Last updated: May 22, 2019
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The automotive sector is one of the core industries of the Indian economy. Indian Government’s impetus to the industry by allowing continuous economic liberalization since 1991 has made India one of the sought after destination for many global automotive players. The automotive sector in India is growing at around 18 per cent per annum. Indian Auto industry has seen a phenomenal growth in the last 20 years. This is due to the convergence of a lot of positive factors. This article aims to examine at some of these to understand the situation better.

The sales trajectory of automobiles has witnessed a sharp increase since 1990s till 2000. Automobile industry has greatly benefitted from a sharp increase in demand and has added extra capacity, better research and development facilities and technological advancement and distribution setup across the country. Factors contributing to the increased demand of automotives and the growth of Indian Auto sector The convergence of government policies, economy’s growth, people’s purchasing power have all contributed to the phenomenal growth of Indian Auto industry.

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Some of the important growth drivers are explained below. Rise in the industrial and agricultural output indirectly helps Indian Auto industry Industrial and agricultural output increase has reflected in higher GDP and overall growth of the economy which is about 9% in the last three years. Higher GDP means more purchasing power. Sales of vehicles for domestic and commercial consumption have seen high growth in these three years too. Growth in the road infrastructure increases demand for vehicles Indian highways and roads have improved a lot in quality and connectivity in the last 20 years.

Projects like the Golden Quadrilateral aim to make even remote areas accessible by road. Some of the National Highways are of international standards. This has made road transport a viable, cost effective and speedy option both for goods and passenger traffic. Rise in the Per capita income increases two/four wheeler sales Industrial growth in the 70s, IT boom in the 1980s and BPO boom in the 1990s have transformed the Indian middle class. The present generation is able to earn the same levels of salary that their parents were earning after years of work.

This has pushed up the demand for two and four wheelers. A rise in per capita income is also indirectly responsible for the retail boom and industrial boom for consumer durables. This has pushed up the demand for commercial vehicles to enable efficient distribution. Urbanization changes the face of Indian auto industry Joint families in towns and villages have given away to migration of the younger generation to cities in search of better opportunities.

The new-age educated migrants and nuclear families (many with double income couples) have a higher purchasing power. Presently, the rate of spread of urbanization is 30% which is likely to increase by 40% in 2030 (UN). Urbanization has promoted infrastructural development and it is estimated to spread at a rate of $500 billion in the next 5-6 years Rising working class and middle class contribute to increased demand of automotives Post 1980s, a surging economy has created millions of new jobs in the private sector.

This has lead to a lot of prosperity in the working class and the middle income households. They are able to provide for food, clothing and education and also are able to think of owning luxuries like vehicles. According to the Planning Commission report, between the year 2003 and 2009, 130 million people would have been added to the working population. According to a finding from McKinsey, the middle income group will grow from 50 million to 550 million by 2025.

Exhaustive range of options in price and models of automotives Indian consumer in 70s and 80s had to choose between and Premier Padmini or an Ambassador. Now there are at least 123 different models of cars from 30 odd manufacturers available. The prices of the compact cars like Tata’s Nano has made the world sit up and take note of the truly unbeatable price points. Attractive Finance Schemes for purchase of automotives Most nationalized and foreign banks have very tempting finance options and low interest rates for purchase of cars and two wheelers.

There are specialized companies that finance the commercial vehicles. All this has made the dream of owning a vehicle an easy reality Favorable Government Policies for the auto sector Apart from a healthy growing economy, Indian auto industry has a lot to thank the government for the amazing growth rates. The Indian government has introduced several industry specific programs. The Indian Auto Policy of 2002, introduced measures like low entry barriers and investment incentives by the local state governments.

To encourage in-house research and development activities, Government has introduced policies that allow weighted tax deduction up to 150%. National Automotive Testing and R&D Infrastructure Project (NATRIP) has been set up n in Rae Bareilly, Ahmednagar, Pune, Manesar, Silchar, Indore and Chennai for strengthening the R&D infrastructure. Cost efficiencies contributing to lower production costs According to a study by KPMG in 2007, India Automotive Study, the labour cost per hour hovers around $20 in UK, USA and Germany. In India, it works out to just $1. 60.

Due to the huge savings in the labour cost sourcing auto components and finished cars makes a lot of business sense to the auto manufacturers who have global presence. The improved design capabilities and continuous improvement in quality has been possible only because of the availability of skilled manpower like engineers and IT professionals. The future of Indian Auto Industry According to a report from United Nations Industrial Development Organization’s (UNIDO) in ‘International Yearbook of Industrial Statistics 2008’, India enjoys 12th position amongst top 15 automakers in the world.

India is at the 4th position amongst the auto makers of developing countries. By 2016 the size of the Indian automobile industry is expected to grow by 13%, to reach a mark of US$ 120-159 billion. Presently, India is the 2nd largest two wheeler market in the world and fourth largest commercial vehicle market worldwide. With allies in a strong economy, rising demand and financial backing, Indian auto industry is standing at the threshold of success.