This is the hidden potential of the Indian automotive sector

The automotive sector is one of the fastest growing sectors of the Indian economy, having a significant impact on the socio-economic development of the country. Historically, it has served as a reliable indicator of India’s overall growth, playing a key role in both macroeconomic expansion and technological progress.

The automotive sector is growing on demand, supporting numerous small and medium-sized industries. Over the past few years, strategic policy interventions and the entry of new players have contributed to the emergence of a dynamic and competitive market. This led to an increase in production capacity in the automotive industry, which led to the creation of significant jobs.

Rising income levels, urbanization and technological progress are driving car sales. Data from the Automotive Component Manufacturers Association of India (ACMA) shows impressive growth in the auto components industry as well. Sales increased from $39.05 billion in FY2016 to $69.70 billion in FY2023.

Domestic sales increased by 34% during the year, contributing to the automotive sector’s contribution to India’s GDP. In February 2023, it increased to 7.1% (compared to just 2.8% in 1992). This growth also had a positive impact on the car accessories sector.

Internationally, India is the world’s fourth largest car market in terms of domestic sales. Currently, India ranks third in the world in terms of production. Cars account for over 45% of the manufacturing industry’s GDP.

These are the main growth drivers of the automotive sector:

Urbanization and rising incomes:

Rapid urbanization and a growing middle-class population, driven by rising disposable incomes, indicate significant potential for growth in motor vehicle ownership. Interestingly, India lags behind other countries in terms of number of cars per 1,000 inhabitants. While the US has the highest number of cars per 1,000 inhabitants at 860, Italy has 756, followed by France (704), the UK (632) and Germany (583), and India at just 34. Even among Asian countries India is losing ground to Japan. (612) and China (223) in this aspect.

The car financing market responds to changes in the economy and consumer behavior. Factors such as interest rates and financing options play a key role. Manufacturer-backed financing programs provide an alternative to traditional bank loans, offering convenience and tailored solutions. Online platforms have revolutionized the application process, making it easier for consumers to secure vehicle financing.

The development of the car financing market is closely related to vehicle sales. As car sales increase, so does the demand for financial services. Sustainable practices, digital advancements, effective risk management, coping with market fluctuations and flexible strategies are essential for long-term growth.

Government policy and initiative:

The Indian government has proposed a significant outlay of $3.50 billion under the Production Linked Incentive (PLI) program for the automotive industry. PLI offers financial incentives of up to 18% encouraging investment across the entire automotive production value chain, with particular emphasis on technologically advanced automotive products.

Interestingly, 85 enterprises were approved under the PLI program, while 18 received approval under the Champion OEM Incentive program and 67 as part of the Component Champion Incentive program. The goal of the PLI-AUTO program is to increase the production of advanced automotive technology (AAT) products.

Additionally, the Faster Adoption and Manufacturing of Hybrid and Electric Vehicles in India (FAME) initiative is playing a key role in encouraging the adoption of electric vehicles and expanding electric mobility infrastructure. The vehicle scrapping policy, introduced in 2021, aims to replace old vehicles with new ones, creating demand for new vehicles.

Growing exports and new players entering the market

Apart from Indian business groups, companies from various countries – including the Republic of Korea, the United States, Japan, France, Italy, the UK and the Netherlands – have received approval from the Indian government under the Champion OEM Incentive. India’s car exports have seen significant growth, driven by partnerships with new players entering the market. Profitable labor and a favorable business environment are some of the factors contributing to the surge in exports.

The ‘Make in India’ initiative encouraged foreign companies to invest in India and set up manufacturing plants. India is positioning itself as a global auto supply center, attracting interest from major automakers.

India’s stringent emission and quality standards ensure that the cars produced meet international standards. For example, Toyota currently exports critical components such as electric drives for advanced hybrid technology.

Market leaders such as Maruti Suzuki have ambitious targets to triple exports in the next five years, while smaller domestic players such as Renault Nissan allocate 65% of their production to exports.

The urgent need to combat global warming and reduce greenhouse gas emissions has led to the introduction of electric vehicles (EVs) in India. Initiatives such as the National Electric Mobility Mission Plan (NEMMP) and Faster Deployment and Production of Hybrid and Electric Vehicles (FAME I and II) have generated interest in and exposure to electric mobility.

The Indian government provides tax exemptions and subsidies to both electric vehicle manufacturers and consumers, promoting the country’s electric vehicle industry. Staged production proposals include 15% duty on EV parts and 10% on imported lithium-ion cells.

100% FDI (foreign direct investment), new manufacturing centers and focus on improving charging infrastructure are driving the Indian electric vehicle industry. Federal subsidies and policies provide significant discounts on Indian-made electric two-wheelers. Local ACC (Advanced Chemistry Cell) battery manufacturers are gaining momentum. Favorable government regulations, including no requirement to have a license for electric vehicle charging stations, additionally support the development of the market.

Application

The dynamic and evolving business environment in India has pushed the automotive industry to look for better mobility solutions. Unlocking hidden potential holds great promise and will continue to shape the country’s economic landscape and technological advancements. The Indian automotive market provides numerous opportunities for both domestic and international players, supporting growth and innovation. As a key player in the global automotive industry, India remains at the forefront of expansion and development.

—The author, DP Singh, is DMD and Joint CEO of SBI Mutual Fund. The views expressed are personal.