Indian Car Industry : Driving Down the Perilous Path


It would not be far-fetched by any stretch of the imagination if one was to say that the passenger car industry has been the de facto poster boy of India’s reform story. An industry that up until the 1980s had been heavily regulated, underwent delicensing, was categorised as a high priority sector and thrown open for the global players to enter. Suddenly, as the narrative goes, after years of an uncompetitive, oligopolistic decay, there was renewed dynamism within the segment. Sixteen new joint ventures were set up and different varieties of passenger cars flooded the market (GoI 2002), catering to the aspirations of a bourgeoning middle class. Large, modern plants boasting of the latest technological wherewithal were set up and there was the promise of new job creation that would be both skilled and rewarding.

Twenty-eight years down the line, the industry retains its much favoured position both in policy discourse and mainstream academic writing. As per the website of the government’s flagship programme, “Make in India,” the automotive sector is seen as one of the six “superstar” sectors, particularly the passenger car segment whose market is expected to triple to 9.4 million units by 2026.1 The Second Automotive Mission Plan 2016–26 similarly identifies the industry as a major employment generator, foreign direct investment (FDI) earner and gross domestic product (GDP) contributor. Academic writings such as those of Gulyani (2001) and D’Costa (2005) highlight the continuous high growth trends that the industry has been witness to and its remarkable performance both in terms of technological development (Sagar and Chandra 2004; Kale 2012) and exports (Narayanan 2006). These are provided as definitive proofs of the resounding success of the reform programme.

It would only be befitting, then, that a stringent critique of the basic arguments of the neo-liberal model is carried out by taking the very same industry as an entry point and undertaking a thorough investigation of its so-called success story. Jatinder Singh’s title is a useful attempt in that direction, providing a much-needed industry-centric examination of the relationship between industrial restructuring, FDI inflows, and consequent trade performance. Through the course of its nine chapters, it investigates the hypothesis that changes in economic policy, particularly those related to foreign investment, bringing in capital, modern technology and managerial and marketing skills, which are necessary for strengthening the resource base, ensuring macroeconomic stability, increasing exports and leading to an overall improvement in the country’s economic performance.

The first set of issues examined by the book revolves around the structural changes that have taken place in the industry during the past six decades and the reasons for the same. On the basis of the nature of policy framework operating at the time, Singh divides the evolution of the industry into four sub-periods. The first phase covering the period from 1947 to the mid-1960s is marked by the state granting protection to the domestic car industry by imposing quantitative restrictions, increasing tariffs and regulating the nature of foreign presence with an objective to promote the indigenisation of passenger car production in the country. The second phase, stretching from the mid-1960s to early 1980s, witnesses a further tightening of the regulations surrounding the industry. This comes down to a host of factors including the shortage of foreign exchange as a result of the oil shocks of the early 1970s. In a bid to modernise the industry and
promote competition amongst domestic manufacturers, the third phase starting from roughly 1981 and ending in 1990 witnessed a considerable relaxation of policy regulations. There was a change in the conditions determining the operating environment, and the rules concerning technical collaboration and imports of goods were also eased. The objective of the policy discourse shifted towards export promotion as a means to earn foreign exchange. The period was marked by the emergence of a joint venture between the Government of India (GOI) and Suzuki Motors, Maruti Udyog Ltd (MUL) which shook the stable oligopoly of Premier Automobiles Ltd (PAL) and Hindustan Motors Ltd (HML) that had dominated the market until now.

In these chapters, Singh provides us with an interesting account of how the success of MUL was not only down to the competitive pricing strategy of the firm, but also on account of an evidently biased strategy adopted by the state to act in favour of this venture. As he notes, no other firm from the passenger vehicle segment was allowed to enter into a joint venture with a foreign firm during this time. A proposal involving a collaborative exercise between Tata and Honda was rejected at the last moment due to a sudden change in criterion in government policy. The finance ministry, on its part, reduced rates on customs and excise duties on firms producing vehicles with an engine capacity of up to 1,000 cubic centimetres as only MUL was manufacturing cars in that category. The nexus between the government officials and MUL was so strong that the latter was allowed to enter the euro currency market to raise resources.

If the joint venture between Maruti and Suzuki led to the restructuring of the segment in the 1980s, the dynamism in the passenger car industry observed in the 1990s has been attributed to the entry of foreign firms whose roles changed entirely from being technology suppliers to that of equity holders. This radically altered the structure of the industry from being a seller’s market to a buyer’s market. Singh acknowledges the importance of other factors operating as well. According to him, the growth of the industry in the early years of the 1990s had been initially driven by the release of pent-up consumer demand. By the end of the decade, however, consumer demand was sustained by factors such as the easy accessibility of credit for passenger vehicles, the urban bias in terms of personal loans distribution and the rise in disposable income of a growing section of the middle class.

Imported Technology

Having established the pattern of structural change in the industry, the book proceeds with its investigation of one of the key arguments made in favour of the reforms, namely that India’s passenger car industry had performed well with regard to the question of technology development. Using firm-level information from the Centre for Monitoring Indian Economy PROWESS data set, Singh notes that while the aggregate picture shows that the amount spent by passenger car firms on technology acquisition and development has indeed risen since the 1980s, a careful disaggregation of technology spending paints an altogether different picture. Spending by firms on technology has been highly biased towards imported technology. While the latter has increased significantly over the reform period, the investment in in-house research and development (R&D) has gone down. For example, industry leader MUL’s spending on R&D remained less than 0.5% until 2010–11, only to increase marginally thereafter. At the same time, the parent firms of these very foreign subsidiaries (located outside the country) spend close to 2%–7% of their sales on R&D. Furthermore, the manufacturers have steadily increased the import share of components, raw materials and intermediate goods during the post-reform period.

His analysis, thus, suggests that although India has been able to attract a large volume of FDI into this sector, it has failed to improve its own technological base in terms of local R&D activities. Firms have neither devised the strategy nor operated with the objective of promoting indigenous technology and continue to remain highly dependent on technology imports. The fact that spending on disembodied technology (acquired via expenditure on licensing fees, royalties and technical know-how fees) has risen during this period, lends little support to some of the claims made above.

The final section of the book deals with the impact of foreign firms’ entry on the trade performance of the industry. Proponents of the reform process have long justified the necessity of opening our markets to foreign players who would use the country as a base to serve the world market (Lall 1985; Aggarwal 2002). The consequent rise in exports, it was argued, would ease India’s balance of payments (BOP) situation. The empirical analysis carried out by Singh in this work refutes the above, depicting no improvement in the export performances of India’s car industry during the 1990s, with some improvement thereafter. Imports on the other hand remained consistently high, post the reform period. His analysis at the firm level shows that amongst the major firms operating in the industry, only Hyundai has been recording a net surplus in terms of foreign exchange earnings with the rest (including MUL) noting a significant gap between import and export intensities. His empirical investigation suggests that there exists no correlation between the FDI and exports. While the liberal trade and investment regime did allow a large inflow of FDI, the outcome of this investment in terms of exports, BOP and technological capabilities has been far below expectations. The objective of most of these firms has been to exploit the domestic market by selling highly import-intensive products rather than focusing on exports. This has resulted in a huge drain of foreign exchange out of the country.

Firms’ Strategies

Through this exercise, Singh raises some uncomfortable truths for policymakers. The recent strategy of the private players is not only worsening our BOP situation, but the lack of indigenous technology development and the monopolisation of technology in the hands of a select few parent firms located at the head of the global value chain (GVC) outside the country also pose some serious threats to the viability of the industrialisation process itself in the country. One does wish that Singh had expanded his analysis to cover the auto-component sector in equally rich detail as well, given that it accounts for a sizeable presence in the larger automotive industry.

While going through what is a succinct narrative of the genesis and growth of the passenger car industry, one cannot help but notice the underlying tension that exists between the vision and objectives of broader state policy on the one hand and the strategy undertaken by individual firms for their own interests on the other. Very often, commentaries dealing with industry-specific studies tend to overemphasise the impact of the former. The experiences of the pre-reform period, in such readings, are in entirety attributed to the nature of policy discourse prevalent at the time. The lack of growth and development of sectors are marked as a failure of a plan that was executed fairly well but was flawed in its very conception, the fact that the interests of the market took a back seat. The post-reform narrative is all about a new type of plan where there appears to be a far greater synchronisation between the objectives of policy discourse and individual firm strategy. Singh’s book departs from such simplistic readings and notes how the post-reform period has been marked by firms pursuing strategies that are often in direct contradiction to the objectives of the state.

However, the power dynamics has shifted so much in favour of the former that the latter often appears helpless. In the section on foreign presence and BOP, Singh notes how in the second half of the 1990s, the GOI on realising that the firms were basically using the country as an assembling centre for passenger cars, tried to impose various restrictions on these firms, which included, apart from other things, their overall local content and minimum foreign equity required. However, none of the firms that signed the memorandum of understanding fulfilled the various conditions listed out, only for the government to eventually scrap the same after pressure from the World Trade Organization.

Having commendably highlighted the shift in power away from the state into the hands of the private players, Singh’s resolution of the problem in the end does leave the reader rather confused as to how it would be achieved. The way forward, according to Singh, is for the state to come up with a differentiated FDI policy that will promote those firms that wish to help export and restrict the entry of those whose sole objective is to exploit the local market. Given that India is capable of providing skilled workers at low wages, and is a large market for multinational corporations’ products which improve its bargaining power vis-à-vis international firms, it is possible, according to Singh, for the country to attract quality FDI. The two points, which are supposed to work in favour of India’s bargaining capacity, however, are not new arguments. They were the very reasons given while justifying India’s liberalisation programme back in the early 1990s. Clearly, as Singh’s extensive empirical body of work shows, the bargaining power of the state has reduced considerably over this period. Why would things be different is something that the reader would wish was more clearly explained in the book. To be fair, the author himself flags this, by questioning the feasibility of his own solution, given that India is tied down after having signed the Uruguay Round agreement.




Aggarwal, A (2002): “Liberalisation, Multinational Enterprises and Export Performance: Evidence from Indian Manufacturing,” Journal of Development Studies, Vol 38, No 3, pp 119–37.

D’Costa, A P (2005): The Long March to Capitalism: Embourgeoisment, Internationalization and Industrial Transformation in India, New York:
Palgrave Macmillan.

GoI (2002): “Auto Policy, March 2002,” Ministry of Heavy Industries and Public Enterprises, Department of Heavy Industry, Government of India, New Delhi,

Gulyani, S (2001): Innovating with Infrastructure: The Automobile Industry in India, New York: Palgrave Macmillan.

Kale, D (2012): “Sources of Innovation and Technology Capability in the Indian Automobile Industry,” Institutions and Economies, Vol 4, No 2, pp 121–50.

Lall, S (1985): Multinationals, Technology and Exports, New York: St Martin’s Press.

Narayanan, K (2006): “Technology Acquisition and Export Competitiveness: Evidence from Indian Automobile Industry,” India: Industrialisation in a Reforming Economy, New Delhi: Academic Foundation, pp 439–70.

Sagar, A D and P Chandra (2004): “Technological Change in the Indian Passenger Car Industry,” BCSIA Discussion Paper 2004–05, Cambridge: Energy Technology Innovation Project, Kennedy School of Government, Harvard University.


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