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Can India’s Auto Industry Become the Bedrock the Country Needs?

Can India’s Auto Industry Become the Bedrock the Country Needs?

U.S. President Donald Trump’s threat of drastically raising tariffs on cars imported to the United States has unnerved the global automotive industry.

Yet India appears unfazed. Washington and New Delhi have certainly sharpened their arrows as they jostle over disagreements on trade. Trump, who has called India the “tariff king,” wants to chip away at the $23 billion U.S. trade deficit with India by gaining greater access to various sectors of the Indian market, including dairy and medical devices. And New Delhi has threatened to impose $241 million in retaliatory tariffs against Washington for refusing to grant waivers on its steel and aluminium shipments destined for the American market.

But India’s largely domestically focused automotive sector will fly beneath the radar of Trump’s auto protectionism and continue to focus on serving a vast internal market of nearly 1.3 billion consumers.
India is the world’s sixth-largest economy, but the country needs to create jobs to absorb the 1 million Indians newly eligible for employment every month. This means that Prime Minister Narendra Modi will maintain high tariffs on key sectors such as auto manufacturing to protect domestic jobs, especially as he aims to shore up votes ahead of his re-election bid during May 2019 parliamentary elections.
India’s young and growing middle class will drive the expansion of the country’s automotive industry in the coming decade. But for Prime Minister Narendra Modi, spurring India’s lagging industrialization and creating jobs en masse for the burgeoning workforce are paramount objectives of his economic policies. Thus, India will maintain tariff barriers in order to safeguard local manufacturing jobs under the flagship “Make in India” initiative, limiting the country’s prospect of becoming a major auto exporter.

Sector Composition: Riding on Two Wheels

India’s automotive sector is growing, but its growth is constrained by a variety of factors, including infrastructure and a desire to protect jobs, which limits exports. (This is representative of the struggles facing India’s manufacturing sector as a whole.) India produced 29 million vehicles in the latest fiscal year ending March 31 (FY2018). Its auto industry — centred around four geographical manufacturing hubs — produces everything from motorcycles and mopeds to sport-utility vehicles, tractors and trucks. A range of global automakers including Honda, Toyota, Hyundai and Ford sell India-specific models locally to capitalize on growing demand in the $2.6 trillion economies.

Types of vehicles produced in India

A breakdown of the four kinds of automobiles India produces points to the economic realities shaping Indian consumer preferences. In FY2018, two-wheelers accounted for the lion’s share of production at 23 million units (80 per cent), followed by 4 million passenger vehicles (14 per cent), 1 million three-wheelers (4 per cent) and 895,000 commercial vehicles (3 per cent). Breathless pronouncements of India’s economic growth notwithstanding — indeed, its 7 per cent rate of expansion is the fastest in the world among major economies — per capita income is about $1,600 per year. For most Indians, then, this means the cost is king, and the lower price-points of two-wheelers make them a more attractive option. The Honda Activa scooter, India’s best-selling two-wheeler, costs $730. By comparison, the Maruti Swift, the country’s best-selling car, costs $6,700. Until Modi’s economic policies can yield a substantive rise in median incomes — a highly complex task requiring deep economic reforms across land and labour — two-wheelers will continue dominating the market.

Automotive Components: The Other Auto Sector

Assembling vehicles are only one-half of India’s automotive equation. The country is also home to an active components sector that produces an assortment of auto parts for original equipment manufacturers and provides the part replacement for domestic and foreign consumption. These parts include pistons, gearboxes, drive axles, shock absorbers, tires, radiators, steering wheels, bumpers, clutches and brakes. In FY2018 the sector generated $43.5 billion in revenue. It has recorded a 5.6 per cent compound annual growth rate over the past decade, employing 1.5 million and generating $13.5 billion in exports earnings. North America and Europe account for 61 per cent of the sector’s exports, and the United States alone accounts for about a quarter, meaning Washington’s proposed tariffs on auto component imports could hit this segment of India’s auto industry.

India’s prominence in the global auto component industry points to the industry’s broader shift toward developing countries — like India — that offer lower labour costs and are well-suited to build these parts, which often require low levels of value-add, demand little to no research and development, and are less conducive to automation. By comparison, the bulk of India’s automobile exports, which account for 14 per cent of the country’s automobile production, are destined for other developing countries, including Mexico, Colombia, Sri Lanka, Nigeria, Bangladesh and South Africa.

Foreign Automakers: When Global Meets Local

In order to avoid India’s sky-high auto tariffs and take advantage of its domestic demand, foreign automakers have established themselves as a dominant presence in the Indian market either by operating as wholly-owned subsidiaries of a multinational firm or by partnering with a local firm under a joint venture. In 2018, foreign companies have produced 17 of the 20 best-selling cars in India. Maruti Suzuki offers a prime example. The company, a joint venture in which the Japan-based Suzuki company holds a 56 per cent controlling stake, is India’s biggest automaker. It accounts for a little over half of India’s market share and produced the five best-selling cars in the country as of September: the Swift, Alto, Dzire, Belena and Vitara Brezza.

Trailing behind Mauriti is South Korean carmaker Hyundai. A wholly owned subsidiary headquartered in the south Indian state of Tamil Nadu, Hyundai India has captured 17 per cent of the market, and two of its cars — the Elite i20 and Grand i10 — are among India’s 10 best-selling passenger automobiles. Mahindra and Tata Motors (which owns Jaguar and Land Rover) are the top domestic Indian manufacturers, accounting for 7 per cent and 6 per cent of the overall market, respectively, but neither of their best-selling models — the Tiago and Balero — have cracked the top 10.

Make in India: The Paramount Objective

For Modi’s administration, a vibrant auto sector is an essential component of the prime minister’s vision for India’s future. Its links with numerous sectors of the economy — including steel and rubber production, auto insurance and consumer financing — make it an economic multiplier, critical for boosting India’s economic status on a global level. And when Modi came to power in 2014, he promised to create a whopping 10 million jobs annually — many of which would be in the auto sector. He included the automobile and automotive component industries as part of the 25 priority sectors under his “Make in India” campaign, which aims to increase manufacturing’s contribution to India’s economy from 16 percent to 25 percent of gross domestic product (GDP).

India’s once-agrarian economy has developed a thriving services sector, which accounts for 55 per cent of economic output today. But unlike China, whose own industrialization sparked one of the most successful economic booms in history, lifting millions from poverty and propelling Beijing’s rise as a major world power, India has had mixed progress industrializing. A legacy of rigid land and labour laws, a convoluted tax code and the difficulties of advancing reform through a raucous parliamentary process have all blunted economic growth.

With its Automotive Mission Plan (2016-2026), a joint vision between the government and industry, India intends to position the automotive industry as the “engine” of Make in India and create 65 million jobs in the auto industry by 2026. But for India to reach this ambitious goal, it will need to develop significantly more — and better — infrastructure. The government recently said it would require $1.5 trillion to close the infrastructure gap, increase investment in research and development, and advance mass skills training — all necessary to bring new jobs to fruition.

The Automotive Future: Look Within

Modi’s need to encourage manufacturing jobs as part of India’s industrialization means the automotive sector will likely remain inwardly focused and the government will maintain its high tariff barriers. India currently enforces annual limits on each manufacturer of 500 units on heavy commercial vehicle imports and 2,500 units on the imports of various finished passenger vehicles. The auto sector tariffs, meanwhile, sit at 60 per cent, the highest of any country in the Brazil-Russia-India-China-South Africa (BRICS) bloc. Indian automakers face limited barriers to exports and are churning out a greater number of cars, but overseas shipments account for only 5 per cent of sales for Indian automakers on average.

This chart shows the top export destinations for Indian-produced motorcycles.

This import-substitution policy, which has successfully enticed foreign automakers to set up shop locally, has also hindered efficiency and productivity since it limits the Indian automotive industry’s exposure to foreign competition. The gradual liberalization of the auto components sector, by comparison, has resulted in exports now accounting for over 40 percent of production.

With 1 million Indians each month becoming eligible for the job market, creating jobs on a mass scale will be India’s biggest challenge over the next decade, compounded by the fact that the automation of manufacturing diminishes the need for human labour.

Prosperity, Fuel and Light: A Season of Growth?

A combination of domestic elements and wider geopolitical forces will shape consumer demand in India’s automotive sector in the months ahead. The country’s Goods and Services Tax (GST), a sweeping reform streamlining India’s convoluted system of indirect taxation, augurs well for the industry. But dealers are pining for a reduction in rates for automobiles that fall under the 28 per cent slab, the highest of the GST’s five rates.

The rising price of fuel, the effects of summer monsoon rains, and rising interest rates aimed at containing inflation and bolstering the weakening rupee are also dampening demand; auto sales in India fell in September for the third straight month. Dealers are pinning their hopes on a revival with the onset of India’s festive season centring on Diwali, the “Festival of Lights,” a time when Hindu devotees offer special prayers to Lakshmi, the goddess of prosperity.

For the Indian automotive industry, this is an auspicious time lined with caution, as rumbling shifts in a global industry discovering the power of automation — and relying on the increasing fusion of software with vehicles — poses new challenges and opportunities for one of the world’s largest automotive industries. For Modi, the potential for the industry as a jobs creator ensures it will be a priority sector in the years to come, as its growth is linked intimately to India’s growth as a country.

Sources: Stratfor.Worldview