Benevolent Benefactor or Insensitive Regulator? Tracing the Role of Government Policies in the Development of India's Automobile Industry

By Tiwari, Rajnish; Herstatt, Cornelius et al. | Policy Studies, January 1, 2011 | Go to article overview

Benevolent Benefactor or Insensitive Regulator? Tracing the Role of Government Policies in the Development of India's Automobile Industry


Tiwari, Rajnish, Herstatt, Cornelius, Ranawat, Mahipat, Policy Studies


Executive Summary

India's automobile industry has witnessed an impressive run of sustained growth in the past two decades. The total number of vehicles produced in fiscal year 1990-91 was only 2.3 million, but by fiscal year 2009-10 this number had swelled to 14.1 million. Similarly, the value of automotive products exported by India was only US$198 million in 1990, but by 2009 the value had increased nearly twenty-five-fold to US$3 billion, representing an average annual growth rate of 26 percent and catapulting India into the league of the top fifteen exporters of automotive products worldwide.

The turning point in the fortunes of India's automotive sector was arguably the policy of economic liberalization initiated in 1991. The reforms were introduced in the wake of a severe financial crisis, which forced India to gradually dismantle its protectionist regime, do away with the "license raj," and to actively seek foreign direct investment (FDI). It is generally acknowledged in the literature that this liberalization process had a significantly positive impact on the automobile sector. This impact might not have been possible, however, if India had not nurtured its automobile industry in the first place and if it had not ensured that a more or less competitive industry basis existed in the country when the automobile sector was fully liberalized by 2002. In this respect, India's policy steps since independence in 1947 are in many ways comparable to those of other, developing countries in Latin America and Southeast Asia-albeit with some differing results. For instance, even though India started relatively late with its economic reforms, the Indian automobile industry quickly came to terms with globalization.

The present study seeks to identify the changes in India's policy regimes in the postindependence era to understand their impact on India's automobile industry. Using a policy framework based on Michael E. Porter's "Diamond'' model of national competitiveness, this study identifies various supporting (and in some instances inhibiting) regulatory conditions imposed by the Indian government in various phases of the industry's evolution. Where feasible, these steps are compared with actions taken by governments in other developing and emerging countries and by some developed countries like Japan in the formation period of the automobile industry, so as to illustrate the similarities and differences in the development paths.

The study concludes that in India the government has played a key role in the evolution of the automobile industry. In the postindependence era, it was in an overregulation mode, sometimes motivated by ideological reasons and at other times constrained by fiscal resources, stifling domestic competition, shutting the door on foreign firms, and even regulating price. With the benefit of hindsight, it might be argued that the protectionist policies followed by successive governments in the prereform era did cause considerable opportunity costs for the Indian automobile industry, for the consumers, and for the state itself.

On the other hand, especially in comparison with some other developing nations that gained independence from colonial rule at about the same time, the government has been relatively successful in creating and sustaining favorable innovation systems at national, regional, and sectoral levels. With its insistence on indigenization in the prereform era, it managed to sustain a significant domestic base that has been able to withstand the competitive pressure in the postliberalization period and has also even managed to expand overseas. The foreign automobile sector firms that have invested in India have been able to operate without many strings attached and have significantly contributed to the upgrading of the sectoral innovation system. The government has played a proactive role in supporting outward FDI by Indian automotive firms. Of late, there has been considerable support in government circles for product innovation and formal research and development activities. …

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