Over the years, the Indian automobile industry has become quite competitive and has reached a global scale. India is the world’s largest manufacturer of two-wheelers and the fifth largest manufacturer of cars and commercial vehicles. The sector contributes approximately 35% and 6.4% to our manufacturing and national gross domestic product, respectively, and provides direct and indirect employment to approximately 37.5 million people. In addition, the automotive industry’s Goods and Services Tax revenue is approximately ₹1.5 billion per year, or about 15% of total collections.
However, not all is bright as there are several complex issues and challenges that need to be addressed immediately to ensure the continued health and growth of this industry. As in other sectors, covid has caused immense damage to the automotive sector, with several factors such as a cyclical downturn, the Bharat Stage VI transition and supply chain disruptions having made the conditions even more severe. Recent domestic vehicle sales have been the weakest in several years and exports have also been affected by shutdowns in major global markets. Although signs of recovery are now clearly visible, the current disruptions in global supply, particularly in semiconductors, threaten to dampen the recovery of this sector.
While India’s auto exports stand at around $27 billion, or about 8% of total exports, in the context of global auto trade, there is ample room for growth, as current exports India’s automotive components only account for 1% of its global trade, and the value of motor vehicles exported from India in 2019 accounted for around half and one-eighth of Thailand’s and Mexico’s exports, respectively. Furthermore, India’s total annual auto imports are currently pegged at around ₹1.83 trillion, or 23% of the industry’s overall turnover. A joint study by the Society of Indian Automobile Manufacturers and Automotive Components Manufacturers Association of India estimated that among our top 12 import categories, transmission and steering units, engines, electrical and electronic components account for 62%, most imports from China (at 32%). Obviously, although we are competitive in some areas, there are still technologies and parts that are not made in India or where we have not achieved the necessary global scale, prices or quality.
Rapidly changing automotive emissions, safety and fuel efficiency regulations, coupled with rapidly changing consumer trends, are driving rapid technological change globally. This includes a move towards electrification and increasing levels of vehicle automation and connectivity. Thus, it is expected that in 10 years, advanced electronic systems will account for 45% of the value of a car, and the share of lightweight materials will also increase to 60%. We have low levels of localization in these technologies, and if we don’t act now, Indian industry would risk losing its competitiveness and falling behind its rivals. Recent disruptions to global supply chains highlight our vulnerabilities and so it is important for us to ‘manufacture in India’ globally and with quality. For this, we need to address the current cost disadvantages in various automotive technologies.
The auto PLI program is one of the largest supply-side incentive programs launched by the government for the automotive sector. Given the role of startups and new technology players in the automotive space, this scheme logically covers not only existing automotive OEMs and suppliers, but also new non-automotive investors. PLI eligibility criteria, determined by new domestic investment and annual growth in sales value and location, provides all businesses with an equal opportunity, regardless of size, area of operation or country of incorporation.
While advanced technology vehicles include battery-electric and fuel cell (EV) vehicles, at the component level, the approach taken is to target advanced technology components that currently exhibit high import intensity. with use in all vehicles. The government has considered industry’s request to keep 2019-20 as the base year for the assessment of incentives and has also provided flexibility for the inclusion of more technologies.
It is commendable that the government, especially the Ministry of Heavy Industries, has ensured that the program addresses the major critical challenges facing the Indian automotive industry. This program will not only provide the desired impetus to improve “Making in India” and reduce imports, but will also facilitate the process of making the industry more globally competitive and help overcome cost handicaps. existing in high-end technologies.
Notably, the program is expected to go a long way in encouraging the Indian automotive industry to move up the value chain towards higher value-added technologies, thereby boosting sectoral growth.
The announcement of the LIP came at the right time and should also help attract global investment as many companies seek to diversify their supply chains amid the pandemic and emerging geopolitical scenarios.
Now, the automotive industry needs to step up and invest in future technologies, advanced manufacturing and improving its processes as well as training its workforce, in order to further India’s integration into the global value chains. Given the capability of the automotive industry and the continued strong support from the government, I believe we can make India a hub for manufacturing advanced, clean and efficient vehicles not only for our domestic market, but also for exports.
Vikram Kirloskar is Chairman of the SIAM Passenger Vehicle CEOs Council and Vice Chairman of Toyota Kirloskar Motor Pvt Ltd.
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