Ford Motor’s exit from India – joining the ranks of General Motors, Harley Davidson, Volkswagen Group’s MAN trucks – highlights our troubled auto industry. The difficulties of this $70 billion industry are a symbol of India’s growth story. Faced with dwindling demand for vehicles and often rising inventory levels, most auto production facilities in the country are running below their capacity. The COVID pandemic and the associated lockdown have added to the industry’s woes. As the market for passenger vehicles remains uncertain despite signs of recovery, most players are hesitant to make fresh investments.
This is what sleeps alongside a demand-constrained economy. Private consumption demand—the most important engine of growth, accounting for more than half of our gross domestic product (GDP)—isn’t firing on all cylinders. After adjusting for inflation, per capita private final consumption expenditure in 2020-21 was lower than the levels recorded in 2017-18. Although there has been some recovery in the first quarter of 2021-22, it is still 12% lower than the corresponding quarter of 2019-20. Investment is also down 17% in the first quarter of 2019-20. Declining consumption and absence of animal spirits among entrepreneurs to invest in are responsible for our steady decline in overall growth since 2016-17.
The auto industry reflects these trends, as it contributes 7.5% to GDP. It accounts for 49% of the output of the manufacturing sector and directly and indirectly employs about 35 million people. Globally, India is the fifth largest passenger-car manufacturer with 2.9 million vehicles in 2020, according to the International Organization for Motor Vehicle Manufacturers. It is also the world’s largest market for two wheelers and the largest manufacturer of tractors. Thus the industry has the critical mass to be the driver of overall growth. This is a bright spot now that vehicle-manufacturing has reached maturity in most advanced countries.
For such reasons, the prolonged decline in vehicle registrations (a reliable indicator of retail sales) – as seen this September in the same month as 2019 – has an economy-wide impact. Of course, recent trends within the industry paint a picture of variation: according to the Vehicle Dashboard of the Ministry of Road Transport and Highways, registrations of motor cars have smartly improved, showing strong growth on their COVID depth, while The quantity of two wheelers is less. . According to Sajid Chinoy of JP Morgan, their distinct trends suggest a K-shaped recovery if motor car and two-wheeler sales are considered proxies for consumption by high- and low-income households, respectively.
These figures may increase this festive season, but the outlook on demand is still worrying. Urban consumers are postponing purchases as new mobility solutions emerge that are disrupting the global auto industry. With ride-hailing options offered by apps like Uber and Ola, the value of car ownership itself is being questioned.
Electric mobility is also in the ascendant. India has a longstanding goal of all new vehicles on the roads being electric by 2030. While digitally connected cars and autonomous vehicles are still some distance away, the emerging possibilities for mobility are a result of the pause used by car buyers. Vehicles running on internal combustion engines are being seen as a thing of the past.
In this environment, Ford Motor’s decision to close shop is bad news for green-field investments that are needed to drive growth not only in the auto industry, but in the overall economy as well. Ford invested $2.5 billion in its India, starting with its facility in Chennai. In 2011, it established another one in Gujarat. Green-field investing is a long-term bet by investors. Like other global corporations that were attracted by the opening of India’s vast market in the early 1990s, Ford introduced products that gained international ready acceptance, such as its Escort model. However, it was soon realized that the market was narrow at the upper end; that he had to develop affordable products. Ikon and Figo were rolled out. But the bet did not pay off. Despite some success with its EcoSport, Ford suffered heavy losses because demand for its vehicles was not strong enough to support its two factories.
As an engine of growth, the auto industry needs policy attention. The industry is dismayed that vehicles are still considered a luxury that only the wealthy can afford. Even two wheelers attract a Goods and Services Tax of 28%. Lowering the cost of ownership will help generate demand. However, instead of helping older makers of fossil fuel-powered vehicles, the government is pushing for electric mobility; It has announced a package to encourage electric and hydrogen fuel cell vehicles. This strategy will not proceed with policy flip-flops. For example, Tesla chief Elon Musk referred to “challenging government regulation” on Twitter in the context of setting up shop in India. The car-charging infrastructure isn’t there yet. If electric vehicles fail to be affordable, they will also face the demand constraints faced by other carmakers. Perhaps India can learn from the example of Norway, which actually facilitated electric mobility through generous tax subsidies. gave.
N. Chandra Mohan is an economics and business commentator based in New Delhi. These are the personal views of the author.
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