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How Automobile Industry became significant part of Indian Economy?

How Automobile Industry became significant part of Indian Economy?

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  • GS 3 || Economy || Industries || Major Industries

Why in news?

The Indian IT sector has been praised as a national treasure, but it is critical to recognize the importance of the Indian automobile industry in the country’s economic development.

Introduction:

  • The Indian auto industry is one of the largest in the world. The industry accounts for 7.1 per cent of the country’s Gross Domestic Product (GDP).
  • The Two Wheelers segment with 81 per cent market share is the leader of the Indian Automobile market owing to a growing middle class and a young population.
  • Moreover, the growing interest of the companies in exploring the rural markets further aided the growth of the sector.
  • Despite the sluggish growth of the economy during that time, the automotive industry began to witness a relatively fast growth during 1970-1980 mainly due to the leading production role of Telso, Ashok Leylands, Mahindra & Mahindra, Hindustan Motors, Premier Automobiles, and Bajaj Auto.
  • Automotive industry of India also started exporting slowly after the liberalization. Here again, MUL and TELCO have been the leading exporters
  • The automobiles sector is compartmentalized in four different sectors which are as follows:
  • Two-wheelers which comprise of mopeds, scooters, motorcycles and electric two wheelers.
  • Passenger Vehicles which include passenger cars, utility vehicles and multi-purpose vehicles.
  • Commercial Vehicles that are light and medium-heavy vehicles.
  • Three Wheelers that are passenger carriers and goods carriers.

Slowdown of automobile industry:

  • Automobile sales in India fell 18.71 percent in July 2019, the worst drop in nearly 19 years, putting over 15,000 people out of employment in the last quarter.
  • Vehicle sales across all categories, including passenger vehicles (PV) and two-wheelers, remained at 18.2 lakh units in July 2019, according to statistics provided by the Society of Indian Automobile Manufacturers, compared to 22.4 lakh units in July 2018 down by nearly 19%.
  • The previous steepest drop in overall domestic vehicle sales was in December 2000, when it plummeted 21.81 percent.
  • Similarly, domestic PV sales fell by 30.98 percent from July 2018 to 2019, the lowest level in over 19 years.
  • Previously, the steepest drop was in December 2000, when wholesales fell 35.22 percent. PV sales fell for the eleventh straight month in July 2019.

Reason for Slowdown of automobile industry:

  • Credit crunch: The failure of several non-banking financial businesses, which used to account for a large portion of automotive lending, has resulted in a credit constraint. As a result of poor loans and sluggish retail sales, several banks and NBFCs have chosen to impose tougher limitations.
  • Economic slowdown: The auto industry is experiencing a slowdown as a result of weakening economic growth and a liquidity shortage. This slowdown was caused by a combination of weak economic growth and rising global trade tensions.
  • Price increases: Automakers are also trying to comply with a slew of new environmental and safety regulations, which has resulted in a price increase for vehicles, putting downward pressure on sales.
  • The Rise Of Ride-Share Services: In recent years, ride-share applications such as OLA and Uber have exploded in popularity across the country. As a result, sales have suffered. It has made customers cautious to purchase a vehicle because regular carpooling reduces many of their expenditures.
  • Lack of investment: Low demand, recent investments for the transition from BSIV to BSVI, and a lack of clarity on policy for vehicle electrification have left the sector uncertain about its future, causing it to halt any further investments. Manufacturers are likewise having to reduce output due to lower demand.
  • Overcrowding: As the automobile business has grown over the last decade, more customers have been able to own their own vehicles. However, this has proven to be a double-edged sword, since increased car sales have resulted in a massive increase in the number of automobiles on the road today.
  • India’s Hasty EV Plan: The Indian government is planning a massive push to convert all automobiles to electric by 2030. Customers are concerned that whatever car they acquire would become outdated in the next decade or so as a result of the EV plan.
  • Other Factors: Higher and non-standard road charges have caused automakers to raise car pricing. Aside from that, the GST on automobile components and cars has contributed to the industry’s problems. As a result, buyers have become hesitant to purchase these automobiles, resulting in a drop in sales.

Impact due to slow down:

  • Impinges on India’s aim of becoming a “manufacturing” hub: The industrial sector is stumbling due to a drop in demand and production in the car sector. India, the world’s sixth largest automaker, accounts for less than 1% of global exports and is notably missing from well-established global value chains.
  • Effect on the Ancillary Economy: The drop in vehicle sales has harmed foundries, steel, rubber, and engineering processing businesses, all of which serve the automotive industry. The units that supply parts for large vehicles are the worst hit.
  • Economic impact: Because agricultural land has been purchased by private developers, the great majority of villages are now reliant on migrant labor employed in the region’s industrial facilities. Due to the closure of car plants in various regions of the nation, firms were obliged to lay off contractual workers, resulting in migratory laborers from rural areas.
  • Job Losses: Approximately 37 million jobs have been lost, with over 80% of those engaged in the automotive sector in the area being on a contract basis. Retrenched workers have created a charter of requests for their particular firms, but due to the slowdown, these demands have not been addressed in a long time. Protests have erupted in the region as a result of the layoffs and unmet demands.

Measure to enhance the sector:

  • Lower Import Tariffs: Unlike the automobile parts and commercial vehicle sectors, finished passenger automobiles have been subject to extremely high import tariffs, ranging from 60% to 125 percent in some cases, making India one of the highest tariff jurisdictions in this sector among major economies.
  • Stable Policy Regime: Added input costs such as high insurance rates, safety provision expenses, and BS-IV norm upgrades necessitate a stable policy regime.
  • Retail Funding: The Reserve Bank of India recognizes that private spending is the backbone of aggregate demand. Despite the fact that banks and NBFCs have ample liquidity, the use of a high-powered magnifying lens in retail finance would harm the economy..
  • Car Leasing: In India, car leasing is becoming more common. Passenger vehicle manufacturers are seen investing in shared mobility and giving leasing alternatives to entice consumers since shared mobility has become an integral element of urban mobility and a portion of purchasers is keeping away from owning vehicles.
  • Labor Market Liberalization: According to a 2016 World Bank study report, India’s labor productivity in the car sector is just one-third that of China, with proportionally lower rates of productivity increase in India throughout the years.

Challenge associated with automobile industry:

  • Electric cars will take up the market share in the future, and the Indian auto industry is not yet prepared.
  • Adoption of Bharat Stage VI would increase the cost of vehicles, and the industry should be prepared to deal with potential demand interruptions as a result of rising pricing.
  • Tariff barriers will not be able to protect the domestic car sector in the long run. The automotive sector must compete globally and grow its exports as well as its position in global value chains.

Government Initiatives taken:

  • Research and development powerhouse: India’s government wants to make it a worldwide manufacturing and research and development powerhouse for the car industry.
  • National Automotive Testing and R&D Infrastructure Project (NATRIP): The government of India is proposing to build R&D centers at a cost of US$ 388.5 million as part of the National Automotive Testing and R&D Infrastructure Project (NATRIP), which would bring the sector up to global standards. Five testing and research facilities have been established as part of this initiative.Under this scheme, five testing and research centres have been established in the country since 2015.
  • Under the Faster Adoption and Manufacturing of (Hybrid) and Electric Cars in India initiative, the Ministry of Heavy Industries of the Government of India has nominated 11 cities throughout the nation for the introduction of electric vehicles (EVs) into their public transportation networks. The Indian government authorized the FAME-II plan in February 2019, with a fund need of Rs 10,000 crore(US$ 1.39 billion) for FY20-22.
  • Over the next ten years, the Automotive Mission Plan 2016-26 (AMP 2026) aims to double India’s car sector, which comprises automakers, auto components, and the tractor industry..

Way Forward:

  • The car industry’s downturn corresponds with a broader industrial recession that has impacted nearly all industries.
  • In the midst of this pessimism, the sector need rapid government action on a number of fronts, including a clear policy on electric cars, a transition from BS-IV to BS-VI standards, a tax exemption under the GST, and a liquidity constraint, to name a few..
  • To do this, the government must stand firm against business pressure and work toward lowering import tariffs while also finishing the country’s unfinished economic reform program, particularly labor market liberalization.

Mains oriented question:

“Indian auto industry have been experiencing negative growth for a long time.” Discuss the different causes and potential remedies. (200 words)