8

CHAPTER-1

INTRODUCTION

Automobile industry is the key driver of any growing economy. It

plays a pivotal role in country's rapid economic and industrial

development. It caters to the requirement of equipment for basic

industries like steel, non-ferrous metals, refineries, petrochemicals,

shipping, textiles, plastics, glass, rubber, capital equipments, logistics,

paper, cement, etc. It facilitates the improvement in various infrastructure

facilities like power, rail and road transport. Due to its deep forward and

backward linkages with almost every segment of the economy, the

industry has a strong and positive multiplier effect and thus propels

progress of a nation.

In India, automotive is one of the largest industry showing

impressive growth over the years and has been significantly making

increasing contribution to overall industrial development of the country.

Presently, India is the world's largest manufacturer of tractors, second

largest manufacturer of two wheelers, and fifth largest manufacturer of

commercial vehicles. It is the fourth largest passenger car market in Asia

and the home to the largest motor cycle manufacturer. This sector has

shown great advances in terms of development, spread and absorption of

newer technologies and flexibility in the wake of changing global

scenario.

In the wave of economic liberalization in the country, the Indian

automobile industry is going through a technological change where each

firm is engaged in changing its processes and technologies to maintain the

9

competitive advantage and provide customers with the optimized products

and services. Starting from the two wheelers, to the multi utility vehicles,

commercial vehicles and the luxury vehicles, the Indian automobile

industry has achieved splendid achievement in the recent years.

BRIEF HISTORY OF AUTOMOBILE SECTOR OF INDIA

History of automobiles in India could be traced back to the import

of first motor car into the country in 1898. Subsequently, completely-built

cars and commercial vehicles were being imported into the country by

British officials and other prominent Indians, either directly or through

dealers/agents. By the end of World War I, the number of such vehicles

imported per year was around 4,000. Envisaging a promising demand for

automobiles in India, General Motors and Ford established their assembly

plants in the country in late 1920s and early 1930s respectively. General

Motors began its operations in the Mumbai plant in 1928 by assembling

CKD kits of cars and trucks imported from abroad. This was followed by

the commencement of similar assembly operations by Ford in its Chennai

plant in 1930 and later also in Mumbai and Kolkata in 1931. The number

of automobiles imported/assembled in India grew significantly in the

1920s and crossed 30,000 units per year by 1930.

The beginning of automotive industry in India was marked in early

1940s with the establishment of automobile companies by two Indian

industrial houses – Hindustan Motors Ltd. (HML) founded by the Birlas

and Premier Automobiles Ltd. (PAL) by the Walchand Hirachand Group

in 1942 and 1944 respectively. Both the companies were established with

foreign technical collaboration and a programme for progressive

manufacture of complete vehicles. However, due to their slow progress

10

initially, the production of automobiles by these companies started only

after independence of India.

Following the independence, in 1947, the Government of India and

the private sector of the country made efforts to create an automotive

component manufacturing industry in the country first. However, the

growth of automobile industry of India was relatively slow in the 1950s

and 1960s due to wave of nationalization and the License Raj which

hampered the Indian private sector in many other sectors too. After 1970,

the automotive industry started to grow, but the growth was mainly driven

by tractors, commercial vehicles and scooters. Cars were still a major

luxury for Indians.

Until 1982, only three manufacturers - M/s. Hindustan Motors, M/s.

Premier Automobiles and M/s. Standard Motors tenanted the motor car

sector. Owing to low volumes, it perpetuated obsolete technologies and

was out of sync with the world industry. In the 1980s, numbers of

Japanese manufacturers launched joint-ventures for building motorcycles

and light commercial-vehicles. At that time the Indian government chose

Suzuki for its joint-venture to manufacture small cars. It leads to the

establishment of Maruti Udyog. In 1982, Maruti Udyog Ltd. (MUL) came

up as a government initiative in collaboration with Suzuki of Japan to

establish volume production of contemporary models. After that numbers

of foreign firms initiated joint ventures with Indian companies to exploit

the vast automobile market of the country.

Following economic liberalization in India in 1991, the Indian

automotive industry has demonstrated sustained growth as a result of

gradual weakening of the license raj, increased competitiveness and

11

relaxed restrictions. Several Indian automobile manufacturers such as

Tata Motors, Maruti Suzuki and Mahindra and Mahindra, expanded their

domestic and international operations. India's robust economic growth led

to the further expansion of its domestic automobile market which has

attracted significant India-specific investment by multinational

automobile manufacturers.

The chronological progress of automobile industry of the country

may be depicted as under-

1840: Simpson & Co established in 1840. They were the first to build

a steam car and a steam bus, to attempt motorcar manufacture, to build

and operate petrol driven passenger service and to import American

Chassis in India.

1865: Crompton introduced public transport wagons strapped to and

pulled by imported steam road rollers called streamers.

1898: First car brought in India by a princely ruler in 1898.

1900-1920: Due to the World War I, a large number of military

vehicles came on the Indian roads.

1928: Assembly of CKD Trucks and Cars was started by the wholly

owned Indian subsidiary of American General Motors in Bombay.

1930: Ford Motors started its assembly units in Madras, Bombay and

Calcutta.

1942: Hindustan Motors Ltd incorporated and their first vehicle was

made in 1950.

12

1944: Premier Automobiles Ltd incorporated and in 1947 their first

vehicle was produced.

1947: Government of Bombay accepted a scheme of Bajaj Auto to

replace the cycle rickshaw by the auto and assembly of auto rickshaw

was started in a couple of years under a license from Piaggio.

1948: at the time of independence of country, only seven firms namely

Hindustan Motors Limited, Automobile Products of India Limited,

Ashok Leyland Limited, Standard Motors Products of India Limited,

Premier Automobiles Limited, Mahindra & Mahindra and TELCO

were in the assembly and manufacturing lines of cars. M&M was

manufacturing jeeps.

1955: Automobile Products of India (API) and Enfield India

commenced the manufacturing of scooters, motorcycles, mopeds and

autos in the country.

1956: Bajaj Tempo Ltd entered the Indian market with a program of

manufacturing Commercial Vehicles. Government approved Bajaj

Auto Ltd's plans for domestic manufacture of Vespa scooters and

granted permission to produce 6000 units annually.

1959: Association of the Component Manufacturers came into

Existence.

1960: Association of Indian Automobile Manufacturers formally

established.

1960’s: Escorts and Ideal Jawa entered the field in of manufacturing

Motorcycles and closed their scooter division. During the first half of

the sixties three companies namely Pearl Scooters Ltd (1962), SZUL

13

Gwalior (1964) and Mopeds India Ltd (1965) entered the arena.

Standard Motors Products of India Ltd. moved over to the manufacture

of Light Commercial Vehicles in 1965. Entire scooter market was

occupied by Bajaj Auto Ltd. and API.

1970’s: During this decade there was not much change in the four-

wheeler industry except the entry of Sipani Automobiles in the small

car market. In the Two Wheeler Industry there were many entries

during this decade. Scooter India established in 1972. In 1972 Kinetic

Engineering entered Unlike Motorcycle and Scooter segments the

Mopeds segment grew rapidly. In the late seventies there were many

entries in the Moped Industry. Only two firms namely, Majestic Auto

Ltd and Sundaram Clayton managed to survive after 1980.

1980's - The period of liberalized policy and intense competition

begins in the 80s. Important policy changes like relaxation in MRTP

and FERA, delicensing of some ancillary products, broad banding of

the products, modifications in licensing policy, concessions to private

sector (both Indian and Foreign) and foreign collaboration policy and

permission of foreign equity up to 40% etc. resulted in higher growth

and better performance of the industry than in the earlier decades.

In 1982 Maruti Udyog Ltd was started in collaboration with

Suzuki, a Japanese firm. Other three Car manufacturers namely,

Hindustan Motors Ltd., Premier Automobiles Ltd., Standard Motor

Production of India Ltd. also introduced new models in the market.

In the Motorcycle segment firms had shifted their emphasis

from heavier models to lighter and fuel-efficient models. Indian

14

market was flooded with new 100 cc models manufactured by

different firms with Japanese Technology.

In Moped segment there were 23 firms engaged in their

production but the virtual oligopoly of Kinetic Engineering Ltd., SCL

and Majestic Auto remained intact. This segment had less

collaboration.

1991 and onward: Beginning In 1991 new Industrial Policy was

announced. It was the death of the License Raj and the Automobile

Industry was allowed to expand. Various issues of critical importance

to the industry are being dealt with forcefully. The Indian Automobile

market in general and Passenger Cars in particular have witnessed

liberalization. The non-commercial segment of Indian automobile

market was flooded with different types of models having latest

technologies manufactured by different national and multinationals

automobile companies. To promote integrated, phased, enduring and

self-sustained growth of the Indian automotive industry a

comprehensive Auto Policy was declared by the Government of India

in 2002, which was later linked up with Automotive Mission Plan

2006-16.

At present, Indian consumers have a broad array of automobile

models for their selection at their disposal. The well-developed Indian

automobile industry produces nearly all kinds of vehicles, which may

broadly categorized with the help of following chart no.1.1-

15

CHART NO.1.1

GENERAL CLASSIFICATION OF AUTOMOTIVE VEHICLES IN INDIA

At present 21 domestic automobile manufacturers and 18 foreign

automobile manufacturers are active in the automobile industry of the

country in the manufacturing of automotive vehicles of different

segments. The following chart no. 1.2A and 1.2B presents a preview of

domestic and foreign automobile companies respectively with the types of

vehicles manufactured by them-

Four Wheelers Three Wheelers Two Wheelers

Passenger Vehicles

Commercial Vehicles

Passenger Cars

Utility Vehicles

Light Commercial Vehicles

Medium Commercial Vehicles

Heavy Commercial Vehicles

Passenger Carriers

Good Carriers

Scooters

Motor Cycle

Mopeds

Electric Two Wheelers

16

17

18

Table no. 1.2A and 1.2B clarifies the facts that out of 21 domestic

automobile companies of country only 3 were established in the period of

liberalization i.e. 1991 and onward. On the contrary out of existing 18

foreign automobile companies 16 were entered in the automobile sector of

India on and after 1994. Most of the foreign automobile companies

showed their interest in the manufacturing of cars and utility vehicles due

to vast untapped potential in non-commercial vehicles segment of the

country.

Now it is clear that the entry of global automobile companies in

India has significantly changed after 1991 which switched the

automobile-manufacturing scenario in the country. The changes in design

and adaptation of international technologies have enabled the Indian

automotive industry to compete globally. The later half of 1990s and early

part of 21st century saw the Indian automobile industry making extensive

jump forward. Since then, Indian domestic automobile companies have

been emerging globally competitive and they have been making

significant strides outside the boundaries of the nation through mergers

and acquisitions.

This is the result of following positive efforts made by the

Government of India on the way of liberalized automobile sector of the

country-

Progressively liberalization of norms for foreign investment and

import of technology over the years for manufacturing of vehicles

including passenger cars in order to make automobile sector globally

competitive.

19

Permission of FDI up to 100% under the automatic route in the

automobile industry.

To allow the import of technological upgradation, with royalty

payment under automatic route in this sector.

CLUSTERS OF INDIAN AUTOMOTIVE INDUSTRY

The Indian automotive industry has been noticed to have grown in

clusters, which are evident in and around Manesar in North, Pune in

West, Chennai in South, Jamshedpur-Kolkata in East and Indore in

Central India. Such a pattern of investments in automobile sector in the

country seems to be regionally balanced. Following Chart no.1.3 below

indicates the manufacturing plants of major automobile players across

different states and union territories in India-

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CHART NO.1.3

Source: www.siamindia.com

21

CONCEPT OF FOREIGN CAPITAL

For economic and industrial development, capital is the most

important factor. Such capital may be from within the country or from

outside the country. When capital available within the country is not

sufficient, capital from abroad is made use of. For less developed

countries, capital has been provided by international organisations like

World Bank and International Monetary Fund (IMF) at government level.

The recent technological developments and spread of information

technology have opened up the economies the world over as never in the

past. This in turn has increased the multinational role and importance of

capital. It has been realized by many countries that inflow of capital from

abroad is vital not only in the early stages of economic development, but

also for the steady growth of a developing economy. Most of the countries

now have been making use of foreign capital and investment. Foreign

capital is useful for both developed and developing countries. Advanced

countries try actively to invest capital in developing countries.

In India, foreign capital has been given a significant role, although

it has been changing overtime. In the early phases of planning, foreign

capital has been used as a means to supplement domestic investments.

Laler on there were technological collaborations between foreign and

Indian entrepreneurs. But since July 1991, there has been a tremendous

change observed in government's policy about foreign investments.

The term 'foreign capital' is a comprehensive term and includes any

inflow of capital in home country from abroad. It may be in the form of

foreign aid or loans and grants from the host country or institutions at the

government level as well as foreign investment and commercial

22

borrowings at the enterprise level or both. Foreign capital may flow in any

country with technological collaboration as well. The classification of

foreign capital may be studied with the help of following chart no. 1.4-

CHART NO.1.4

CLASSIFICATION OF FOREIGN CAPITAL

Foreign Direct Investment

Foreign Portfolio Investment

Foreign Aid Private Foreign Invest ment

Loans

Grants

Foreign Institutional Investors

Direct Investors

Wholly Owned Subsidiaries

Joint Ventures

Acquisitions

23

CONCEPT OF FOREIGN DIRECT INVESTMENT

Foreign direct investment is also known as ‘Direct business

investment’. Benjamin L. Cohen1 quoted the definition of FDI as given

in IMF manual in the following words “Foreign direct investment is al1

investments involving long term relationship and reflecting a lasting

interest and control of a residual entity in one economy in an enterprise

resident in an economy other than that of the direct investor. Such

investment involves both initial transaction between the two entities and

all subsequent transactions between them and among foreign affiliates.”

Here foreign affiliate means a subsidiary company or an associate in

which investors owns a total of at least 10%, but not more than half of

shareholder’s voting power. From the above definition, the following

characteristics of FDI may be enumerated:

It is an investment made by a foreign company in a home country.

The foreign company may make an investment either by opening its

branch or by having a subsidiary or foreign controlled company in

home country.

Profit is the prime motive of such an investment. It may be in the form

of a royalty and dividend payments.

In FDI investor may obtain effective voice in the management through

other means such as subcontracting, management contracts, turnkey

arrangements, franchising, licensing, trademarks and patents and

product sharing.

1 Benjamin L. Cohen; Multinational Firms and Asian Exports; Yale University Press, New Haven; 1995; P.52

24

On the winding up of the firm, the assets may be repatriated to the

country of origin.

FDI are governed by long term considerations because these

investments cannot be easily liquidated. In aiming at investment decision,

a foreign investor would have to be convinced that existing comparative

advantages are more than the comparative disadvantages in the

destination country. There are several factors that Influence FDI

decisions. They are-

o Long-term political stability

o Government policy of a country

o Industrial and economic prospects

o Rules about repatriation of profits and disinvestment

o Treatment by officials of government departments and

o Taxation laws etc.

ROLE OF FDI FOR THE DEVELOPMENT OF INDIA

The importance of FDI extends beyond the financial capital that

flows into a country. In addition, FDI inflows can be a tool for bringing

knowledge, managerial skills and capability, product design, quality

characteristics, brand names, channels for international marketing of

products and consequent integration into global production chains, which

are the foundation of a successful exports strategy. FDI could benefit both

the domestic industry as well as the consumer, by providing opportunities

for technological transfer and up gradation access to global managerial

skills and practices, optimal utilization of human capabilities and natural

25

resources, making industry internationally competitive, opening up export

markets, providing backward and forward linkages and access to

international quality goods and services and augmenting employment

opportunities. FDI flows are usually preferred over other forms of

external finance because they are non-debt creating, non-volatile and their

returns depend on the performance of the projects financed by the

investors. In a world of increased competition and rapid technological

change, their complimentary and catalytic role can be very valuable. For

all these reasons, FDI is regarded as an important vehicle for economic

development particularly for developing economies like India.

The path of economy growth and development certainly navigate

with the help of FDI. India is an over populated country, infrastructure

facility is not much developed here, therefore, supply term is became

week and inflation is occurred. FDI is an additional part of the Indian

economy without it the present status of economy never be maintained by

India. To compete in International level, to survive local business, to

upgrade old technology and primarily to increase the number of

employments FDI plays a vital role in Indian economy. But it is essential

that proper investment policies and population welfare outlook should be

preferred while calling FDI in India.

Nowadays FDI is encouraged in most of the commercial sectors of

India under the automatic route. There are more than 63 zones in India

where FDI is involved. Some sectors are prohibited from FDI because of

national security, sensitiveness and to protect interest of the country. At

the same time some sectors are reserved by Indian government for public

26

sector. The following list depicts all these sectors in a self explanatory

manner-

Permitted sectors for FDI in India

Service Sector Construction Activities

Consultancy Services Automobile Industry

Trading Textiles Industry

Computer Software & Hardware Fermentation Industries

Telecommunication Leather and Leather Goods

Education Fertilizers Industry

Printing of Books Industrial and Agricultural Machinery

Coal Production Mining, Ceramics & Boilers

Non-conventional Energy Railway Related Components

Petroleum & Natural Gas Earth-moving Machinery

Metallurgical Industries Electrical and Electronics Equipments

Power Drugs & Pharmaceuticals

Real Estate Cement & Gypsum Product

Air Transport Hotel & Tourism

Sea Transport Hospital & Diagnostic Centers

Industrial Instruments Rubber Goods

Scientific Instruments Machine Tools

Photographic Raw Film & Paper Steam Generating Plants

Diamond and Gold Ornaments

Restricted sectors for FDI in India

Atomic energy Lottery business

Plantation or agricultural activities Nidhi company

Chit fund business Betting and gambling

Business in Transferable Development Rights

Mining of chrome, zinc, gold, diamonds, copper, iron, gypsum, manganese and sulfur

27

Industries Reserved for Public Sector and do not receive FDI in India

Atomic energy and Minerals used in atomic energy

Railway transport,

Ammunition and defence equipment,

Mineral oils,

Arms and Ammunition

Now it is realized that as a developing country, India can get

following benefits with the optimized use of FDI in the country-

It is detected that FDI decreases the production cost of goods and

services. Elimination of transaction and transporting cost between

India and guest country is also possible under FDI.

The role of FDI in job creation and conservation is found more

favorable for the country. Good inflow of FDI creates new

employments in Indian industries and market sectors.

It is examined that, balance of payment status of India turns into

cheering position after liberalized economic environment. FDI

increases the industrial productivity of the country. With the step of

large output, India boosts export area and repairs the deficit between

import and export.

It is found that, FDI improves the GDP rate of India. It is a symptom

of healthy economy. Better GDP rate repairs living standard of peoples

in the country.

It is observed that, FDI enhance the competition at global level.

Increased FDI inflow developed the efficiency and sustains the growth

rate of India.

28

It is viewed that FDI releases broad opportunities in the traffic of

goods and services in India.

It is found that, FDI helps for upgrading the existing old working

process with developed process in India. Developing countries can

implement advanced technology in industrial and IT sector by inviting

FDI.

It is observed that, now foreign firms are investing large amounts in

joint ventures of India. For occupying better position in the Indian

market they spent large amount on quality and distribution of product.

FDI increases the level of competition in the country. It will result

products and services with fine quality and economical prices can be

easily available at urban and rural area in India.

It is studied that FDI has also ensured a number of employment

opportunities by backing the creation of industrial units in various

corners of India. Equilibrium economical development of various

states of India can be possible through FDI.

It is also watched that FDI has given an inducement to small and

domestic producers. They become efficient for competition in their

local and outside markets. It will result in enhancing the economy

growth.

Finally it may be said that FDI formulate large supply of products

and services by implementing advanced infrastructure and technology in

Indian industry which is a good sign for steady economic growth of

country. But it should always be remembered that foreign companies

always try to achieve quick and large refunds on their invested capital.

29

They take interest only in profit oriented ventures and neglect domestic

and traditional business from investment. Hence, it is the responsibility of

Government of India that FDI investors should remember all business

ethics while investing in India. Restricted business should not be started

with FDI. Fraud, corruption, quality fault and incomplete legal formalities

should not take place in FDI. Consumer, Society and environmental

welfare should keep in the mind while inviting FDI.

INFLOW OF FDI IN INDIA

India is the fifth largest economy in the world and position third in

the Gross Domestic Product (GDP) in the Asia. India is considered second

largest country amongst all further developing countries. These are the

major grounds for FDI inflow from developed countries to India. The

inflow of foreign direct investment in India from 1991-92 to 2010-11 may

be studied with the help of following table no. 1.1-

Table 1.1

INFLOW OF FOREIGN DIRECT INVESTMENT IN INDIA FROM 1991-92 TO 2010-11

Year Inflow of FDI ( Rs. in Crore)

Fixed Base Indices

Chain Base Indices Trend Values

1991-92 589 100.00 100.00 -51019.70

1992-93 1713 290.83 290.83 -37402.28

1992-94 13026 2211.54 760.42 -23784.87

1994-95 16133 2739.05 123.85 -10167.45

1995-96 16364 2778.27 101.43 3449.96

30

1996-97 21773 3696.60 133.05 17067.38

1997-98 20014 3397.96 91.92 30684.79

1998-99 10101 1714.94 50.47 44302.21

1999-00 22450 3811.54 222.26 57919.63

2000-01 31015 5265.70 138.15 71537.04

2001-02 38874 6600.00 125.34 85154.46

2002-03 29105 4941.43 74.87 98771.87

2003-04 72139 12247.71 247.86 112389.29

2004-05 69042 11721.90 95.71 126006.71

2005-06 94981 16125.81 137.57 139624.12

2006-07 135080 22933.79 142.22 153241.54

2007-08 249921 42431.41 185.02 166858.95

2008-09 110123 18696.60 44.06 180476.37

2009-10 332575 56464.35 302.00 194093.78

2010-11 281897 47860.27 84.76 207711.20

Source: Handbook of Statistics-2011; Published by Reserve Bank of India, New Delhi; 15 September, 2011; p. 258

From the analysis of table no. 1.1 it was revealed that the FDI

in India was Rs. 589 crore in 1991-92, which reached to Rs. 281897

crore in the year 2010-11 showing the continuous increase up to

1996-97 and fluctuating status in the years 1997-98 and onward.

On computing Fixed Base Index Numbers, taking 1991-92 as

base year, it was noted that the amount of FDI in India made an

extraordinary growth in the country i.e. 47760.27% during the study

period.

31

The Chain Base Index Numbers showed the heavy fluctuation

in the annual flow of FDI in the country, it shows the fluctuating

nature of this source of capital.

On the other side it may be noticed that inflow of FDI in India is

not confined from the developed countries only. In fact India is getting

most of the part of its, FDI from Asian nations. The share of main foreign

direct investment contributors' countries in India in the year 2010-11 may

be studied with the help of following table no. 1.2-

Table 1.2

SHARE OF MAIN FOREIGN DIRECT INVESTMENT CONTRIBUTORS' COUNTRIES IN INDIA

IN THE YEAR 2010-11

Name of Investor Country FDI (Rs. in crore)

Percentage

Mauritius 121233 43.01

Singapore 24954 8.85

USA 21093 7.48

UK 20446 7.25

Netherlands 11598 4.11

Cyprus 9775 3.47

Japan 9747 3.46

Germany 7164 2.54

UAE 4054 1.44

32

France 3911 1.39

Others 47922 17.00

Total FDI Inflows 281897 100.00

Source: Compiled from the various Bulletins and Reports published by Ministry of Commerce & Industry and Department of Industrial Policy and Promotion, Government of India, New Delhi.

It clears from the observation of table no. 1.2 that in the year 2010-

11only Mauritius contributed more than 43% FDI in India and Singapore

remained at second place having made an investment of 8.85% of total

FDI in the country. Japan, U.S.A., Netherlands, U.K., Germany,

Singapore and France were among the other leading sources of FDI

inflow in the nation.

The sectors attracted highest foreign direct investment in India

in the year 2010-11may be studied with the help of following table no.

1.3-

Table 1.3

SECTORS ATTRACTED HIGHEST FOREIGN DIRECT INVESTMENT IN INDIA

IN THE YEAR 2010-11

Name of Investor Country FDI (Rs. in crore) Percentage

Services Sector (Financial and Non Financial) 60017 21.30

Computer Software and Hardware

24370 8.66

33

Automobile 22520 7.99

Housing and Real Estate 22486 7.98

Telecommunication 21551 7.64

Construction Activities 18732 6.64

Power 10275 3.64

Metallurgical Industries 8456 3.00

Petroleum and Natural Gas 4637 1.64

Others 84414 29.94

Chemical (Excluding Fertilizers) 4439 1.57

Total FDI Inflows 281897 100.00

Source: Compiled from the various Bulletins and Reports published by Ministry of Commerce & Industry and Department of Industrial Policy and Promotion, Government of India, New Delhi.

It clears from the observation of table no. 1.3 that in the year 2010-

11, the sectors which attracted higher inflows were services,

telecommunication, automobile, construction activities and computer

software & hardware etc. India evolved as one of the most favoured

destination for investment in the service sector and computer software and

hardware arena due to low cost wages and wide demand-supply gap in

services. Gradually India has become important centre for back-office

processing, call centers, technical support, medical transcriptions,

knowledge process outsourcing, financial analysis and business

processing hub for financial services and insurance claims. In the same

way Automobile sector of the country is attracting FDI to a great extent

due to wide untapped market of the country.

34

From the year 1991-92, the automobile sector of the country

is realizing a handsome part of total FDI inflow of the country. The inflow

of foreign direct investment in the automobile sector of India from 1991-

92 to 2010-11 may be studied with the help of following table no. 1.4-

Table 1.4

INFLOW OF FOREIGN DIRECT INVESTMENT IN AUTOMOBILE SECTOR OF INDIA

FROM 1991-92 TO 2010-11

Year Inflow of FDI (Rs. in crore)

Fixed Base Indices

Chain Base Indices

Trend Values

1991-92 29 100.00 100 -5502.80

1992-93 53 182.76 182.76 -4217.38

1993-94 161 555.17 303.77 -2931.97

1994-95 306 1055.17 190.06 -1646.56

1995-96 688 2372.41 224.84 -361.15

1996-97 1195 4120.69 173.69 924.27

1997-98 1669 5755.17 139.67 2209.68

1998-99 2203 7596.55 132.00 3495.09

1999-00 1726 5951.72 78.35 4780.51

2000-01 1556 5365.52 90.15 6065.92

2001-02 3068 10579.31 197.17 7351.33

2002-03 4873 16803.45 158.83 8636.74

2003-04 4061 14003.45 83.34 9922.16

2004-05 3310 11413.79 81.51 11207.57

35

2005-06 4531 15624.14 136.89 12492.98

2006-07 6612 22800.00 145.93 13778.40

2007-08 17228 59406.90 260.56 15063.81

2008-09 26914 92806.90 156.22 16349.22

2009-10 31469 108513.79 116.92 17634.63

2010-11 22520 77655.17 71.56 18920.05

Source: Compiled from the various Bulletins and Reports published by Ministry of Commerce & Industry and Department of Industrial Policy and Promotion, Government of India, New Delhi.

From the analysis of table no. 1.4 it was revealed that the

inflow of FDI in automobile sector of India was Rs. 29 crore in

1991-92, which reached to Rs. 22520 crore showing a fluctuating

status during the study period.

On computing Fixed Base Index Numbers, taking 1991-92 as

base year, it was noted that the amount of inflow of FDI in

automobile sector of India reached to Rs. 22520 crore in the year

2010-11showing an amazing growth i.e. 77555.17% during the

study period.

The Chain Base Index Numbers showed the heavy fluctuation

in the annual flow of FDI in the automobile sector of country.

36

IMPORTANCE OF THE STUDY

FDI is the process whereby residents of one country acquire

ownership of assets for the purpose of controlling the production,

distribution and other activities of a firm in another country. Foreign

direct investment (FDI) is a measure of foreign ownership of productive

assets, such as factories, mines and land. Increasing foreign investment

can be used as one measure of growing economic globalization.

According to International Monetary Fund (IMF) definition, FDI has three

components, viz., equity capital, reinvested earnings and other direct

capital. A large number of countries, including several developing

countries like India report FDI inflows in accordance with the IMF

definition, which include reinvested earnings and other direct capital

flows, besides equity capital.

International capital flows have significant potential benefits for

economies around the world. Countries with sound macroeconomic

policies and well functioning institutions are in the best position to reap

the benefits of capital flows and minimize the risks. In recent years, India

has emerged as a desirable location for FDI by investors from the United

States and many other countries. Its rapidly growing economy, low wages

and educated work force have attracted FDI in the services and

manufacturing sectors to serve both the Indian market and third country

markets. Foreign investors’ enthusiasm for India, however, has been

tempered by widespread poverty, rigidity in the labour market, rising

salaries and high employee turnover in some industries, an antiquated

infrastructure, weakens in the overall educational system and excessive

bureaucracy and corruption.

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On the other side, India has become the center of attraction for

global automobile vehicles makers given the immense opportunity with

mid-income masses aspiring to own a car as well as abundance of raw

materials and low-cost labour. Favourable Foreign Direct Investment

(FDI) policy makes the entry of international players easy into the

automobile sector of India by introducing Auto Policy-2002. Various

international manufacturers are envisaging India as the hub for small car

production and other automobile vehicles.

Keeping in view the above facts, the researcher has decided to

conduct an analytical study on the FDI in automobile sector of the

country and for this purpose she has selected the topic entitled ,

Impact of Foreign Direct Investment on the Growth of Automobile

Industry in India since 1991.

It is believed that results of this study would attract the

attention of Government, automobile manufacturers, investors of

automobile sector and they all would be encouraged to make

positive decisions for the growth of automobile industry of the

country through sustainable foreign direct investment in this sector.

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OBJECTIVES OF THE STUDY

The main objectives of the present research study are as

under:

To study the concept of Foreign Direct Investment.

To study the history of automobile sector of India.

To analyse the trend of FDI inflow in the country as well as in

automobile sector of India.

To analyse the composition of FDI inflow in automobile sector of

India.

To evaluate the impact of FDI Inflow on Automobile Sector.

To study the influence of government policies on the development of

automobile industry of the country.

To study the factors affecting the inflow of FDI in the automobile

industry of India.

To draw logical conclusions and to propose constructive

suggestions in the light of the conclusions draw from the present

research study

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LIMITATIONS OF THE STUDY

There are a number of limitations regarding the present research

study. These limitations can be studied under the following heads:

LIMITATIONS REGARDING DATA COLLECTIONData collection is the most difficult task to achieve as the data

given in various records and documents published by various agencies

vary from each other to a great extent. Here, researcher made a decision to

use the data and information available only at government documents

published by RBI; Ministry of Commerce & Industry,

Government of India, New Delhi; Department of Industria l

Policy and Promotion, New Delhi; SIAM, New Delhi and the

sources of similar nature. The researcher visited the offices

and libraries of concerned departments time and again and

convinced the officials to provide the required data and

information which are necessary to complete the research

work.

LIMITATIONS REGARDING THE AVAILABILITY OF LITERATURE

For the purpose of this research study the researcher faced a great

difficulty in searching the matter related to her study. In fact the matter

directly related with the FDI inflow in the automobile sector of country

was very scarce and scattered. Due to this problem the research had to

make a thorough search in newspapers, journals, text books etc. and had

to collect the matter related to this research study. Also the Internet web

sites could prove helpful to some extent in providing some theoretical

literature related to the present research study.

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LIMITATIONS REGARDNG SHORTAGE OF TIME

Time is the biggest restraint in a research study. There is a

prescribed time limit with in which a researcher has to complete her

research study. This is the reason that the researcher could cover mainly

the aspects, which are given in the synopsis only.

LIMITATIONS REGARDING FINANCE

Being an individual, the researcher has the limited resources of

finance with her. Therefore, she ever found herself in financial crises and

could complete her survey work and purchased the required literature

facing the finance paucity with her.

Thus, the present study was conducted under certain limitations

regarding the data collection, personal interview, scarceness of literature,

time limitation, limited resources of finance with the researcher etc. But

here it is worth mentioning that the quality of the work was maintained up

to the satisfactory level and no compromise was made due to the above-

mentioned limitations.