The future of mobility in India’s passenger-vehicle market

September 12, 2018

Incumbents in the automotive industry should prepare for a changing landscape as India grows into the world’s third-largest passenger-vehicle market and global trends disrupt the sector.

India is expected to emerge as the world’s third-largest passenger-vehicle market by 2021. It took India around seven years to increase annual production to four million vehicles from three million. However, the next milestone—five million—is expected in less than five years. Hitting that mark will depend on today’s rapid economic development continuing, with a projected annual GDP growth rate of 7 percent through 2020, ongoing urbanization, a burgeoning consuming class, and supportive regulations and policies.

With this growth in mind, we set out to build a perspective on the trends shaping the Indian market, the value proposition for the automobile industry in India, and imperatives for winning in the market. This article explores all three.

Key trends shaping the Indian passenger-vehicle market

The market for passenger vehicles in the country will evolve in the context of several larger trends, some specific to India, and some relevant globally.

Favorable macroeconomic and demographic trends

Currently, the automotive sector contributes more than 7 percent to India’s GDP. The Automotive Mission Plan 2016–26 sets an aspiration to increase the contribution to 12 percent.

A number of economic trends could help in meeting this target. Rapid urbanization means the country will have over 500 million people living in cities by 2030—1.5 times the current US population. Rising incomes will also play a role, as roughly 60 million households could enter the consuming class (defined as households with incomes greater than $8,000 per annum) by 2025. At the same time, more people will join the workforce. Participation could reach 67 percent in 2020, as more women and youth enter the job market, raising the demand for mobility.

Some of them would leap straight into four-wheeler segment, and others will graduate from two- to four-wheelers. Over 44 percent of the consuming-class households will be in 49 growth clusters—for example, Delhi is expected to have the same GDP per capita at purchasing power parity as the entire country of Russia in 2025. Cities like Delhi are a sweet spot for car manufacturers to target.

In the future, these macroeconomic and demographic trends could shift pockets of growth in passenger-vehicle market. Mini cars and hatchback cars have been the mainstay for the automobile industry in India, with share around 50 percent and growth of 6 to 7 percent between financial year 2014 and 2017. These segments will continue to maintain a dominant position, but the majority of growth is expected to come from new segments such as compact SUVs, sedans, and luxury vehicles.

Continued government focus on supporting the industry

Through the Automotive Mission Plan, the National Electric Mobility Mission Plan (NEMMP), and other initiatives, the government seeks to achieve two objectives—facilitate long-term growth in the industry and reduce emissions and oil dependence.

In the Automotive Mission Plan 2026, the government and industry set a target to triple industry revenues, to $300 billion, and expand exports sevenfold, to $80 billion. To meet these aims, it is estimated that the sector could contribute more than 60 million additional direct and indirect jobs, and the result could be improved manufacturing competitiveness and reduced emissions.

To tackle emissions, the government seeks to bring local standards up to par with global standards, enabling India to leapfrog from BS-4 to BS-6 emissions (the Euro 6 equivalent) by 2020 (Exhibit 1). Additionally, India has implemented Corporate Average Fuel Efficiency norms in which the manufacturers have to improve their fuel efficiency by 10 percent between 2017 and 2021 and by 30 percent or more from 2022.

The development of India as a manufacturing hub

The World Economic Forum ranks India 30th on the global manufacturing index, which assesses the manufacturing capabilities of more than 100 countries. The government’s “Make in India” initiative has played an important role in elevating country’s position. In the past three to four years, India improved on nine out of ten parameters for ease of doing business.

Although there is still a long way to go before India becomes a leader in the manufacturing arena, companies in the automotive sector are embracing this opportunity to leverage India as a hub for low-cost, high-quality products. After creating a strong value proposition in mini cars, India is gaining global recognition in the compact sedan and SUV category.