The automotive sector in India has overcome significant challenges over the past 3 years - from combatting a sharp drop in demand during the COVID-19 pandemic to supply issues emanating from the shortage of the automotive chip that impacted production. The good news is that the market for this sector today has reversed course, with an unprecedented surge of orders over the past 4 to 5 months.

Our experts believe and most industry players would agree that the following four trends will reinforce and accelerate one another, making the automotive industry in India ripe for disruption. However, the road ahead not only has significant opportunities but also specific risks that need to be mitigated. This thought leadership provides specific insights; and we trust that you will find the same to be useful.

Demand for electric vehicles ('EV')s

The central government has taken various measures to promote the adoption of EVs in the country to achieve goals of reduced emissions. This includes the setting up of charging infrastructure for EVs, tax incentives for EV manufacturers and subsidies for consumers who purchase EVs. India’s propitious potential for creating a fertile market for EVs is evident and the same has also been recognized by a study done by the CEEW centre for energy finance.

While the surged demand attaches more importance to the Government's plans to cater to the market, setting up of infrastructure for charging these vehicles, procurement of land and components is a costly affair. Manufacturing of EVs requires highly technical abilities, which need to be developed on a vast scale within the country to realize the ideal of self-reliance.

Enhanced infrastructure

As the automotive industry digests the demand for EVs, the timely completion of infrastructure projects is the need of the hour. Government initiatives such as NATRiP, the Bharatmala Pariyojana and the Sagarmala project amongst others in this regard, are focused towards establishing state-of-the-art automotive testing and R&D infrastructure, while improving connectivity within the country and enhancing maritime infrastructure respectively.

At the same time, the use of automobiles is a major cause of local air pollution, greenhouse gas emissions and road accidents. Combined with the large environmental footprint of the automotive industry and concerns about working conditions in its supply chains, the industry needs to combat such negative externalities, while embracing new age technology and automating its supply chain.

Labour law reforms

Being the 4th largest producer of automobiles in the world with an average annual production of more than 4 million motor vehicles and an EV market estimated to reach ~US$ 7 billion in India by 2025 (according to research reports), it is all the more essential that labor law reforms penetrate the automotive industry to benefit all stakeholders. Labour reforms cover a wide range of aspects, however overall, they should aim to promote fair working conditions and create a level playing field between workers and management, while also taking into account requirements of the industry to remain competitive and sustainable over the long term.

Various automotive manufacturers have endured losses at the hands of labor unrest, that in most cases, has erupted as a result of wage and/or unemployment differences. The hard truth about labor laws is that they require reforms and safeguards against exploitative conduct, especially since a substantial number of workers fall under the unorganized category.



Tax reforms

The AMP 2026 (Automotive Mission Plan from 2016-26) is a vision outlined by the Government of India that proscribes the trajectory of growth of the automotive ecosystem in India. The Union Budget 2023 has removed custom duty on capital goods/machinery for manufacture of lithium-ion cell for use in batteries of electrically operated vehicles. The Hon’ble Finance Minister of India has reemphasized on government’s priority of green mobility by bringing to the fore the recently launched ‘National Green Hydrogen Mission’. With an outlay of INR 19,700 crore, the mission is expected to “facilitate transition of the economy to low carbon intensity, reduce dependence on fossil fuel imports".



While the budget proposals are seeking to do away with the surcharge, hiking the custom duty to 70%, on completely built-up vehicles with a CIF value below US$ 40,000, provide an opportunity for manufactures to facilitate indigenization to enhance competitiveness.

Finally, we leave you with the following excerpts from our conversation with MGC Global Risk Advisory LLP's Practice Leader for the Automotive Sector - Surender Sharma.

"Spurred by government support in the form of subsidies under the FAME-II policy, enhanced awareness and increasing product launches, the EV segment has seen a significant upturn in prospects over the past 18 months. The industry requires greater and ongoing incentivization for the 2-wheeler segment, which has yet to revert to the pre-covid levels. Harmonization of registration charges and subsidies across states will also facilitate inclusive growth across the country”.

We trust that you have found our analysis to be informative. Should you have any questions or require assistance, please do not hesitate to reach out to contactus@mgcglobal.co.in.

With best wishes,

Markets team

MGC Global Risk Advisory

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