India’s Automobile Industry: Increasing Opportunities for Investment

January 13, 2017 Posted by India Briefing Reading Time: 4 minutes

India is a global leader in the automotive sector, backed by its domestic production capacity, market size, and exports. On average, the country’s automobile sector boasts of an annual production of around 24 million vehicles; the sector also employs over 29 million people (directly and indirectly).

Breaking down its global position by industry segment, India is the world’s largest tractor manufacturer, second largest two-wheeler manufacturer, second largest bus manufacturer, fifth largest heavy truck manufacturer, sixth largest car manufacturer, and eighth largest commercial vehicle manufacturer.

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This article discusses the growth trends in the automotive sector in India, which offers a highly attractive investment landscape for foreign investors and manufacturing firms. Testament to this is the fact that South Korea’s Kia Motors, Daihatsu from Toyota, PSA Group’s Peugeot Citreon, and three car makers from China, Beiqi Foton, SAIC, and Changan Automotive desire to enter the Indian market, pivoted to become the third largest in the world by the end of the decade.

India’s automobile industry and market size

Overall, the Indian automotive industry is a major employment creator, GDP contributor, and FDI earner. In fact, in 2015-2016, the US$93 billion automotive industry contributed 7.1 percent to India’s GDP and 49 percent to the national manufacturing GDP. For every vehicle produced, direct and indirect employment opportunities are generated with the employment of 13 persons for each truck, six persons for each car and four for each three-wheeler, and one person for two-wheelers.

Meanwhile, the auto component industry grew at a turnover rate of six percent from 2010 to 2016, contributing to 2.3 percent to India’s GDP and provided direct employment to 1.50 million people in the fiscal year 2015-2016. The industry registered an 8.8 percent increase in its turnover from US$34.4 billion in FY 2014-2015 to US$37.45 billion in FY 2015-2016 (US$1=Rs 68.25).

Exports grew by 22 percent and the auto-component industry contributed 4 percent to India’s exports in FY 2015-2016, with earnings of US$10.39 billion (Rs 709 billion). The top export destinations of Indian auto-components are the U.S., Germany, Turkey, U.K., and Italy.

In terms of the automobile market size, the two-wheeler segment dominates with an 81 percent market share in the Indian automobile market, owing to its young population and a burgeoning middle class. An increasing interest exhibited by companies in exploring the country’s vast rural market further aids the growth of this sector. Finally, India’s passenger vehicle (PV) segment holds a 13 percent market share.

India’s automobile sector shows positive outlook

India is a prominent automotive manufacturer and exporter with highly optimistic expectations continuing for growth in the near future. The following growth trends over the past year may be noted:

Production increased by 2.6 percent in the financial year (FY) 2015-2016 as the industry produced a total of 23,960,940 vehicles, including passenger vehicles, commercial vehicles, three-wheelers, two-wheelers, and quadricycles as against 23,358,047 vehicles produced in the previous fiscal year.
Tracking the rise in domestic sales, passenger vehicles sold increased by 7.24 percent in 2015-2016 over the same period in the previous fiscal. Year-on-year growth within the respective segments of passenger vehicles and passenger cars, utility vehicles, and vans was 7.87 percent, 6.25 percent, and 3.58 percent in FY 2015-2016. In the commercial vehicles segment, growth was 11.51 percent in FY 2015-2016 over the previous year. In the same period, medium & heavy commercial vehicles (M&HCVs) registered a growth of 29.91 percent, while light commercial vehicles (LCVs) grew marginally by 0.30 percent.
Sales of three-wheelers sales grew by 1.03 percent in FY 2015-2016 over the previous fiscal year. Within this segment, passenger carrier sales grew by 2.11 percent.
Two-wheelers sales registered a growth at 3.01 percent in FY 2015-2016. Within this segment, sales of Scooters grew by 11.79 percent.
Rapid rise in the total production of electric and hybrid vehicles from 17,107 (FY 2014-2015) to 71,909 (FY 2015-2016) and a rise in the total sales from 16,513 (FY 2014-2015) to 65,224 (FY 2015-2016).
Finally, the rise in exports saw automobile exports grow by 1.91 percent (worth US$8.8 billion). Major growth drivers were passenger vehicles, commercial vehicles, and two-wheelers, registering a growth of 5.24 percent, 16.97 percent, and 0.97 percent, respectively, year-on-year in FY 2015-2016. Two-wheelers accounted for the largest share of exports at 69.4 percent, passenger vehicles comprised a sizeable 16.7 percent, and three-wheeler vehicles registered around 11.1 percent share in exports.

FDI in India’s automobile industry

Foreign direct investment (FDI) equity inflow into the automobile sector increased by 72 percent during 2014-2016 from US$3.05 billion (during 2012-2014) to US$5.25 billion. From April 2016 to September 2016, the automobile sector received US$728.65 million in FDI equity inflows. Leading global players like ISUZU Motors, Ford Motors, Tata Motors, Honda, and Suzuki Motors have already invested heavily in the manufacturing sector resulting in the establishment of new assembly lines, manufacturing, and greenfield units, thereby boosting the automotive manufacturing ecosystem in India.

Some of the major foreign investments into the Indian automotive sector in the last two years are listed below:

Government policy to boost auto manufacturing

The consolidated automotive industry holds great importance in the government’s manufacturing policy framework, where it is labelled as a ‘sunrise sector’.

The government’s Automobile Mission Plan 2016 – 2026 envisages making India one of the top three automobile manufacturing centers in the world, potentially earning a gross revenue of US$300 billion by 2026.
To promote exports of manufactured green technology products, the export obligation of 16 specified products has been reduced under the Export Promotion Council Goods (EPCG) scheme (Foreign Trade Policy 2015-2020).
Faster Adoption and Manufacturing of Hybrid and Electric Vehicles (FAME) scheme to address the global demand for innovative and fuel economy vehicles. This will incentivize the development, manufacture, and promotion of hybrid/electric vehicles market (XEVs) that include mild hybrid, full hybrid vehicles (HEVs), plug in hybrids (PHEVs) and pure electric vehicles (PEVs). It was launched on April 1, 2015, targeting a market penetration of 6 to 7 million vehicles per year by 2020.
Hybrid vehicles now attract excise duty at 12.5 percent and electric vehicles attract excise duty at 6 percent, as against the excise duty of 30 percent, 27 percent, 24 percent, and 12.5 percent applicable on vehicles with conventional fuel.

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Notwithstanding the ongoing pains of demonetization that caused a temporary decline in sales in December 2016, the Indian government’s ‘Make in India’ drive and its sectoral policy are both highly encouraging for the future outlook of the Indian automotive industry.

Diversified segments and the presence of global automotive manufacturers strengthen the sector’s ecosystem in India. This is important as India seeks to be the third largest auto market by the end of 2020. Forward looking government incentives such as reduced duty on hybrid and electric cars also boost the future of the industry.

Lastly, the current government’s pro-business sentiment is shaping its reforms focus on regulatory easing, infrastructure development, logistics improvements through rail, road, and sea cargo, and expanding FDI limits, all of which bodes well for foreign investors.