By Mr. Prahalathan Iyer, Chief General Manager, Exim Bank of India
The multipronged impact derived from the volatility in fuel prices affects the growth of the automotive industry all over the world including India. Oil price highly influences the demand for automobiles not only because fuel is the energy for automobiles, but also because of its indirect impact on the various inputs that goes in to the production of automobiles, such as polymers, steel and aluminum. Further, hike in oil prices have an impact on inflation, affecting the savings and the disposable income of the consumers, thereby affecting the demand for automobiles.
Export-Import Bank of India (Exim Bank) in its working paper observed that many nations, in recent years, have implemented policies towards the production and sale of fuel efficient vehicles in order to address the impact of oil prices on the automotive industry, besides addressing the concerns associated with the atmospheric pollution. The Government of India has also been encouraging the purchase of hybrid and electric vehicles through FAME (Faster Adoption and Manufacturing of Hybrid and Electric vehicles in India). Under the scheme the demand incentive is available to the buyer in the form of an upfront reduced purchase price to enable wider adoption. But no subsidy is given to the manufacturer.
As a result of these policies, manufacturers all over the world had, assuming stronger demand for improved fuel efficiency, invested heavily in technologies that improve fuel economy and lower carbon emissions. These product options were offered at a price premium with the expectation that the higher fuel economy would result in lower operating costs. On the other hand, lower fuel prices change the return on investment calculation for the consumers dramatically, and with oil prices staying relatively low over the last couple of years, demand for these technologies has fallen as well.
According to a study, India holds a share of 4.72% in the global automobile production. The manufacture of auto components is gradually shifting towards Asian countries such as China, India and others because of higher market potential and low cost manufacturing options available.
The volume production of Indian Automobiles has registered a CAGR of over 4.43% during 2011-12 to 2016-17. The two wheeler segment constituted a major share of the total production of automobiles in the country which accounted to 79% of the production in 2016-17, followed by passenger vehicles with a share of 15%, and three wheelers and commercial vehicles each at 3%. By 2026, India is expected to be the third largest automotive market by volume in the world. Exports as a percentage of production has increased from 12.97% in 2010-11 to 13.74% in 2016-17, indicating the growing capability of the Indian Automobile industry to meet the international standards and increasing acceptance of automobiles manufactured from India in the global market.
During the period April-September 2017, the total production of vehicles registered a growth of 9.18 percent. The domestic sales of passenger vehicles registered a growth of 9.16 in April-September 2017, commercial vehicles grew by 5.96 percent and two-wheelers grew by 10.14 percent over the corresponding period of the last year. Three Wheeler sales declined by (-) 9.89 percent in April-September 2017 over the same period last year. Overall automobile exports grew by 10.71 percent in April-September 2017. Two and three-wheeler segments registered an export growth of 15.22 percent, and 19.42 percent respectively, while passenger vehicles and commercial vehicles declined by (-) 1.34 percent and (-) 28.53 percent, respectively in April-September 2017.
The Indian auto-components industry has also experienced a healthy growth over the last few years. A buoyant end-user market, improved consumer sentiment and return of adequate liquidity in the financial system are some of the factors attributable to this growth. The turnover of the Indian auto component industry has grown from USD 42.2 bn in 2011-12 to USD 43.5 bn in 2016-17. The exports of Auto components from India have grown at a CAGR of 4.37% from USD 8.8 bn in 2011-12 to USD 10.9 bn in 2016-17.
A stable policy framework, growing purchasing power, large domestic market, and an ever-increasing development in infrastructure have made India a favourable destination for investment in the automotive sector.
The Exim Bank research paper identified certain major areas that needs to be addressed on a sustained basis to maintain growth of the industry. This includes technology upgradation towards green environment through Research & Development; skill development including application of Information Technology to make the manpower tech savvy and development of appropriate infrastructure; encompassing elements such as battery recharge stations, wider network of CNG pumps, perhaps through public-private partnerships; among others. There is a need to initiate a programme for encouraging research and development in the Indian automotive industry, concentrating on development of intelligent vehicles adhering to safety standards, energy efficiency and emission norms, and alternate fuels. Also increased IT adoption in the automotive industry not only enhances the competitiveness of the industry in the existing markets, but also creates new markets for the Indian automotive industry.
Manpower shortages to cater to the R&D requirements, technology absorption, ICT intervention in the Indian automotive industry is a major concern. In this context, the Government and industry need to come together and address the challenges related to skill development and workforce shortages, both in terms of quantity and quality. The initiative taken by the USA, over three decades ago, to establish a National Institute for Automotive Service Excellence, which now provides training testing, and certification of auto service and repair professionals to ensure continuous availability of trained technicians for the industry. Further, an enhanced dialogue with manufacturers and oil marketing companies to establish a better infrastructure for greener vehicles is the way ahead.