India's Auto Industry: Opportunities Amid Challenges

India’s auto industry is at a pivot, as US tariffs, GST 2.0 and supply chain dependencies will decide its future course.

Key Takeaways

• US tariff hikes pose an obstacle to MSME auto component exports
• China’s monopoly is hindering EV growth.
• GST 2.0 is boosting domestic demand and supporting MSMEs
• India has a chance to accelerate ‘Make in India’ and reduce import reliance.

Tariff Shocks: An MSME Challenge

The increase in tariffs by the Trump government, ranging between 25% and 50%, has disrupted India’s auto component export market. Large manufacturers can look out for domestic alternatives, but this is a major setback for MSMEs, as they get nearly 60% of their business from exports. The US alone accounts for almost 27% of India’s entire auto component exports.

According to experts, 15%-20% of India’s export earnings could be lost. The completely manufactured vehicle market would not be affected, the reason being cars are not exported in large numbers when compared to auto components.

Rare Earth Magnets

At the time of major EV fallouts, Beijing has imposed strict restrictions on the export of rare earth magnets. China controls approximately 70% of the global rare earth magnet export with a refining capacity of 90%. Although they make up only about 5% of the entire manufacturing cost, they are extremely vital.

The Chinese external affairs minister on his visit to Delhi assured them he would ease up the restrictions, but no shipment has been received by any domestic companies so far, even after sending 30 requests since April. To overcome this, India is looking for other import countries like the US, Japan, Vietnam, etc. But this would cause delay in the EV manufacturing. If this situation continues, this can also disrupt the two-wheeler market.

This is the effect of over dependency on China for these magnets. Since India has the fifth largest rare earth magnet deposits globally, it is the right time that our government starts investing in refining and processing these metals domestically. This would break the so-called monopoly established by China and would support the Indian EV manufacturers.

GST Rate Cut

The recent GST rate cut can be seen as a relief for consumers. Due to reduced GST, the demand for vehicles is set to rise. This will have a ripple effect on the auto components and manufacturing industries. MSMEs, being the bulk order receivers, will heavily benefit from this. This rise in demand would also create opportunities for mechanics, drivers and other service providers.

If we look at the bigger picture, this increased activity would support the ‘Make in India’ initiative, where the automobile industry is the torchbearer. Currently this industry contributes around 7% to the country’s total GDP; with rising demand, this contribution can increase in the near future. This can be a good opportunity for investors looking to explore this industry.

Conclusion

The automobile industry in India is facing both opportunities and challenges. With GST rate cuts increasing the domestic demand and creating growth for MSMEs, issues like over-dependencies on Chinese imports and the rising tariffs are hindering the expected growth.