Republic Economic Summit: Despite strain, automobile sector pegged to make strong comeback

In the Indian capital market, automobile companies have been in the back seat rather than being a driving force. While there was buoyancy that there will be robust sales in the post-pandemic world, however, the sector was affected by the global shortage of semiconductors that led to drastic production cuts. Automobile majors such as Tata Motors, Maruti Suzuki and others have cut production due to chip unavailability. Despite all these factors, there is hope that the industry will recover soon. 

In the lead-up to the first-ever Republic 'India Economic Summit', which will see the most influential names in the industry and the economic world come together to put the world's fastest-growing major economy under the microscope, Republic World is taking an in-depth look into some of its key drivers, and as it's often said, no sector is as indicative of the health of an economy as the automobile sector, as it reflects both consumer spending and also has vast supply-chain consequences.

Automobile Industry in India

The Automobile industry of India manufactured 26 million vehicles including passenger and commercial vehicles, two-wheelers, three-wheelers and quadricycles in the April-2019 to March-2020 period, according to the government's Invest India portal. Of the total vehicles manufactured, 4.7 million are exported. In terms of heavy vehicles, India holds a strong position as it is the world's largest manufacturer of tractors, second-largest bus manufacturer, and third largest heavy trucks manufacturer. 

It is worth noting that the industry's share in India's GDP is 7.1% and employs 35 million individuals directly or indirectly. The automobile sector is currently worth $118 billion, which is expected to reach $300 billion by 2026.

Industry breakdown

In the sector, two-wheelers account for 80.8% of the market share, while passenger cars hold a 12.9% market share. Small and midsized cars dominate the passenger car sales, according to government data. In FY20, India's automobile exports reached 4.77 million, implying a Compound Annual Growth Rate (CAGR) of 6.94% between FY16-FY20. 

Government's Aatmanirbhar Bharat push

The Union Cabinet chaired by Prime Minister Narendra Modi has given its approval to introduce the Production-Linked Incentive (PLI) Scheme in the automobile and Auto Components sectors for enhancing India’s manufacturing capabilities and enhancing exports under the Aatmanirbhar Bharat programme. A Rs 57,042 budget has been approved for the sector for the five year period.

The PLI scheme will incentivise the emergence of advanced automotive technologies' global supply chain in India. "The automotive industry is a major economic contributor in India. The PLI scheme will make the Indian automotive Industry more competitive and will enhance the globalisation of the Indian automotive sector," PIB said.

Covid-19: Slowdown and return

Although the nationwide lockdown may have assisted in containing COVID-19, it has brutally affected the automobile sector. The industry showed signs of revival after the first wave, however, the second wave struck the industry hard. Some of the automakers even delayed or cancelled their production in the first quarter of FY 21. Furthermore, the automobile retail sales fell 18% year-on-year in the 42-day long festive period in 2021 as semiconductor shortage weakened the production across the companies affecting their abilities to supply adequate vehicles to dealer partners.

According to the data collected by the Federation of Automobile Dealers Associations (FADA), total retail sales across vehicle segments stood at 20,90,893 units during this festive period, down 18% from 25,56,335 units in 2020. Passenger vehicle sales were down by 26%, two-wheeler sales declined by 18 and tractor sales were down by 53%. In contrast, commercial vehicle sales surged by 10%.

"We have witnessed the worst festive season in the last decade. Semiconductor shortage which was already a full-blown crisis showed its true colours when in spite of above healthy demand, we could not cater to customer's need as SUV, compact-SUV and luxury categories witnessed a huge shortage of vehicles," FADA President Vinkesh Gulati said.

Government's Electric vehicle push 

The Modi government's push toward a net-zero carbon emissions goal by 2070 is also visible in the automobile sector. The Centre already offers a low 5% GST on electric vehicles. Also, first-time individual buyers availing loans can get text benefits up to Rs 1.5 lakh. The Road and Transport Ministry has also exempted EVs from registration certificate (RC) issue and renewal fees.

Moreover, to facilitate EV owners the government is planning to install 6,000 charging stations across nine expressways in the country, MoS Dr Mahendra Nath Pandey said. “Since charging is the main concern when it comes to the use of EVs, the government has chosen nine expressways where 6,000 charging stations have been sanctioned and about 3,000 will be installed soon," he said.

Union Minister Nitin Gadkari on Monday said that the EVs are getting a good response from people. He also pointed out that 250 startups are working on e-vehicles and this will reduce the cost of EVs. Furthermore, he stated that green hydrogen is the future and informed, "I am going to buy a car next month, which will run on hydrogen."

Currently, electric passenger vehicles sales account for less than 1% of total passenger vehicle sales in India, though there is strong momentum. In the first half of FY22 (April to September), a total of 6,261 e-passenger vehicles (PVs) were sold, marking a 234% year-on-year growth.

According to the government, the EV market is expected to grow at a CAGR of 44% between 2020-2027 and will hit 6.34 million-unit sales by 2027. The e-vehicle industry will also create five crore jobs by 2030. Companies like Ola Electric, Ather Energy, Tork Motors and SmartE, as Bajaj Auto managing director Rajiv Bajaj calls them 'OATS' are heating up the electric two-wheelers market, challenging the conventional BET (Bajaj, Enfield and TVS) market.

Despite the strain, the auto industry is expected to grow in the coming months. The semiconductor issue is likely to get resolved in the coming time. Besides this, people coming back to offices in the post-COVID-19 era are likely to prefer private transport over public one which will shoot up sales. The government has also predicted that India's passenger vehicle industry is likely to post a growth of 22% - 25% in FY22.