India back on the road to growth?

It seems like only yesterday that India was being widely talked of as one of the next titans of the global auto industry.

And indeed things were looking good for the world’s second most populous nation. During a succession of boom years, vehicle sales were driven by strong economic growth and a rapidly expanding middle-class. Indian companies started taking an interest in international businesses, most notably Tata’s highly successful acquisition of Jaguar Land Rover, and the stage was set for India to join the ranks of the world’s automotive superpowers. More recently though, a combination of increasing fuel prices, the weakening rupee and prolonged high interest rates have led to rising vehicle finance costs and a marked slowdown in the domestic market. In 2013 sales fell for the first time in a decade, despite manufacturers’ liberal use of incentives in a bid to entice customers into their showrooms.

In the past few days however, there have been a couple of promising signs that policy-makers are ready to act to help pull the nation’s auto sector out of the doldrums.

On 21 February the government of Tamil Nadu announced plans to set up an bold new “Auto City” - a modern 1,000 hectare industrial park for domestic and global vehicle manufacturers and suppliers. This is the first initiative of its kind in India and the state government plans to form an Automotive Industrial Development Centre (AIDC) offering investment services, support and incentives with the aim of making Tamil Nadu a “destination for manufacture and export of motor vehicles”. The Auto City would boast a logistics hub to provide multi-modal transport, a design and technology park and common infrastructure such as effluent treatment and waste management utilities. It would enable the transportation of goods to various ports on a 24-hour basis. Chennai is already the centre of India’s auto industry with global OEMs including BMW, Ford, Hyundai and Renault Nissan located in the area, along with major domestic players. Tamil Nadu also accounts for 35 per cent of India’s auto component production worth $6.2 billion. Now the state government says it aims to make Chennai one of the top five auto-clusters world-wide.

And this announcement from Tamil Nadu comes just days after the Indian government announced cuts to the national excise duty on automobiles in it’s interim budget for 2014. Finance minister P. Chidambaram took the unexpected step of reducing the duty on small cars and two-wheelers from 12 to 8 percent. He also slashed duty from 30 percent to 24 percent on SUVs, and on large and mid-sized cars from 27% to 24% and 24% to 20% respectively. Manufacturing received a boost too in the form a reduction of excise duty on capital asset purchases from 12% to 10% across all sectors.

If these measures are signs that India’s political leaders are serious about intervening in the strategic interests of their domestic auto industry, it might be back on the road to growth again pretty soon.