The Indian automotive sector, directly and indirectly, employs 37 million citizens and contributes to over 7% of the national GDP. It has gained from strength to strength over the years. Right from importing and assembling foreign automotive components in the past, to designing and making indigenous products, its transformation has indeed been dramatic. However, underlying this success story is the contribution of a robust ecosystem of auto-ancillary MSMEs that provided an opportunity to Make in India available. Yet, while the green shoots of economic recovery appear elsewhere, those who put the country on its wheels are left mostly struggling to find their feet.
On a steep backslide
The automotive industry in India is going through a deep structural slowdown that the pandemic-induced disruptions have only compounded. For the sector, business realities have been evolving faster than they can respond. High tax rates, liquidity crunch following the NBFC crisis, a continuous hike in fuel prices, and a contracting economy have led to the implosion of domestic sales. Also, with the imminent imposition of the BS-VI norms over the horizon just ahead of the lockdown, manufacturers were compelled to immediately invest in cleaner technologies, taking a hit on their earnings.
SIAM estimated that the industry registered a CAGR of -1.9% between FY16-FY21, and the Federation of Automobile Dealers Associations (FADA) observed an 18% decline in the total retail sales across vehicle segments during the festival season of 2021, compared to the previous year. The consequences have been exceptionally brutal for the automotive MSMEs. They form vital links in the industry supply chains but have little shielding from the slump due to inadequate finance, labor issues, lack of trust, and technology access. The fallouts ranged from large-scale job losses, payment defaults, to the complete winding up of businesses.
Sovereign interventions to the rescue
However, that being said, it will be unfair not to outline the affirmative policy actions that are already being initiated to address the demand and supply-side constraints in the sector. Considering the automotive industry as pivotal to achieving the dream of a $5 trillion economy, GOI has approved a formidable allocation for the sector under its Atma Nirbhar Bharat initiative. Further, the Union Budget 2021-22 introduced a Voluntary Scrappage Policy to boost demand by systematically removing old and polluting vehicles plying the Indian roads. Also, production-linked incentives for the Automobile & Auto components with a total outlay of $7.5 billion have been announced to boost employment creation and exports.
Digital Dexterity: preparing for future uncertainties
While the benefits of these measures will surely trickle down onto the automotive MSME partners, setting them eventually on a path of steady economic recovery, the present experience offers a learning opportunity. The MSMEs must leverage the available windfall to transform radically and prepare for tomorrow’s contingencies. Here embracing the Digital is key to reinventing the fundamental operational aspects, optimizing overheads, automating processes, standardizing work structures, and minimizing dependency on manual labor. Rather than a return to normalcy, automotive MSMEs must use this recovery phase to formulate business strategies that involve the right intent, insights, and investments to be digital-ready and be culturally synced with their enterprise peers. For instance, while ERP systems have so far been only a turf reserved for large automotive manufacturers with deep pockets, today, cloud-ERPs can help even their MSME supply chain partners to integrate, accelerate, and scale processes digitally.
Research suggests that despite the current hiccups, the Indian automotive sector can grow to reach $300 billion by 2026, creating employment opportunities for 65 million people. However, given the EV revolution over the horizon, the proliferation of alternative propulsion systems and change in commuter behavior, combined with the ever-present possibilities of another COVID-like disruption in the days ahead, life for the automotive manufacturers and their MSME partners will never be the same. The health of the Indian automotive MSME ecosystem is entwined with a significant share of the country’s strategic autonomy in manufacturing. In the national interest, the industry must embrace the changing dynamics and plan proactively for a more resilient future.