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


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-liberalization 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 program 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 conceptualize 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.

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 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.

Japanese Collaboration

The reason the government was invested in exploring the possibility of a small car was that domestic demand for passenger cars was increasing, but the automobile industry lacked the technology to meet this growing demand. During, therefore, the 1970s, 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 license 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.

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 liberalization, 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.

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.