By Manish Sharma

Global automakers greeted the New Year to India with a buoyant note. The 10th Auto Expo (a bi-annual event held in January) in Delhi created hysteria with a record 10 launches on its opening day. From prominent carmakers renowned for their luxury lineage like Volkswagen and Toyota to old warhorse like General Motors (GM), all announced grandiose plans to crown India as the next bastion of auto renaissance.

While the spectacular launches were accompanied by thumping statements, the route taken by the auto industry is imprinted with the theme ‘small is big’. Not less than three launches were tailored to meet the needs of the growing Indian middle-class population. Volkswagen, a late entrant into India, got so enamored with the potential of the compact car segment that it brought its worldwide success Polo with an attractive price tag of Rs 4.5–6 lakh. Toyota is relented to test the ground in the segment with Etios, while GM hopes to change the game with its stylish and tantalisingly priced (Rs 3.5 lakh) new model Beat.

The reasons for such frenzy are not very hard to find. Despite the economic slowdown and fear of job loss, penchant for cars did not diminish in the country in 2009. The auto industry saw a growth of 15 per cent last calendar year over 2008. Around 2 million passenger cars were sold, out of which 75 per cent belong to basic and compact car league - commonly known as hatchbacks or A-segment. Thus, around 3,500 compact cars were being sold every day in the domestic market apart from 25,000 two-wheelers. Similar pattern is expected to be repeated in 2010 with industry watchers anticipating a generational shift from two-wheelers to the compact segment.

Moreover, India has reached the “tipping point” as described by industrialist Anand Mahindra in a recent interview. This is the motorization rate that a country normally crosses once its per capita income reaches to a particular level. India has already entered the league of US$1-trillion economy. From 2004 onwards, growth in per capita has been higher than the GDP growth. Per capita income has crossed the US$1000 mark and ‘demographic dividend’ has increased the size of workable population with reasonable disposable income - around 13 million households earn US$10,000- 50,000 a year. The National Council for Applied Economic Research (NCAER) had reportedly mentioned that the middle-class share of the population is slated to go up to 20 per cent by 2015, with income getting doubled from the present. All these factors would boost growth in the auto sector.

Ernst & Young has predicted the Indian passenger car market to grow at 12 per cent annually over the next five years to touch 5.5 million units by 2015 from 1.9 million units at present. The government’s Automotive Mission Plan (AMP) has laid out ambitious target. It envisages that India will be the world's 7th largest car producer and 4th largest truck manufacturer in another five yeas. Moreover, by 2016, the auto sector would contribute 10 per cent to GDP from the current level of 5 per cent.

The buzz is tremendous currently. Nissan has lined up US$920-million investment in partnership with Renault. Volkswagen has pumped in Euro 580 million (US$847 million) to keep the cost down of Polo. GM opened a second, US$300-million factory in India in September 2008, boosting annual capacity to 225,000 vehicles. The abysmally low rate of penetration (1 in 100 people) and rising demand along with government’s incentives (like excise duty reduction on small cars) are the factors behind the beeline at India’s doorsteps, but how the ‘invisible hand’ of market plays its role remains to be seen.

Indiabiznews, January 09, 2010