.

Table 1: Exports of Indian Automobile Industry

Units: In thousands

  2015-16 2016-17 2017-18 2018-19
Exports 3,643 3,480 4,042 4,629
Growth % 1.95 -4.47 16.15 14.5

Source: SIAM

The demand for automobiles, which has increased over the years, is linked to both economic growth and rise in income levels.  It is inversely related to the interest rates and fuel prices as a majority (around 85%) of the total vehicles are bought on credit. However, the Indian automobile industry is experiencing a slowdown in the domestic demand for the past few months resulting in a massive inventory pile-up, even as the rise in export demand (by 26% in Q1 FY 19) has given some relief to manufacturers.  

The overall production of the automobile industry has declined by 18.29% to 24,06,640 units in September 2019 while exports rose by 0.68 per cent to 4,17,232 units. Sales declined for 11 consecutive months as of September 2019, with a marginal increase in October due to the festive season. Sensing the stress from the supply side of automobiles industry in the domestic market, the Indian government has stepped-up on stimulus measures like easing the liquidity in the banking system, reducing corporate tax and announcing SOPs to exports.

According to data released by the Society of Indian Automobile Manufacturers (SIAM), all the segments within the automobile sector reported a positive growth in exports during 2018 excluding passenger vehicles (See table 2). The two-wheeler sector registered a growth of 23% while the three-wheelers sector recorded 55.96% growth.

Trend in automobile production and exports in India

  EXPORTS PRODUCTION EXPORTS PRODUCTION
Category 2017-18 2017-18 2018-19 2018-19
Passenger Vehicles 7,48,366 40,20,267 6,76,193 40,26,047
Commercial Vehicles 96,865 8,95,448 99,931 11,12,176
Three Wheelers 3,81,002 10,22,181 5,67,689 12,68,723
Two Wheelers 28,15,003 2,31,54,838 32,80,841 2,45,03,086
Quadricycle* 1,605 1,713 4,400 5,388
Grand Total 40,42,841 2,90,94,447 46,29,054 3,09,15,420

Source: SIAM, figures in actual units

Between January-December 2018 around 701,157 passenger vehicles were exported from India as against 740,095 passenger vehicles recorded during 2017, a decrease by 5.26%. The top five passenger vehicle exporters were Ford India, Hyundai Motor, Maruti Suzuki, Volkswagen India and General Motors with an aggregate contribution of around 83%. These top five exporters experienced a slump in exports except Hyundai Motor whose in total exports increased to 22.8% in FY 18, registering a growth of 2%. The slowdown in passenger vehicles exports last year was mainly because the shipments to major markets like Indonesia and Sri Lanka had reduced.

Though the commercial vehicle exports have increased in 2018-19, but they are facing challenges to expand exports in the last few years due to disruptions such as the implementation of GST, NBFC crisis, increase in axle load norms and the BS VI transition.

The slowdown in demand and production of automobiles in India is expected to be temporary, and the sector is projected to pick up with improvement in the economy. With an increasing population and rising disposable incomes, India is expected to have one of the fastest-growing automobile markets. Moreover, the rapidly globalising world is further opening up newer avenues for India’s automobile sector to develop a strategy to enhance export competitiveness. In the coming years, India’s automobile exports are likely to continue to see an increasing upward trend in demand as the investment increases and the economic environment improves.

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