The Economics of the Indian Automotive Industry by- Abhay Singh

Introduction

My name is ABHAY SINGH a meticulous student of grade XII. Upon writing the

research paper on DISPOSAL OF E-BATTERIES I decided to write a research

paper on THE ECONOMICS OF AUTOMOBILE INDUSTRY IN INDIA. Upon greater

understanding of the topic, I gained information that Taxation, which we all

think is the main reason behind the limitations of international car

manufacturers in India is NOT the only reason, there are various reasons apart

from this. I came to the understanding that Tesla is not planning to come to

India. As well as an MNC such as ford has decided to leave India. The question

in my mind remained that a country as big as India that caters to so many car

manufacturers, but still MNCs are not happy with the policies and often remain

in conflict with the Indian central government. In this research paper, I have

listed down points including taxation to help create a better understanding of

the topic.

While visiting the outskirts of Delhi, its stark contrast with the urban metropolis

intrigued me. How can the same city have 2 entirely different worlds? Failure of

the trickle-down theory was the initial source of income inequality.

Accumulation of wealth in the top 1% does not add adequate economic value as

opposed to poorer sections who have a larger propensity to consume. Joseph

Stiglitz’s ‘Price of Inequality’ refuted the misconception that the rich are job

creators as incentives to the rich lead to job creation abroad. It is the market

demand that forces firms to produce and eventually creates jobs, thus evincing

that inequality and economic growth are not complementary.

The Economics of the Indian Automotive Industry

Last year FORD an American multinational car manufacturer exited the Indian

automotive market, not just this, Toyota that is to be known for producing

reliable and safe family cars has told that they won’t be further expanding in

India, Alongside, Honda said that they will only run 2 or 3 models in India and

start cutting supplies and eventually shutting down other models. Before all

these companies multinational companies, some big names like CHEVERLOTE

and MITSUBISHI has already left India.

General Motors the 2nd biggest car manufacturer in the World never entered

India

According to the automotive industry valuation India comes 4th in the world but

if this is the case then why are all these companies leaving the Indian market?

People often think the easiest answer could be TAXATION. But further in this

research paper when we will discuss the causes we will get to know that this is

not the only reason, there are several other important reasons why the

companies are exiting the Indian market

Overview of the Indian Automobile Industry

If we look at the figures for FY22 then we will get to know that in 2022 India

sold around 2.3 crore cars, yes the number looks deceiving but if we compare it

with the past 5 years the growth looks stagnant. Many automakers face losses

just because the cars are ready and are not able to sell or perform well in the

market Indian market.We can blame coronavirus for this but FY21 was also

impacted by covid, but in FY22 the numbers decreased drastically. These

figures include all automobiles including 2-wheelers, passenger vehicles, and

commercial vehicles. Out of these cars, 17.5% were passenger cars which

rounds up to 30 lakh cars. Out of these cars, less than 1% which is 23,748

covers the luxury segment including brands like Mercedes, BMW, Bentley, etc.

The clear picture is that the luxury market of India is not that big

In India if we divide the car sales by the company we will get to know that the

most number of cars sold by a manufacturer in India is by Maruti Suzuki then

Hyundai followed by Tata motors followed by Mahindra followed by KIA. Kia is a

sub-brand of Hyundai based in Korea. There is not a single American company

on this list. Although looking at world figures; out of the top 5 automobile

manufacturers in the whole world, 3 are American Companies.

The common thing among the top 5 automotive companies in India is that they

have a growth rate of an average of 250% to 300%

DATA

Looking at this data, it will be clear to say that Indians are preferring more SUVs

than sedans. Because of this, the Managing Director of Maruti Suzuki is saying

that if Maruti Suzuki wants to increase its market share in India then they must

focus on SUVs to be a leader in the segment. Even If we look around ourselves

we will notice that the market capital and demand for mid-size SUVs have

increased drastically, they are more frequent on roads and their sales are also

booming.

In the past years during covid when car sales were in dropping drastically only

SUV’s growth was booming. Between the years 2009-2019, the sales of SUVs

was the most.

This was an overview of the Indian Market, by this, one thing is crystal clear

that the Indian consumers that were lower middle class are rising to an upper

middle class, which is the reason why they are preferring SUV’s over other

smaller cars. Consequently, the demand for SUV’S in India has skyrocketed,

and the Indian automotive industry taking full advantage of it.

THEN THE REAL QUESTION ARISES

Why did the American Giants leave the Indian Automotive industry ??? There

are other companies like Hyundai and KIA who are operating from outside India

and still processing at a high rate in India and comparatively the American

companies couldn’t grow and they exited one of the largest markets.

To get a deeper look let’s look into the Taxation policy in India first-

Overview of taxation policies in India

Cars have a GST of 28% furthermore a cess of 3%to 22%

If we compare these taxes to other countries we know that India has an

aggressive taxation policy. If we compare this with the pre-GST ERA, the VAT,

and other taxes, they were almost the same. From this reason, we get to know

that tax cannot be the only reason for their exit, because the taxes had been

the same for the past years, even with the change of central government. The

taxes are almost the same as during Congress Era and the BJP era.

Then what are the reasons for their Exit ??

If we import a car below 31 lakh then we have to pay duties of approx. 60%. On

the other hand, If the car is above 31 lakh then we have to pay 100% import

duties.

CBU (a fully assembled vehicle) is imported from abroad, hence many

companies have stopped importing vehicles directly.

TO REDUCE TAXES WHAT THEY DO IS- They import parts and components of

the same vehicle and assemble it in India paying 30% of duties. Harley

Davidson, a bike company was the first to open an assembly plant in Haryana

saving a lot by this process.

This was done by the government and Nitin Gadkari JI, to promote make in

India. ON THE OTHER HAND, if you import a small number of parts and

manufacture them in India then you have to pay 15% import duty, because of

this ford inaugurated their car plants in Tamil Nadu and Gujarat, Toyota in

Haryana, Hyundai in Hyderabad to save costs in import duty. And comparing

the price of the Indian market and Indian consumers their main aim was to be

relevant and affordable

Ford was operating for many years, and there wasn’t much of a difference in

taxation, between the 2 different governments. Comparing GST with VAT as

was the case earlier, they were manufacturing their cars in India, hence

saving import duties, saving tax money, but still, they decided to leave.

WHY DID FORD TAKE SUCH A DECISION ???

If we look into their financials, then we get to know the real reason, in the past

10 years, ford has incurred losses of around 15,000 crores in India because

their cars weren’t selling well. This was a major drawback because establishing

a brand is one thing and earning profits is another.

If we Look Closely, any automobile company that comes from North America

takes India as an option only an option, whereas they have to assert their

presence in countries like China and Australia because of the market share.

This is because if we look at the per capita income of the USA it is 50,40,000

INR whereas; the Indian per capita income is 1,50,000 INR there is a difference

vast difference between the people’s spending power. So in this case the

margins that they get in the US, the cars that they can sell expensive over

there, same cars can’t be sold in India at the same price, because there is a

completely different market here, in India people are very price sensitive, and

why not they would be price sensitive, they have a very low per capita income,

if the Per capita income would have been higher then they might not have been

price sensitive, as simple as that.

Promoting the American dream, the officials of Ford could not grasp the idea of

Indian consumers,

The biggest problem with ford was that most of the cars launched by

them were copy-pasted from the American market to the Indian

market, The cars that became a massive success in North America

were later launched in Europe and eventually India, and then they

realised that sales are nowhere near where they should be and they

decided to exit the market.

In Ford’s exit taxation wasn’t the only reason, the main reason was their sales

were not good, and because they didn’t understand the Indian market.

After looking at all these things we conclude that in India, Local Indian

automobile companies are more successful than that of foreign manufacturers.

There are 2 reasons behind this

1.Indian companies understand the Indian market very well, other

companies just copy-pasted their successful models from abroad,

Indian companies focuses just on the Indian market, that’s why they

know the market, how price sensitive the people are in India and what

all they want.

2.If we talk about Tata motors which has shown a big turnaround in the

past few years, they have focused on R&D they even brought their

own EV, right now the majority market share in EVs is owned by Tata

motors

Tata motors have benefited from their vertical integration where other

companies of the TATA group work in the EV ecosystem where TATA elexy

provides the designs for the EV’s and other vehicles This is where the group

helps in to expand the automobile business, They work in harmony

The growing automobile industry has created a demand for R&D and tech jobs

that are on an all-time high.If we look at the data of the past few years, the

highest hike has been in the tech sector and most job opportunities are to be

found in this sector.

Now if we look at the 2nd case of Toyota it’s quite different, the officials say

that they can’t expand more in India, because taxes are too high and are

different as compared to other countries, To a report by economic times- the

on-road price of a Toyota fortune is 47 lakh, upon selling this car the profit to

Toyota is merely 40,000 rupees, and the government receives about 18 lakh

rupees in taxes including GST, CESS and other taxes on a sale of that 1 vehicle.

This has 2 outcomes

1. The people who buy such expensive cars are very low, companies

struggle to sell these expensive cars and upon selling they receive a

profit of mere 40,000 rupees if we compare these margins to other

countries Toyota being a very big company, they receive much better

margins in other countries, The officials said that if the taxes were

reduced then they will have much better margins leading to further

expansion, but with the current margins they are not able to expand in

India and not employing good manpower- Toyota

2.Honda is also restricting many of its models in India, they won’t bring

out new models for India and they have the same saying as Toyota

So one thing we get to know upon looking at the tax system in India is that the

taxation system of India are very aggressive,

Ideally, any country’s tax system should play a volume game meaning putting

many smaller taxes so we can recover more money in the long term

In India if we talk about cryptocurrency, if the govt would have put up a little tax

then in the future the government could’ve earned more money but suddenly

putting a 30% tax on crypto, the crypto market is on verge of extension, and all

of the companies are shifting to Singapore, Dubai, so the income from these

companies to the government would be quite low in the coming time, India

should learn from Dubai and Singapore as they attract foreign investments to

their countries.

This is not just the case here, LTGC (Long term capital gain tax ) which is 10%

that also is in the planning to be increased, and just like this the government is

increasing GST in various other things, not focusing on the volume game, the

government is focusing on short term revenue, and these things work out

pretty well in the short term getting a good amount of collection, but in the long

term, it sure has many impacts.

If we look at the few past years we will find that Tata motors have been

recovering pretty well, Maruti Suzuki has also been recovering pretty well but if

we look at the profit margins of these companies, till now Tata motors are in

loss but if we talk about the profit margins when Tata motors were in profit,

they only had a profit margin of 3%

The real problem is that if the profit margin of any company is less, then they

don’t spend much on R&D,

The government asked the manufacturers to fit 6 airbags in every car, this

decision was made out to be compulsory, considering the cost of 1 airbag is

800 rupees, this is not big of a deal for companies but if the taxes are so high

that there are less or no margins, that is where the companies try to cut out

costs in making to save some margins. They often do cost-cutting

This is the reason why a big company like Maruti Suzuki is not bullish on New

vehicles like electric vehicles, they say that they will let things happen and after

a while, they will make an entry because if their pilot project fails, or if it doesn’t

become successful then they will directly incur losses because of the low

margins.

This does not apply to every company, if we talk about why Chevrolet failed in

India? It would be because of low sales despite some models like Travera that

were successful, but they didn’t have any service centers in India, Chevrolet

hardly had any service centers in tier 1 cities, and tier 2 and tier 3 were not

even on the list when the competition with Mahindra became tougher, the exit

of Chevrolet was inevitable.

We cannot say taxation Is the only reason for exiting India because many

companies from outside are working both EFFECTIVELY AND EFFICIENTLY are

working in India like Hyundai and Kia and if we look at the automobile industry

from an investment point of view we must always check the profit margin of the

company because we see this industry struggling a lot in the margin point of

view, and if the profit margin is low, even a slight global problem would result in

the company going to losses just as we have seen in the past with Tata motors

because of JLR (JAGUAR LAND ROVER)

And just because of the heavy import duties Tesla has refused to come to India,

saying they would only come to India if they receive any tax reliefs, so this is

also a barrier from abroad to come to this country, we can bet on EV’s lead by

Tata motors on the future.

CONCLUSION- In India, Indian Automobile Industries are quite successful

compared to foreign companies, To attract more foreign investments india

should consider reducing its aggressive taxation measures.