Industry

Backdrop increased by 8.2 per cent in 2005-06 com-

The year 2005-06 has posted a pared with 8.4 per cent in 2004-05 and 7.0
strong GDP growth of 8.4 per cent with per cent in 2003-04 (Table I.1). There has
industrial growth touching 8.7 per cent thus been a slight deceleration in the
and manufacturing growth at 9.0 per cent. growth of IIP. However, the index of man-
The merchandise export growth in 2005- ufacturing, with a weight of 79.36 per cent
06 has been above 20 per cent for the in the overall industrial IIP, has been accel-
fourth successive year. The manufactured erating during the last four years. Its
goods account for three-fourths of India's growth rate has increased from 6.0 per
merchandise exports. The good perform- cent in 2002-03 to 7.4 per cent in 2003-
ance merchandise export is an indicator of 04, 9.13 per cent in 2004-05 and to 9.15
international competitiveness of India's per cent in 2005-06. The acceleration in
manufactured goods. the manufacturing output is further evi-
Indian industry accounted for dent from a growth rate of 11.8 per cent
about 27 per cent share of country's GDP posted during April-August 2006 com-
during the triennium ending (TE) 2005- pared with 9.6 per cent growth in the cor-
06 with the corresponding share of manu- responding period of 2005. This has also
facturing sector in GDP at 17 per cent. led to acceleration in the general IIP dur-
The share of manufacturing sector in ing April-August 2006.
India's GDP is relatively low compared Within the use-based industry
with around one-third share in China, group, output of capital goods has posted
Malaysia and Thailand. the fastest growth rate of 15.7 per cent in
2005-06 followed by consumer goods at
The index of industrial production (IIP) 12.0 per cent (Table I.2). Within the con-

Table I.1: Group-wise Index of Industrial Production (% growth, Y-o-Y)

Industry Manufacturing Mining Electricity General

Weight 79.36 10.47 10.17 100.00
2002-03 6.01 5.79 3.22 5.78
2003-04 7.38 5.28 5.04 6.98
2004-05 9.13 4.38 5.15 8.37
2005-06 9.15 1.01 5.16 8.16
April-August
2005-06 9.62 1.70 5.94 8.66
2006-07 11.82 3.06 5.67 10.59
Source: Central Statisitcal Organisation

Quarterly Review of the Economy I.1

 NOVEMBER 2006

sumer goods, growth was led by durable durable goods also posted relatively high
goods (15.3 per cent) while the non-durable growth during this five-month period of the
goods grew by a lower rate of 10.9 per cent. current financial year. However, consumer
The slow growing segments were interme- non-durable goods posted relatively low
diate goods posting a growth rate of 2.5 per growth rate of 9.5 per cent in April-August
cent and basic goods at 6.7 per cent. The 2006 as compared with 13.9 per cent in the
momentum in the growth of output of capi- corresponding period of 2005.
tal goods continued through April-August The year 2005-06 witnessed strong
2006 with the growth rate posting a high of growth in some of the infrastructure indus-
18.6 per cent compared with 13.8 per cent tries including coal and cement (Table I.3).
growth in the corresponding period of While there has been some deceleration in
2005.The basic, intermediate and consumer the output of electricity and steel, there has

Table I.2: Index Number of Industrial Prodcution –

Use Based Classification (% growth, y-o-y)
Use based group Basic Intermediates Capital Consumer Consumer Consumer
Goods Goods Goods Durables Non-
Durables
Weight 35.6 26.5 9.3 28.7 5.4 23.3
2002-03 4.8 3.9 10.5 7.1 -6.3 12.0
2003-04 5.5 6.4 13.6 7.2 11.6 5.8
2004-05 5.5 6.1 13.9 11.7 14.3 10.8
2005-06 6.7 2.5 15.7 12.0 15.3 10.9

April-August
2005-06 7.0 3.5 13.8 13.7 13.0 13.9
2006-07 8.3 9.5 18.6 11.3 16.5 9.5
Source: Central Statisitcal Organisation

Table I.3: Index of Industrial Production for

Infrastructure Industries (% growth, y-o-y)
Infrastructure Coal Electricity Steel Cement Crude Oil Petro
Industry Products
Weights 3.22 10.17 5.13 1.99 4.17 2.00
2002-03 4.56 3.17 7.33 8.84 3.44 4.93
2003-04 5.13 5.06 9.76 6.10 0.72 8.24
2004-05 5.98 5.18 8.38 6.58 1.82 4.33
2005-06 7.24 4.92 8.02 12.35 -5.25 2.15
April-August
2005-06 6.22 5.84 11.60 12.73 -4.47 -1.75
2006-07 6.81 5.68 6.96 8.95 3.03 12.07
Note: The weights of six infrastructure industries add upto 26.68 which represents the
composite infrastructure index
Source: Ministry of Commerce and Industry, Government of India

Quarterly Review of the Economy I.2

 NOVEMBER 2006

been sharp deceleration in the output of ment in July 2006 and averaged at 10,557
petroleum products and crude oil. The and went further up to 11,305 in August
decline in crude output is related to the 2006 (RBI Monthly Bulletin, October
damage to the off-shore production facili- 2006). It was at its new peak of 12,791 as on
ties from a fire accident. During the period 27 October 2006.
April-August 2006, there has been acceler- The year 2005-06 posted high FDI
ation in the output of coal, crude oil and net inflows of US$ 7,691 million compared
petroleum products but deceleration in the with US$ 5,987 in 2004-05. The growth in
output of electricity, steel and cement. FDI inflows has continued during the first
quarter of 2006-07 with the net FDI
Investment Activity inflows amounting to US$ 2,254 million
The year 2005-06 witnessed brisk compared with US$ 1,735 million regis-
activity in new investment issues with 128 tered in the corresponding period of 2005-
new issues compared with only 51 in 2004- 06.
05. The total amount raised through the It is thus evident that the new
new issues amounted to Rs. 20,899 crore in investment activity that had become rela-
2005-06 compared with Rs. 12,004 crore tively brisk in 2005-06 continues to be
raised in 2004-05. This amounted to 150 effervescent even during the current fiscal.
per cent increase in the number of new
issues and 74 per cent increase in the
amount raised. The period April-July 2006 Auto Components Industry: Per-
has posted brisk pace in the amount raised formance and Prospects
through new issues. While the number of
new issues has been somewhat low during Backdrop
April-July of 2006, compared with the cor- The Indian automotive industry
responding period of 2005, the amount was delicensed in 1991 and has been grow-
raised has been relatively high. The number ing rapidly since the mid-1990s. The Indi-
of new issues touched 27 in April-July 2006 an auto components industry has responded
as compared with 30 in the corresponding to the emerging scenario through making
period of 2005. The amount cumulated to significant advances particularly during the
Rs. 11,450 crores in April-July 2006 as last five years. Despite multiplicity of tech-
compared with Rs. 3,306 crores in April- nology platforms and relatively low volumes
July 2005 (RBI Monthly Bulletin, October this sector has grown in terms of spread and
2006). absorption of new technologies. Relatively
The BSE Sensitive Index (SEN- low labour cost, availability of the skilled
SEX) of ordinary shares has posted smart labour force and high quality consciousness
growth in 2005-06 over 2004-05. It among the Indian vendors has spurred the
touched 8,280 (Base 1978-79 = 100) on an recent growth phase of the Indian auto
average in 2005-06 posting a growth rate of components industry.
44 per cent. It touched 11,742 in April 2006 A comprehensive overview of the
and dropped to 11,599 in May 2006 before Indian auto component industry has been
crashing to 9,935 in June 2006. However, presented in the "Draft Automotive Mis-
this was a temporary phase resulting from sion Plan: 2006-2016" (DAMP) brought
rising inflation concerns and tighter mone- out by the Ministry of Heavy Industries and
tary conditions in the global markets. The Public Enterprises, Government of India in
BSE SENSEX started its upward move- September 2006. It states the Vision State-

Quarterly Review of the Economy I.3

 NOVEMBER 2006

ment for India's automotive sectors as: Table I.4: Auto Component Production
"To emerge as the destination of Year Production Annual
choice in Asia for the design and manu- (in US$ million) Growth Rate
facture of automobiles and automotive (per cent)
components. The output of India's auto- 1996-97 3278 -
motive sector will be US$ 145 billion, 1997-98 3008 -8.24
contributing to more than 10 per cent of 1998-99 3249 8.01
India's Gross Domestic product and pro- 1999-00 3894 19.85
viding employment to an additional 25 2000-01 3965 1.82
million persons by 2016." 2001-02 4470 12.74
The current employment in the 2002-03 5430 21.48
Indian automotive industry is estimated
2003-04 6730 23.94
as 200,000 persons in vehicle manufac-
2004-05 8700 29.27
turing, 250,000 in component manufac-
turing firms and 10 million at different 2005-06* 10000 14.94
levels of value chain of forward and back- *Estimated
ward linkages. It is expected that addi- Source: ACMA
tional 25 million jobs would be created
through additional opportunities arising Table I.5: Auto Component Industry Investment
in direct and indirect employment during Year Production Annual Growth Rate
the next 10 years1 .
(in US$ million) (per cent)
1997-98 1813 -
Production
1998-99 1850 2.04
The Indian auto component
industry (IACI) has around 500 firms in 1999-00 2000 8.11
the organised sector and around 10,000 2000-01 2300 15.00
firms in the unorganised sector. The out- 2001-02 2300 0.00
put of this industry has grown by more 2002-03 2645 15.00
than 22 per cent per annum during the 2003-04 3100 17.20
last four years (Table I.4). In value terms 2004-05 3750 20.97
the output has grown from US$ 4.47 bil- 2005-06* 4400 17.33
lion in 2001-02 to an estimated US$10 *Estimated
billion in 2005-06. Almost all the compo- Source: ACMA
nents required to produce two, three and
four wheelers are now produced in the Investment
IACI. There is evidence of high indigeni- The IACI has created a vast
sation of automobiles produced in India capacity base during the recent years.
including the completely Indian made Investment has grown by 17.6 per cent
vehicles including Tata Indica and Indi- per annum during the last four years
go, Mahindra Scorpio, Bajaj Pulsar and (Table I.5). The investment has increased
TVS Victor. from US$ 2.3 billion in 2001-02 to US$

1 Discussion in this Section draws upon the "Draft Automotive Mission Plan: 2006-2016"
brought out by the Ministry of Heavy Industries and Public Enterprises, Government of India.
The data have been sourced from the ACMA website http://www.acmainfo.com

Quarterly Review of the Economy I.4

 NOVEMBER 2006

4.4 billion in 2005-06. Many major man- industry by the year 2015 is expected to be
ufacturers of the world have set up their as US$ 20-25 billion.
manufacturing and sourcing units in About 60 per cent of India's exports of
India. These include car manufacturers auto components move to Europe and the
Hyundai and Ford. The Robert Bosch United States both of which are the high
auto part maker company of Germany has AQL (high acceptable quality) countries.
relocated manufacture of certain key The global auto components market has
products from some of its European loca- also been changing rapidly during the last
tions to MICO, India. New investments decade. In the 1990s more than 80 per
are proposed to be set up by the Wheels cent of the exports were to the interna-
Electronic SDN (Malaysia), the GKN tional aftermarket and only 20 per cent to
Driveline (U.K.) and the Parts Interna- global OEMs. As in 2005, more than 70
tional Company (Dubai). The French per cent exports are targeted to the global
automobile group PSA Peugeot Citroen, OEMs and only 30 per cent to the after-
Toyota, the Daimler Chrysler and the market.
General Motors are also sourcing compo-
nents from India. Table I.6: Auto Component Exports
The quality of production of the Year Exports Annual Growth Rate
IACI has been up to the mark of interna- (in US$ million) (per cent)
tional standards. Out of about 500 auto 1997-98 330 -
component manufacturing firms, 456 are 1998-99 350 6.06
ISO-9000 certified. Many of these have 1999-00 456 30.29
other international certifications as well
2000-01 625 37.06
including TS-16949, QS-9000, ISO-
14001 and OHSAS-18001. Nine firms 2001-02 578 -7.52
have received Deming Prize, four have 2002-03 760 31.49
received the JIPM Award and one has 2003-04 1020 34.21
received Japan Quality Medal. 2004-05 1400 37.25
2005-06* 1800 28.57
Exports
*Estimated
Increasing exports of auto com-
Source: ACMA
ponents from India during the last four
years confirm the high quality and inter-
national competitiveness of this industry. Future Potential and Major Challenges
Exports have increased from US$ 578 There is potential of much higher
million in 2001-02 to US$ 1.8 billion in future growth of automotive industry in
2005-06. This translated into an average India both in terms of vehicles and auto
growth rate of about 33 per cent per components. The current car penetration
annum during the last four years (Table level is 7 cars per thousand in India com-
I.6). Many of the global original equip- pared with 10 in China, 27 in Thailand,
ment manufacturers (OEMs) have been 130 in Mexico, 147 in Malaysia and 500
sourcing their requirements from the in Germany. It is expected that the pas-
IACI. However, the export volume of senger car domestic market would
India is just about 1 per cent of the global increase from 1 million cars in 2003-04 up
exports estimated at about US$ 185 bil- to 3 million by 2015. This would imply
lion of auto components. The target of the auto components market expanding
exports of the Indian auto components from about US$ 10 billion in 2005-06 up

Quarterly Review of the Economy I.5

 NOVEMBER 2006

to US$ 15 billion by 2015. India's current growth phase along

However, there is need for with its promise to provide the neces-
adequate Research and Development sary human and physical capital to
(R&D), innovation and upgradation establish and sustain automotive
to keep pace with the best internation- industry would go a long way in mak-
al production practices so as to ing this sector as one of the most
enhance competitiveness of this indus- important and dynamic sectors of
try. Increasing productivity would be manufacturing in India in the near
the key driver of growth. Factors future. Other important factors that
including labour costs, custom duties, would catalyse the growth phase of
interest rates and economies of scale this sector include provision of ade-
would play a major role in determining quate and high quality infrastructure
the competitiveness of this industry. It including power, roads, ports and air-
is expected that many more globally ports and adequate reforms in labour
successful OEMs and auto makers law, and exit policy for the firms that
would shift their production to as well would like to close down.
as source their requirements from
places which are high in productivity.

Quarterly Review of the Economy I.6