ARTICLES
The Growth of the Indian Automobile Industry: Analysis of the Roles of Government Policy and Other Enabling Factors
Introduction
The automobile industry is an important driver of the economic growth in India and one of the successful sectors in which the country has high participation in global value chains (GVCs).
Structure and Makeup of the Indian Automobile Industry
The Indian automobile industry – comprising of the automobile and the automotive components segments – is one of the key drivers of economic growth of India. Being deeply integrated with other industrial sectors, it is a major driver of the manufacturing gross domestic product (GDP), exports, and employment. This sector has grown on account of its traditional strengths in casting, forging and precision machining, fabricating (welding, grinding, and polishing) and cost advantages (on account of availability of abundant low-cost skilled labor), and significant foreign direct investment (FDI) inflows.
Growth Path of the Indian Automotive Industry
India’s indigenous passenger car industry was launched in the 1940s with the establishment of Hindustan Motors and Premier Automobiles Limited. The two companies together garnered most of the market share till the 1970s, along with Telco, Ashok Leyland, Mahindra & Mahindra (M&M), and Bajaj Auto. The market for automobiles was not large given the low rate of economic growth in the country at this time, and thus the industry had a very slow-paced growth till the 1980s.
Efforts to establish an integrated auto component industry were initiated in the 1950s. The industry was protected by high import tariffs, and the production was catered to the demands of local automobile manufacturers. Manufacturing was licensed, and there existed quantitative restrictions on imports of automobiles and automotive components. However, a significant demand for passenger cars was emerging as the country’s population and per capita income began to grow. The government felt the need to introduce modern, fuel-efficient, and low-cost utility cars that could also be affordable for “the common man.”
Role of the Government
The automobile industry has in many ways been shaped by the Indian Government’s policy and nurtured in microeconomic environment it helped to create. Apart from the direct impact through fiscal policy instruments, the industry policy even influenced firm-level learning processes and shaped technological capability accumulation.Footnote
Since 1970, the Indian Government gradually added the automotive industry to a list of its core or “pillar” industries, recognizing it as a significant driver to achieve economic growth since it had many forward and backward linkages.Footnote38 The industry began to be prioritized in the manufacturing sector for promotion and favorable policy support to promote productivity. In 1975, as a general industrial policy, the government permitted an automatic capacity expansion by 25% every 5 years and removed price controls
Other Enabling Factors in the Growth of the Industry
Other enabling factors in the growth of the industry include domestic market demand, FDI, JVs, and corporations’ competitive strategies.
A growing working population and an expanding middle-class have been the key demand drivers for automobiles in India. India has the second largest road network in the world at 4.7 million kilometers. Road development activity has gradually increased over the years with an improvement in connectivity between cities, towns, and villages in the country. The Government of India’s policy to set aside substantial investment layout for infrastructure development in every 5-year plan has included the focus on the development of country’s roads. This has given a fillip to the demand for cars and other vehicles.
Upgrading and Innovation
Indian lead firms have made significant efforts toward upgrading over the years, including the use of advanced modular platforms, new materials, and platform sharing in India.Footnote67 The concept of upgrading refers to the capacity of firms to make better products, more efficiently, and move into more skilled activities.Footnote
The Future Scenario
The current policy debate in India is around the issue of achieving greater competitiveness, efficiency standards, and the need for introducing electric vehicles. The Draft National Automotive Policy 2018 formulated by the Department of Heavy Industries (Government of India) envisages increasing exports to 35–40% of the output and to make India one of the major automotive export hubs in the world. It also envisages long-term roadmap for emission standards beyond Bharat Stage VI and harmonization with the global standards by 2028.Footnote
Conclusion
With its buoyant economy, a large young population, and growing foreign direct investment, India has been an attractive investment destination for global automobile and component manufacturers since the last two decades. Its growth story has been dominated by more homegrown lead firms. However, absorption of global best practices has been slower than in China. Strategies of firms in the Chinese auto industry provided a boost to technological learning more quickly and broadly than in India.Footnote78 Capable of end-to-end production, India has also become an assembly hub for large cars and manufacturing hub for small cars. Firms have started exporting to other countries. India-based manufacturers are engaged in global innovation networks and sourcing suitable technologies from all over the world to complement their own R&D efforts.