Motoring Ahead: Investing in India’s Automotive Industry

By India Briefing

Posted: 19th January 2017 08:25

India is a global leader in the automotive sector, backed by its domestic production capacity, market size, and exports. On average, the country’s automobile sector boasts of an annual production of around 24 million vehicles; the sector also employs over 29 million people (directly and indirectly). Breaking down its global position by industry segment, India is the world’s largest tractor manufacturer, second largest two-wheeler manufacturer, second largest bus manufacturer, fifth largest heavy truck manufacturer, sixth largest car manufacturer, and eighth largest commercial vehicle manufacturer.

This article discusses the growth trends in the automotive sector in India, which offers a highly attractive investment landscape for foreign investors and manufacturing firms. Testament to this is the fact that South Korea’s Kia Motors, Daihatsu from Toyota, PSA Group’s Peugeot Citreon, and three car makers from China, Beiqi Foton, SAIC, and Changan Automotive desire to enter the Indian market, pivoted to become the third largest in the world by the end of the decade.

India’s Automotive Industry and Market Size
Overall, the Indian automotive industry is a major employment creator, GDP contributor, and FDI earner. In fact, in 2015-2016, the US$ 93 billion automotive industry contributed 7.1 percent to India’s GDP and 49 percent to the national manufacturing GDP. For every vehicle produced, direct and indirect employment opportunities are generated with the employment of 13 persons for each truck, six persons for each car and four for each three-wheeler, and one person for two-wheelers.

Meanwhile, the auto component industry grew at a turnover rate of six percent from 2010 to 2016, contributing to 2.3 percent to India’s GDP and provided direct employment to 1.50 million people in the fiscal year 2015-2016. The industry registered an 8.8 percent increase in its turnover from US$34.4 billion in FY 2014-2015 to US$37.45 billion in FY 2015-2016 (US$1=Rs 68.25). Exports grew by 22 percent and the auto-component industry contributed 4 percent to India’s exports in FY 2015-2016, with earnings of US$10.39 billion (Rs 709 billion). The top export destinations of Indian auto-components are USA, Germany, Turkey, UK and Italy.

In terms of the automobile market size, the two-wheeler segment dominates with an 81 percent market share in the Indian automobile market, owing to its young population and a burgeoning middle class. An increasing interest exhibited by companies in exploring the country’s vast rural market further aids the growth of this sector. Finally, India’s passenger vehicle (PV) segment holds a 13 percent market share.
Positive Outlook of the Automobile Sector
India is a prominent automotive manufacturer and exporter with highly optimistic expectations continuing for growth in the near future. The following growth trends over the past year may be noted:
Government Policy in the Automotive Sector
The consolidated automotive industry holds great importance in the government’s manufacturing policy framework, where it is labelled as a ‘sunrise sector’.
Major Investments and FDI Inflows
Foreign direct investment (FDI) equity inflow into the automobile sector increased by 72 percent during 2014-2016 from US$3.05 billion (during 2012-2014) to US$5.25 billion. From April 2016 to September 2016, the automobile sector received US$728.65 million in FDI equity inflows. Leading global players like ISUZU Motors, Ford Motors, Tata Motors, Honda, and Suzuki Motors have already invested heavily in the manufacturing sector resulting in the establishment of new assembly lines, manufacturing, and greenfield units, thereby boosting the automotive manufacturing ecosystem in India.

Observation
Notwithstanding the ongoing pains of demonetization that caused a temporary decline in sales in December 2016, the Indian government’s ‘Make in India’ drive and its sectoral policy are both highly encouraging for the future outlook of the Indian automotive industry. Diversified segments and the presence of global automotive manufacturers strengthen the sector’s ecosystem in India. This is important as India seeks to be the third largest auto market by the end of 2020.  Forward looking government incentives such as reduced duty on hybrid and electric cars also boost the future of the industry. Lastly, the current government’s pro-business sentiment is shaping its reforms focus on regulatory easing, infrastructure development, logistics improvements through rail, road, and sea cargo, and expanding FDI limits, all of which bodes well for foreign investors.

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This article was first published on http://www.india-briefing.com/

Since its establishment in 1992, Dezan Shira & Associates has been guiding foreign clients through Asia’s complex regulatory environment and assisting them with all aspects of legal, accounting, tax, internal control, HR, payroll, and audit matters. As a full-service consultancy with operational offices across China, Hong Kong, India, and ASEAN, we are your reliable partner for business expansion in this region and beyond.
For inquiries, please email us at info@dezshira.com. Further information about our firm can be found at: www.dezshira.com.
 
 

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