Performance of Indian Automobile Industry: An Economic Analysis.

Date01 October 2023
AuthorKumar, Sanjeev,Gehlot, Dinesh,Kumar, Sanjeev^Gehlot, Dinesh


The automobile sector is one of the core sectors of the Indian economy since developed transportation infrastructure plays a critical role in the growth and development of an economy. A decade of continued high and stable growth has resulted in a significant rise in the demand for automobile products, particularly cars. The rise in demand for private vehicles can be attributed to the increase in income of middle-class families. The size of the middle class in India expanded sharply. The wealth per person in working age has substantially increased during the last two decades and the share of working age group in gross domestic product (GDP) has increased to 17.3 percent as compared to 15.6 percent in 2000 (Credit Suisse, 2021). The New Economic Policy (NEP), 1991-allowed for 100 percent foreign direct investment (FDI) in Indian automobile market through automatic route which had a tremendous impact on the performance of the Indian automobile industry (MHI, 2022). The new industrial policy has liberalized the process to obtain industrial license to set up an automobile manufacturing unit. Simultaneously, Government of India (GOI) liberalized the norms for FDI and made import of new technology easier to facilitate the growth of the Indian economy. These initiatives contributed to make the Indian automobile sector more competitive and efficient in the global market. Globally, automotive industry contributes significantly to employment generation as the employability has increased by 35. percent since the global financial crisis (ILO, 2020). Considering the concept of gestation period, the effects of liberalization, or any change in government policies would at least require 5 to 10 years before it starts showing results in the growth process. The progress in industrial sector due to liberalization gets reflected in the advanced and technologically efficient industrial sector. The policy objective behind liberalization was to make India a favorable destination for global market players in manufacturing, to attract FDI and to increase the credit worthiness of the nation. Indian automobile market is being referred to as "Sunrise Sector" of the Indian economy considering the huge profit and market share it has captured (UNIDO-ACMA-MHI Survey Report, 2022). As far as car manufacturing is concerned, Tata Motors and Mahindra & Mahindra constituted the domestic manufacturers whereas other manufacturers operate from foreign nations.

India produced 22.65 million vehicles annually in FY 21, with 13 million vehicles being produced between April-October 2021(IBEF, 2022). The two-wheeler section dominates the market in terms of volume owing to the growing middle class and large demographic dividend. Moreover, the growing interest of the companies in exploring the rural markets aided the growth of the sector. India began as a prominent auto exporter. It has strong export growth expectations in the near future. Several initiatives, such as scrap-page policy, Automotive Mission Plan 2026, and production-linked incentive scheme, by the GOI are aiming to make Indian automobile market more efficient and an emerging global competitor. These schemes have focused on various dimensions that would contribute to make India a powerful global leader in the two-wheeler and four-wheeler section, (IBEF, 2022).

Indian automobile market constitutes a large product chain, two-wheelers being the most demanded and consumed product. This high demand and consumption is owed to the developing nature of the Indian economy, and the wide consumer base with low per capita income which could afford 2-wheeler vehicle more conveniently. George, Jha, and Nagarajan (2002) tried to analyze the government policies which contributed to the progress of the 2--wheeler segment. The paper focuses on the subjective reality of developing countries like India and suggested to maintaining a balance between competitiveness and economic growth through appropriate economic policies. They concluded that the Indian automobile market is oligopolistic by nature. Since Independence, Indian economy has transitioned from the phase of automobiles being owned only by the rich and royal families to automobiles (especially two-wheeler) being owned by the middle -income group.

Literature Review

Vandana (2017) concluded that the automobile industry has a strong multiplier effect, with forward and backward linkages. As per the study, there is a strong positive correlation between the performance of the automobile industry and health of the economy. Transition of Indian economy is not possible without good economic policies. Kumar and Mridula (2017) explained that the new industrial policy has liberalized the automobile sector which resulted in a significant growth rate ranging from 5.0 percent to 8.0 percent. It helped India to become the sixth largest producer of automobile products with a turnover of approximately 38.3 million USD and employing nearly 19 million people in India. The increase in the consumption of vehicles led to high levels of air pollution further putting enormous pressure on the environment. Smita (2019) conducted a study to analyze the impact of government policy, infrastructure, and other enabling factors on the expansion of the automobile industry in India. In 2023, India became the third-largest automobile market and the demand for Indian vehicles continued to grow in the domestic and international markets (Hindustan Times, 2023). As the global demand for electric vehicles is increasing, the Indian automobile industry is upgrading the technology for manufacturing units, with digitization and automation in sync with the latest trends in the market.

Kanupriya and Sandeep (2018) proposed that the Indian automobile industry is a key factor in the development of the economy. They focus on the factors which influence the growth pattern of the automobile industry, for instance, FDI. They concluded that there is an increase in FDI inflow in the Indian economy, due to an increase in purchasing power of Indian consumers and the FDI (Rajesh & Dileep, 2013) norms which were liberalized in NEP, 1991. They recommended that the government should collaborate with the industry for skill development of the workforce to make them more productive. They found that the automobile industry in India receives a high amount of FDI with the latest technology which augments production efficiency. The liberalization policy of the government concerning FDI in the Indian automobile industry has a positive and significant impact on the sector. The growth of FDI in the automobile sector reflects the tremendous potential of the industry in employment generation and improving the living standards of the people. The study explains that FDI has a greater impact on the automobile industry because it comes with better technology, better management and better skills, which helps in achieving higher growth and makes the sector efficient, profitable and sustainable.

Kameshwar and Bhuvanesh (2014) explained that an increase in the share of FDI in the retail sector results in...

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