Auto sales mirror India’s uneven economic recovery

The automobile industry is critical for the economy. The rise and fall of demand for vehicles largely reflects the health of the manufacturing sector. The latest news about an upswing in sales during the last fiscal (2022-23) thus gives greater confidence that the pace of economic growth will be sustained at the target level of 6.4 per cent over the course of the current financial year.

Passenger vehicle sales are reported to have risen by 27 per cent while commercial vehicle sales have also grown by a healthy 16 per cent during 2022-23. The only let down has been two-wheelers, where demand has fallen, and sale volumes have slipped back to levels reached about a decade ago.

The data must be viewed in the context of the automobile industry’s towering presence on the industrial scene. It contributes 45 per cent of India’s manufacturing GDP, and accounts for 7.1 per cent in the overall GDP. It is also a major employer with a McKinsey survey having estimated that it provides 37 million direct and indirect jobs.

The uptick in demand for automobiles in various categories over the past year is, therefore, a significant development. The improvement in the auto sector follows the general sluggishness of the pandemic, and the economic upheavals created by the Ukraine conflict. As has been well documented, the revival of worldwide industrial production in 2021 came along with a severe shortage of critical electronic goods such as semiconductors or chips. The disruption of global supply chains at the time meant that production of a wide range of goods especially passenger cars in India was stalled for lack of chips. These tiny electronic components were suddenly needed everywhere, but production had stalled during the pandemic. So, despite rising domestic demand for automobiles, output slowed down.

The chip availability has improved considerably, leading to the robust increase in passenger car sales. Apart from the industry’s revival, what is noteworthy now is the increasing focus being put on vehicles operating without the traditional internal combustion engine. Automobile companies are pressing the accelerator on cars powered by electric batteries, CNG, and the new age hydrogen fuel cells. The shift has come about partly due to nudges given by a government trying to reduce imports of expensive crude oil. It partly reflects the growing consumer demand for cars fuelled by renewable energy sources.

The move towards EVs has also been given an impetus by several central and state subsidy schemes for electric and hybrid vehicles. The most notable of these is FAME (faster adoption and manufacturing of hybrid and electric vehicles) which provides incentives to reduce costs and subsidies to make vehicles more affordable.

The outcome of these efforts is that 1.123 million electric vehicles were sold in FY2023 compared to 458,000 in the previous year, a spurt of 155 per cent. The biggest increase is in two-wheelers which rose from 252,000 last year to 720,000 in 2023. Monthly sales of EVs have also crossed 100,000 for the last six months.

The drive towards new age technologies was showcased recently at the Auto Expo in Delhi, which unveiled a series of models in the EV, hydrogen cell and flexi-fuel spaces. For consumers, the immediate attraction is the vastly lower running cost compared to the existing range of internal combustible engine (ICE) vehicles.

The cost factor also seems to have driven sales of two-wheeler EVs, which are currently dominating this segment. In contrast, however, sales of all types of two-wheelers have lagged far behind commercial vehicles and passenger cars. The reasons cited are higher cost of vehicles due to increase in component costs. But this phenomenon needs to be investigated as it seems to point to lower income groups having failed to recover fully from the rigours of the pandemic. On the other hand, those in the higher income bracket seem to have returned to normalcy, and are pushing sales of more expensive personal vehicles.

Thus, it seems the resurgence of the automobile industry over the past 12 months is in line with the uneven economic recovery following the two pandemic-hit years. On the positive side, the industry is moving inexorably towards more sophisticated green technologies helping to reduce carbon emissions and cut costly fossil fuel imports in the long run. On the negative side, the lack of demand for smaller personal vehicles shows the recovery has not been broad based, and left many by the wayside.

The automobile industry may mirror the economic revival, but it also puts the spotlight on the policy gaps that have left out those at the bottom of the pyramid.

(Sushma Ramachandran is a senior journalist.)

Disclaimer: The views expressed are the author's own. They do not necessarily reflect the views of DH.