Demand for Small Cars Built India's Automobile Industry: A Reading List

The demand for automobiles in Indian has dropped, which may not fare well for the automobile industry which has historically grown through domestic demand. 


The automobile industry has been crucial to India’s economic development, having provided both direct and indirect employment because of its linkages to several other industries. According to a recent editorial in the Economic and Political Weekly (EPW), the current sales of vehicles have been the lowest in the last 19 years because of a drop in domestic demand. This is perhaps a consequence of a slowdown in the global economy. There was a 26% dip in car sales in May 2019 versus last year, and consequently a nearly 8% fall in overall vehicle production. Indian firms have currently halted production to clear inventories, and many reported ­operating at around 70% of their potential efficiency level.

The drop in demand is particularly worrying as historically, the growth of the Indian automobile industry has been driven by domestic demand. From the early 19th Century, the Indian automobile industry has grown from being entirely dependent on imports to competitive and independent manufacturing in the post-liberalisation era. 

In this reading list, we take you through the stages in which the Indian automobile industry developed. 

1. Building a Nationwide Policy

The first motor car was imported to India in 1898 and in 1928, General Motors India began to assemble trucks and cars in Bombay. They were followed by the Ford Motor Company in 1930, which began production in Madras, and later in Bombay and Calcutta. Several other such motor companies existed before India achieved independence, such as Hindustan Motors and Premier Automobiles. But after independence, the Tariff Commission in 1953 asked firms that did not have a phased manufacturing programme to withdraw from the Indian market. An automobile policy was drafted after 1965, which left only seven automobile-manufacturing firms in India. Only in 1981 did the government approve of four new firms. Sanjay Kathuria explored the history of the automobile industry in India in his 1987 EPW article. He wrote that the desire to conceptualise a nationwide policy for manufacturing automobiles in India had existed as early as the 1930s. He argues that the Second World War was instrumental in the development of the automobile industry in India. 

In 1935 M Visvesvaraya's proposal to establish an automobile industry was rejected by the then central government. However, the National Planning Committee of 1938, set up by the Indian National Con- gress, appreciated the "real, long-range  importance of this new means of transpor- tation and its place in India's planned economy"' and emphasised the importance of setting up an "organised automobile industry in the country".6 The war needs also brought into bold relief the usefulness of having a domestic automobile industry. In line with this thinking, the government of India constituted a panel on automobiles and tractors in 1945, which submitted its report in 1947. The panel recommended liberal incentives for national concerns undertaking manufacture of automobiles in India, but "no specific action appears to have been taken on these recommepda- tions". The government of independent India was undoubtedly keen to foster growth of the domestic industry. In the years follow- ing the panel report, customs duty on certain components was raised, import of complete vehicles banned (except in special cases), and local manufacture encouraged.8 But it was in the inter-war period that the foundations of the Indian industry had been laid. Hindustan Motors was set up in 1942 under the management of Birla Brothers (Pvt) and Premier Automobiles in 1944 under Aero-Auto. The progress of the two companies was "slow in the initial stages, due to the intense competition from both old and new producers who were merely assemblers".

2. Putting the “Small Car” on the Agenda

After the Tariff Commission of 1953, two more ad hoc surveys of the automobile industry in India were conducted in 1956 and in 1960. The former focused on fair prices in the industry while the latter explored the possibility of a manufacturing small cars. Thereafter, in 1967, Arthagnani wrote that the government has appointed a committee to inquire into the deterioration of the quality of cars at a time when the industry was experiencing a slump. The possibility of making a small car was added to this agenda to see if the automobile policy would be able to accommodate it. 

All this is happening at a time when the industry, particularly the truck-manufacturing part of it, is going through a recessionary phase. Moreover, with increasing indigenisation and the freer availability of imports — even for items of low official priority like passenger cars — all the producers are able to use their capacity almost fully, for the first time since 1957 when the foreign exchange crisis hit the industry, particularly units like Premier Automobiles which had till then thrived on imports. In cars gradually the waiting lists are going down; in the newly introduced one-tonners, there has been active price-cutting and aggressive selling, and there are reported to be shut-downs among large truck makers.  

3. Japanese Collaboration

The reason the government was invested in exploring the possibility of a small car was because domestic demand for passenger cars were increasing, but the automobile industry lacked the technology to meet this growing demand. During the 1970s, therefore, the government decided to set up a public sector unit to manufacture small cars, but this initiative was scrapped, as T Hamaguchi wrote. According to Hamaguchi, Sanjay Gandhi claimed to have developed an indigenous, fuel-efficient, small car which did not require any imports of know-how and capital goods. The government gave him a licence to produce 50,000 cars a year as Maruti and Co Ltd, but the company could complete production of only a hundred cars. This along with a number of political factors shaped by the decade of Emergency, paved the way for collaborating with the Japanese company Suzuki. 

The Maruti-Suzuki Project on manufacture of automobiles has been the centre of attention of the nation in many ways. The project has initiated the process of revitalisation of India's automobile industry which is nearly thirty years behind the most recent technological development in the world. The project involves the largest-ever direct investment by Japan into India. Another significance attached to it is the development and absorption of the foreign technology, embodying thirty years' of evolution, within a span of five years. In other words, under the banner of self-reliance, the project is also responsible for implementation of the indigenisation programme. The idea of manufacturing "people's" cars, small and low-priced so as to reach the masses, was first developed in early 1960s when the Indian economy was experiencing accelerated growth. Yet the project was not given serious consideration till the 1970s, when there was a severe shortage of passen- ger cars. Car production, which was grow- ing at 5.4 per cent per annum in the 1960s, had declined to one per cent a year in the 1970s. At the same time, the demand for cars increased steadily and was estimated at 80,000, against a capacity of over 35,000 in the industry, by 1974. Thus people had to wait for years to get a car, and even a car used for a few years was sold at a premium.

4. Technology and Investment

In 1993, C Bhaktavatsala Rao wrote (using data from 1989-90)  that the Indian automobile industry consisted of 13 manufacturers with a combined output of 3,45,052 automobiles and gross turnover of Rs 66,273 million. According to Rao, the total capital employed in the industry was Rs 32,000 million, and the net profitability was Rs 2,033 million. He argued that in light of liberalisation, the Indian automobile industry needed to focus on improving its technological capabilities in order to compete with foreign automobile manufacturers. Additionally, Indian firms would be required to allocate investments efficiently. These were the primary structural problems that Rao was able to identify from the phases in which India’s automobile industry developed. 

A detailed study of each of the evolutionary periods identifies technology as the most meaningful dimension for the study of structure and supportive investment behaviour of the Indian automobile industry. Given the highly regulatory policy environment in India, technology has a unique relevance for industry evolution. Both government policy and industry strategy were manifest through technology. While government policies incorporate a number of other controls also, controls as reflected on technical collaborations, product licences and indigent sation are found to be the most important. From the viewpoint of the firms technology policy is seen to offer alternative approaches to long-term growth and competitive advantage. The individual automobile firms, and as a consequence the industry as a whole, through the instrument of technology tended to vary the product range, and strengthen manufacturing capability over a period of time. 

5. Automobiles in Emerging Economies

The Indian automobile industry was strictly governed since Independence through regulations and licenses. Suzuki was the first foreign company to enter the Indian market in 1981, after which India witnessed a boom in demand for automobiles. In 1995, Maruti had a capacity of about 2,50,000 vehicles, which made it the clear market leader, capturing about 70% of the market. Post-liberalisation policy changes allowed foreign companies to enter freely, but as Avinandan Mukherjee and Trilochan Sastry argued, Multinational Corporations preferred to enter into joint ventures with Indian partners. According to them, the Indian automobile industry's growth was led by opportunities in the domestic market. 

Several large assemblers have entered the Indian market through joint ventures. Unlike South Korea, managerial control is with international companies. As of date, no Indian company has plans to become a significant global player except perhaps Telco which is about to launch indigenously designed vehicles in inter- national markets. The component industry however, has a long way to go to meet the challenge. Therefore, the assemblers are initially importing knocked-down kits, and are slowly indigenising. Several assemblers are encouraging their own overseas component suppliers to enter India through joint ventures with local supplier firms. One can characterise the industry evolution as a movement from strict government regula- tions to an industry driven by growth prospects, foreign managerial control, minimal government interference except for duties and taxes, and no major thrust towards becoming truly global or acquiring cap- abilities in product development. However it may emerge as a significant exporter since domestic market may not be able to sustain 18 companies in the country.

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