Finance costs, global demand near-term hurdles for auto sector: Eco Survey

Among structural issues, increase in long-term third-party vehicle insurance premiums has spiked total upfront insurance cost by 10-11%, especially for two-wheelers

Higher borrowing costs and tempering global demand are the near-term hurdles for the Indian auto industry even as its outlook is upbeat, said the Economic Survey for 2023-24 on Tuesday.

Among structural issues, the increase in long-term third-party vehicle insurance premiums has increased the total upfront insurance cost by about 10-11 per cent, especially for two-wheelers, the Survey mentioned.

Therefore, the two-wheeler segment has been the most affected, with the lowest sales in the past ten years, it said. "Addressing these challenges will boost the automobile industry," it added.

"Despite the upbeat outlook, the automotive industry faces certain challenges. Higher borrowing costs and tempering global demand are expected to be near-term hurdles," it said. With inflation rising all across the globe post Covid-19 and the Russia-Ukraine war, the global demand for cars is decreasing and borrowing costs (interests, etc) are increasing.

The auto industry posted its highest-ever annual domestic passenger vehicle (PV) sales in 2022 at 3.793 million units on the back of pent-up demand and better semiconductor chip supply. The figure was 23.1 per cent more than that of 2021.

In December 2022, India became the third largest automobile market, surpassing Japan and Germany in terms of sales, the survey noted.

"In 2021, India was the largest manufacturer of two-wheeler and three-wheeler vehicles and the world’s fourth-largest manufacturer of passenger cars. The sector’s importance is gauged by the fact that it contributes 7.1 per cent to the overall GDP and 49 per cent to the manufacturing GDP while generating direct and indirect employment of 3.7 crore at the end of 2021," it mentioned.

About one per cent of the total 3.793 million PVs that were sold in 2022 were electric. "The automotive industry is expected to play a critical role in the transition towards green energy. The domestic electric vehicles (EV) market is expected to grow at a compound annual growth rate (CAGR) of 49 per cent between 2022 and 2030 and is expected to hit one crore units annual sales by 2030," the survey noted.

The EV industry will create five crore direct and indirect jobs by 2030. To support and nurture this development, the government has undertaken multiple steps, the survey noted.

Pitching for rationalisation of taxes for the automobile sector, R C Bhargava, chairman of Maruti Suzuki, had last month said that the industry can’t grow when the tax rate on cars is 50 per cent.

Bhargava also noted that despite the Modi-government’s emphasis on reforms, manufacturing in India is still a laggard mainly due to failure of “implementation machinery” in the country.