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India: An automotive implosion?

Updated: May 18, 2020

As of now, India is the fourth-largest consumer automotive market in the world. It was expected to emerge as the world’s third largest consumer automotive market by 2021. It took India around seven years to increase their annual production from three million vehicles to four million vehicles. However, the next milestone of five million is expected in lesser than five years. However, with the coronavirus pandemic in India, this may not hold true.

The assumption that India will increase its output was based on a number of factors and trends, including Prime Minister Modi’s flagship “Make in India” initiative, rising incomes as well as the rapid urbanization that India is going through.

As a part of the initiative, the government vowed to increase the share of the manufacturing sector in the GDP to 25%, from the previous 16%, and create 100 million jobs in the sector, all by 2022. Rapid urbanization will mean that over 500 million people will live in cities, by 2030. Rising incomes will also play a huge role in with roughly sixty million people estimated to enter the consuming class (households with incomes greater than $8000 per annum) by 2025. Simultaneously, more people will continue to join the workforce.

All of this combined, is expected to lead to a greater demand and output in the automotive industry. However, the coronavirus pandemic as well as changing government policies may completely change the equation.

Recently, there has been a slump in the demand for consumer automobiles in India. The slump has been assumed to be caused by weakening economic growth and a liquidity crunch, in combination with the collapse of some non-banking financial companies that accounted for a significant share of automobile financing.

The coronavirus pandemic is likely to affect imports, exports as well as domestic consumption and production of goods.

With the ongoing liquidity crunch, people will be less likely to spend their money, which will lead to a decrease in demand for these goods. Exports and imports are likely to drop, with a majority of businesses halting or reducing their production, including several Japanese automakers such as Toyota, Honda, Suzuki and Nissan.

On the other hand, amidst this pandemic, some manufacturers working in countries with weaker lockdown restrictions are gearing up to increase their production “to secure the supply chain”.

Manufacturers such as Hyundai are gearing up to change their sales technique, by shifting towards digital sales in India, a trend likely to outlive the pandemic. Hyundai has become a pioneer in digital vehicle sales with its sales platform that integrates 500 dealers nationwide with potential customers.

This move is likely to ensure there is still some demand for the product even in this situation. However, the buyers will be on the margin, and decisions will be made based on marginal utility.

Automakers are also struggling to comply with a host of new environmental and safety policies, which has prompted a hike in vehicle prices. The transition to BS6 makes vehicles more expensive for buyers, as well as entails an overhaul of diesel engine technology. The government has already prompted Maruti Suzuki, India’s biggest automobile company, to announce an end to their sale of diesel cars from next year. The lack of clarity on policy for electrification of vehicles has led to uncertainty and cause it cease future investments.

This can cause a shift in the composition of goods in the automotive industry. Goods will transition from being petroleum-dependant to being electricity-dependant.

In India’s Automotive Mission Plan 2026, the government set a target to triple industry revenues and expand exports sevenfold. To meet these aims, it is estimated that this sector could provide more than 60 million additional direct and indirect jobs, as a result of which manufacturing competitiveness can be improved.

Over the next two years, the automotive industry is definitely going to see major fluctuations. The first fluctuation has already occurred, with coronavirus spreading. Only if a cure for the coronavirus is found within the next year, the automotive sector will go back to normal, possibly better than normal in the consecutive year. Otherwise, the outcome is very uncertain, mainly because there will too many changing variables in the world economy, along with the onset of a recession. It may take a longer time for the automotive sector to recover from the blow.

Author : Ritvik Sai Narayan

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