Indias annual production stood at 29.08 mn vehicles (including passenger vehicles, commercial vehicles, three wheelers, two wheelers and quadricycles) in FY18 as against 25.33 mn in FY17, registering a growth of sharp growth of 14.8% y-o-y vis--vis a growth of 5.5% during the same period last year.

The industry is valued at around 7.1% of the countrys Gross Domestic Product (GDP). The Two Wheelers segment leads the Indian Automobiles market with 80% market share owing to a growing middle class and a young population. Moreover, the companies growing interest in exploring the rural markets further aided the growth of the sector. This is followed by the Passenger Vehicle (PV) segment with 14% market share.

India, being a prominent auto exporter, the exports stood at about 14% of the automobiles produced annually. After declining by about 4.5% in FY17, exports witnessed a sharp growth of over 16% in FY18. Exports of two & three wheelers registered a sharp growth of over 22% y-o-y on back of gradual recovery in overseas demand. On the other hand, commercial vehicles exports declined by about 10% and that of passenger vehicles remained largely stable.

Going forward in FY19, CARE Ratings expects the auto industry to continue witnessing healthy growth as the disruptions caused by various policy implementations (demonetization, ban on BS-III vehicles, GST, rate revisions) have almost moderated. Also, demand is expected to improve on back of various initiatives taken by the government in the Union Budget 2019 for the Agriculture and Infrastructure sectors.

Improved consumer sentiments post the Seventh Pay Commission by the Centre as well as salary revisions by States and higher farm incomes supported by increased MSPs for certain kharif crops in expected to further increase rural disposable income. This is expected to boost the demand for passenger vehicles and two-wheelers especially motor cycles.

The government has also recently (October 2017) approved one of the biggest highway construction projects in India - Bharatmala project, worth Rs 7 lakh crores to build approximately 83,000 kms of road by 2022 along with improvement in construction and mining activities and higher demand from e-commerce and FMCG industries is expected to give a fillip to the commercial vehicles segment going forward. Also, in order to take the polluting commercial vehicles (CVs) off road, the government may fix 20 years as the lifetime of the commercial vehicles. The Vehicle scrapping policy is expected to come into force from April 1, 2020. This is expected to give further boost to CV sales in the country.

However, on the other hand, increase in commodity prices and frequent policy changes are the key concerns for the growth of the industry. Also, the investment required in order to ensure improved emission standards is likely to pose a challenge for the players.

Main drivers for these growth rates:

GDP growth to be higher at about 7.5%

Good monsoon and higher farm income

Increased infrastructure and industrial activities

Factors to watch for in FY19:

Higher outlay in Budget 2018 for infrastructure, transportation and agriculture segment, which had been volatile off late, is expected to be positive for the commercial vehicles demand.

With the decline in the holding period of a vehicle from 5-6 years to 3-4 years, the inflow of used cars and commercial vehicles has gone up considerably. Also, easy access to finance options, greater participation of organized OEM backed players in used vehicle markets; higher number of aspiring buyers with improvement in standard of living and increased industrial activities, etc. is likely to create higher demand for the used-vehicle segment. This in turn is expected to marginally impact the demand for new passenger vehicles and commercial vehicles in the future.

Higher disposable income in hands of buyers with seventh pay commission by the Centre and salary revisions by the states is likely to increase demand for the small cars and two wheelers. Two-wheelers demand is expected to improve on back of steady rural as well as urban demand

Demand for three-wheelers could be under pressure in near term. However, the segment is likely to register growth on back of rising urbanization and migration to cities boosting intra-city transportation.

Auto exports from India is expected to show strong growth as many companies like Volkswagen, Ford Motors, General Motor are focusing on exports and expansions in newer markets such as South America, North America and Asia will only add to the growth. Export demand from African and Latin American countries is expected to pick up on back of stabilization of exchange rates and commodity prices in these regions

The original equipment manufacturers (OEMs) are focused towards meeting the growing domestic demand for various auto segments going forward with elimination of demonetization effects in the economy. Also, the taxation processes have now been streamlined post the initial interruptions of GST implementation in FY18

Also, the government has announced to totally skip Bharat Stage (BS)-V norms and adopt BS-VI norms by April 2020 for cars for fighting pollution, poses a challenge to the domestic manufacturers. Many manufacturers have already started setting up plants for production of BS-VI complaint vehicles. However, the availability of higher grade fuel for these vehicles is of high concern as using BS-VI fuel in the current BS-IV engines or running BS-VI engines on the current-grade fuel, may be not be effective in curbing vehicular pollution, and may wreck the engine in the long run.