Car Market in India: Potential to be the World’s Third Largest Market by 2030

Back in October 2012, I highlighted why the Indian car market would ultimately ride out the perfect storm that was raging at the time and return to growth. As expected, car sales did decline in 2013, by 6.9%, but already returned to growth in 2014 and India ultimately has the potential to overtake Brazil, Germany and even Japan by 2030 – thus becoming the third largest car market in the world. The small car and SUV segments should be especially appealing for carmakers as far as portfolio planning is concerned but both a physical and psychological presence is needed to capture the hearts and minds of the wave of consumers beyond Delhi, Mumbai and Bangalore that rising incomes will enable to afford a new car.

Short, Medium and Long-Term Outlook

Lower oil prices have helped to compensate for the loss of the fuel duty reduction from January and interest rate cuts and speculation that they may be cut further are already positively impacting demand in 2015. Also, and the government is also indicating its firm commitment to implement the goods-and-services tax (GST) from 1st April 2016. As my colleague An Hodgson wrote, “this could be the single most important fiscal reform since the country’s independence in 1947, as it will make India a truly single national market, simplify the tax structure, reduce corruption and red tape, boost corporate earnings and improve government fiscal health.” The economic outlook for India is therefore rather healthy, with GDP growth over 6% projected for 2015 to 2017, although some concerns do remain over keeping inflation under control. As it stands though, Euromonitor International currently forecasts 3.6% growth in passenger car sales in 2015, which would see India overtake Brazil to become the fifth largest car market in the world. The positive medium-term economic outlook leads us to call for a further 4.9% growth in car sales in 2016 and with 2017 enjoying the first full-year benefit of the GST, a further expansion of 5.4% is predicted.

It is noteworthy that car sales have broadly grown in line with the development of households with an annual disposable income over US$15,000 and barring any major shocks to the Indian economy, consumer confidence, credit availability/interest rates, taxation, oil prices etc., our household incomes growth data suggests that India has the potential to support a market of 3.3 million car sales in 2020, thus overtaking Germany to become the fourth largest market in the world behind China, US and Japan. Furthermore, our long-term forecast predicts that India will even surpass Japan in car sales by 2030, claiming third place.

New car sales in Japan, Germany, Brazil and India, 2000-2030

India-Cars

Source: Euromonitor International/JATO Dynamics

Small cars, SUVs and second-tier cities offer the greatest opportunities

As far as segment shares are concerned, small cars dominate, accounting for 46% of car sales in 2014 and India’s young population and income distribution profile suggest that their share will climb even further. Re the latter, households with sufficient income to support the purchase of small cars are growing at a faster rate than those which can afford more expensive cars and, in fact, those which cannot afford a car at all. However, the market share of entry-level, mini cars has actually been falling – the poor sales performance of the Tata Nano is a well-documented case in point, whereby Indian consumers aspire to ownership of a new car but don’t wish to be associated with the cheapest cars available on the market. Volkswagen, Toyota and Hyundai have performed well for example, stealing share from Maruti with small car offerings that are not perceived as cheap “made for India” cars. SUVs are of course the other success story in India – as in most markets, they are especially gaining share as consumers switch from upper and lower medium-size cars as well as MPVs and the on-going SUV product offensive (especially small SUVs) will only add further support to the continuation of this trend.

As to where the growth will come from, Euromonitor’s Cities data is useful to identify the car sales potential – for example, looking again at the development of households with over US$15,000 annual disposable income, Delhi, Mumbai and Bangalore are naturally set to see the biggest gains in volume terms but there are many second-tier cities which are due to grow at a faster rate in percentage change terms, such as Ahmedabad, Kolkata, Chennai, Hyderabad, Patna and Pune.