Assessment of electric two-wheeler, and

three-wheeler industry in India

Greaves Electric Mobility Private Limited.

October 2024
Contents
Overview of Indian economy................................................................................................................................... 3
Review of GDP Growth Over Fiscals 2019-2024 and Outlook for Fiscals 2025-2029......................3
Near-term Review and Outlook on GDP......................................................................................... 5
Near Term Review and Outlook on Inflation.................................................................................10
Factors with a Direct Bearing on Automotive Industry Demand in India......................................12
Rising Middle Class Population..................................................................................................... 16
Policies Impacting the Indian Automobile Industry.......................................................................18
 Overview of Indian economy
Review of GDP Growth Over Fiscals 2019-2024 and Outlook for Fiscals 2025-2029
India ranks as the world’s 5th largest economy and is the fastest growing among major economies.
The Indian economy logged 4.4% CAGR between fiscals 2019 and 2024. This was a sharp
deceleration from a robust 6.7% CAGR between fiscals 2017 and 2019, which was driven by rising
consumer aspiration, rapid urbanisation, the government’s focus on infrastructure investment and
growth of the domestic manufacturing sector. Economic growth was supported by benign crude oil
prices, soft interest rates and low current account deficit. The Indian government also undertook
key reforms and initiatives, such as implementation of the Goods and Services Tax (GST),
Insolvency and Bankruptcy Code, Make in India, financial inclusion initiatives, and gradual opening
of sectors such as retail, e-commerce, defence, railways, and insurance for foreign direct
investments (FDIs).

A large part of the lower growth between fiscals 2019 and 2023 was because of the economy
contracting 5.8% in fiscal 2021 owing to the fallout of Covid-19. The pandemic’s impact was more
pronounced on contact-sensitive services and social distancing norms affected services such as
entertainment, travel, and tourism, with many industries in the manufacturing sector also facing
issues with shortage of raw materials/components as lockdown in various parts of the world upended
supply chains.

Over the period, India’s economic growth was led by services, followed by the industrial sector. In
parts, though, growth was impacted by demonetisation, the non-banking financial company (NBFC)
crisis, slower global economic growth, and the pandemic.

As lockdowns were gradually lifted, economic activity revived in the second half of fiscal 2021. After
a steep contraction in the first half, owing to rising number of Covid-19 cases, GDP- gross domestic
product moved into positive territory towards the end of fiscal 2021. Subsequently, in fiscal 2022,
India’s real GDP grew 9.7% from the low base of fiscal 2021.

India’s GDP exceeded expectations during all four quarters of fiscal 2024. However, growth slowed
down in fourth quarter but stayed strong. According to the National Statistics Office (NSO),
provisional estimates (PE), GDP growth slowed to 7.8% year-on-year in the fourth quarter of last
fiscal from 8.6% of third quarter but was higher than 6.1% in the year-ago quarter, real GDP growth
for third quarter is revised from 8.4% in second advance estimate of NSO to 8.6% year-on-year.
Growth of the past two quarters were kept same in provisional estimate i.e. 8.1% in second quarter
and 8.2% in first quarter of the fiscal 2024. Fourth quarter growth was much stronger than 5.9%
factored in in the second advance estimates (SAE) of the National Statistics Office (NSO) in
February. This prompted the NSO to revise up the fiscal 2024 GDP growth estimate to 8.2% (which
is the provisional estimate), from 7.6% in the SAE. Additionally, the estimate for fiscal 2023 was
7.0%, while for fiscal 2022 it was 9.7%.

Growth surpassed forecasts in the fiscal 2024, driven by strong government spending and a sharp
rise in manufacturing and construction growth. Globally, growth in major economies such as the US
and China beat estimates and has contributed to better export earnings for India.

GDP grew 6.7% year-on-year in the first quarter of fiscal 2025. The print was a deceleration vs the
fourth quarter of fiscal 2024, which saw the economy expand 7.8%.
After a strong GDP estimate in the past three fiscals, CRISIL MI&A expects GDP growth to moderate to
6.8% in fiscal 2025. Fiscal consolidation will reduce the fiscal impulse to growth. Rising borrowing
costs and increased regulatory measures could weigh on demand and net tax impact on GDP is
expected to normalize. Exports could be impacted due to uneven growth in key trade partners and
any escalation of the Red Sea crisis. On the other hand, with the spell of normal monsoon and easing
inflation could revive rural demand.
Investments, a key factor that boosts growth, are expected to moderate as the government focuses
on fiscal consolidation. The extent of revival in private investment cycle will determine the investment
momentum in fiscal 2025. CRISIL MI&A anticipates a return to normal levels of indirect tax impact on
GDP. However, uneven economic growth in major trade partners like the US and EU, along with
escalating tensions in the Middle East, may hinder exports.

India’s GDP growth trend and outlook

CAGR CAGR
FY19-FY24: 4.4% FY24-FY29: 6.5-7.5%
30 12.0
0 %
8.3 9.7 8.2
25 % %
0 6.5 % 6.8
8.0 7.0
% 7.0 %
200 % 3.9 %
%
%
Trillion

15 2.0

GDP
(%)
0 %
INR

10
0 -

235-245
180-190
-
50 5.8% 3.0%
114

140

145

137

150

161

174
123

131
10
5

0 -
8.0%

GDP at constant (2011-12) GDP(% y-o-

prices y)
Note: E - estimated and P - projected
Source: National Statistical Office (NSO), IMF, CRISIL MI&A estimates

The growth moderation in the fourth quarter of fiscal 2024, was driven by fixed investment
measured by gross fixed capital formation 6.5% year-on-year vs 9.7% in the previous quarter.
Private consumption stayed steady at 4.0%, trailing overall GDP growth, but improved its
performance in the second half of the fiscal. Net exports also impacted GDP growth positively in the
fourth quarter, driven by pick up in export growth (8.1%) and moderation in import growth (8.3%).
From the supply side, the industrial (8.4%) and services (6.7%) sectors saw a moderation, while the
agriculture and allied sector (0.6%) inched up slightly.
Similarly, growth in the fiscal year 2024 has been driven by fixed investments (9.0% growth), while
private consumption at 4.0% trailed overall GDP growth but improved its performance in the second
half of the fiscal. On the supply side, industry grew the most (9.5%), followed by services (7.6%), and
agriculture (1.4%). A sharp rise in net tax growth contributed to the divergence between GDP and
GVA (Gross Value Added) last fiscal and was a key factor behind the upward revision of GDP growth.

In first quarter of fiscal 2025 GDP grew 6.7% year-on-year. On the supply side, GVA growth of 6.8%
was slightly higher than 6.7% GDP growth. From the demand side, decline in government
consumption spending was a drag on GDP growth. And reducing growth in net taxes limited the rise
in GDP over gross value added (GVA) growth. Both private consumption and fixed investments
picked up in the first quarter of fiscal 2025. From the supply-side, despite healthy growth of 7.0%,
manufacturing was slower than in the last quarter fiscal 2024, while agriculture and services
improved. However, the improvement in agriculture was relatively modest, which capped the rise in
GDP.
Near-term Review and Outlook on GDP
Services, Industrial and Agriculture Sector

In fiscal 2020, the services sector accounted for 55.3% of India’s GDP compared with 52.4% in
fiscal 2015. However, its share dipped to 52.9% in fiscal 2021 owing to the pandemic.

The industrial sector, which is the second-largest contributor, maintained its share in GDP of ~31%,
logging 7.0% CAGR between fiscals 2015 and 2019. Industrial contribution declined in fiscal 2020,
with slowdown in economic development. Before overall economic activity slowed down in fiscal
2020, India’s industrial sector output growth was supported by the Make in India initiative, rising
domestic consumption and GST implementation. The initiatives improved India’s position on the
World Bank’s Ease of Doing Business index to 63 in fiscal 2019 from 142 in fiscal 2014.

The pandemic and subsequent lockdown exacerbated the economic slowdown in fiscal 2021. The
services segment was the worst affected and declined 8.4% year-on-year mainly due to the decline
in Trade, Hotels, Transport, and Communication services (THTC) by 19.9% and decline in Public
Administration, defence and other services by 7.6%, followed by industrial, which declined 0.4%
year-on-year. Agriculture was the only sector that grew 4.0% year-on-year and restricted the fall in
GDP.

In fiscal 2021, the agriculture and service sector’s share in Gross Value Added (GVA) at constant
prices expanded, while the share of the industrial sectors contracted.

In fiscal 2022, agriculture GVA grew at a rate of 4.6% and the industrial sector grew by 12.2% on a
low base of fiscal 2021. Whereas the service sector grew by 9.2% year-on-year. This helped GDP to
grow by 9.7%

Agriculture GVA continued to grow at a steady 4.7% in fiscal 2023. Faster GDP growth in fiscal 2023
saw the share of agriculture increase in the fiscal. The share of industrial sector in GDP grew 2.1% in
fiscal 2023, strongly due to utility services and construction with 9.4% growth, which was higher
than all other industrial sectors. Mining grew by 1.9%, while manufacturing saw a marginal drop
from a high base of fiscal 2022. The high base of fiscal 2022 led to moderate growth of the industrial
sector in fiscal 2023. The services sector grew 10.0% in fiscal 2023. Trade, hotels, transport, and
communication services (THTC) saw strong year-on-year growth of 12% in fiscal 2023.

Share of sector in GVA at constant prices

97.1 104.9 113.3 120.3 127.3 132.4 126.9 138.8 148.0 158.7

52.4 53.0 53.3 53.3 54.0 55.3 52.9 52.8 54.4 54.6
% % % % % % % % % %
Trillion
INR

31.1 31.6 31.5 31.4 31.2 29.6 30.8 31.6 30.3 30.9
% % % % % % % % % %
16.5 15.4 15.2 15.3 14.8 15.1 16.3 15.6 15.3 14.5
% % % % % % % % % %
FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24

Agri Industrial
Services
Source: RBI; CRISIL MI&A Consulting
The Agri sector witnessed a growth of 1.4% year-on-year in fiscal 2024, thereby contributing to
14.5% of the GVA. The services sector is expected to provide a thrust to the economy with 7.6%
growth and 54.6% GVA share while the industry sector will maintain 30.9% share.

Services growth picked up (6.7% in Q4 vs 7.1% in Q3). Growth moderated in THTC sector (5.1% in
Q4vs 6.9% in Q3), reflecting fading pent-up demand post the pandemic. Financial, real estate and
professional services also picked up to 7.6% from 7.0%, driven by a healthy banking sector and
robust real estate. Financial services also benefited from healthy credit momentum. Public
administration, defence and other services grew 7.8% vs 7.5%.

Agriculture and allied GVA picked up to 0.6% in fourth quarter (compared with 0.4% growth in
previous quarter). The subdued growth in agriculture and allied activities reflects lower crop output
this year.

Among major producing sectors, the manufacturing growth moderated, at 8.9%in the fourth quarter
from 11.5% in the previous quarter of fiscal 2024.Infrastructure and investment-related sectors,
which had contributed to the strong growth in the first half of the fiscal, slowed in the second half,
according to the granular data from the Index of Industrial Production (IIP). The benefit from falling
input costs is also fading, as the decline in commodity prices halted. Construction GVA grew at a
healthy pace despite some moderation (8.7% in Q4 vs 11.5% in Q4) and was supported by
continued government capital expenditure (capex) in infrastructure. However, a slowdown was seen
in electricity (7.7% in Q4 vs 9.0% in Q3) and mining (4.3% in Q4 vs 7.5% in Q3).

In the first quarter of fiscal 2025, on the supply side, GVA growth of 6.8% was slightly higher than
6.7% GDP growth as growth in net taxes slowed sharply (4.1%)

GVA growth for agriculture picked up to 2.0% in first quarter of fiscal 2025 vs 0.6% in the previous
quarter. Higher growth in agriculture and allied activities reflects a healthy rabi harvest (which
typically takes place between March to May) with wheat production picking up 3.1% year-on-year.
However, growth remained significantly below 3.7% recorded in the first quarter of last fiscal. Heat
waves in some parts of the country during April and May adversely impacted agricultural production.

Industry growth stayed steady at 8.4%. Within industry, manufacturing growth moderated to 7% in
the first quarter of fiscal 2025 from 8.9% in the previous quarter. Index of Industrial Production (IIP)
data shows a mixed trend in demand for goods. Notably, reduced government spending weighed on
IIP growth. Input costs also inched up, with Wholesale Price Index-based inflation rising to 2.4% from
0.3% in the previous quarter. The industrial sector recorded a significantly robust performance
compared with 5% growth in the year-ago period.

Construction GVA rose in the first quarter of fiscal 2025 to 10.5% vs 8.7% in the previous quarter,
despite a contraction in government spending. This indicates that broader construction activity
remained strong, possibly buoyed by continued real estate momentum.

A significant pick-up was seen in electricity in first quarter of fiscal 2025 at 10.4% as compared to
7.7% in previous quarter and mining at 7.2% in Q1 fiscal 2025 vs 4.3% in Q4 fiscal 2024. The latter is
likely due to high demand during heatwaves in April and May.

Services growth picked up (7.2% in Q1 fiscal 2025 vs 6.7% in Q4 fiscal 2024), driven by increasing
growth in public administration and THTC services. THTC growth picked up to 5.7% in first quarter of
fiscal 2025 from 5.1% in the previous quarter, supported by rising private consumption. Growth in
financial, real estate and professional services moderated to 7.1% in first quarter of fiscal 2025 from
7.6% in previous quarter but remained elevated. Public administration, defence and other services
grew 9.5% in first quarter of fiscal 2025 vs 7.8% in previous quarter.
However, growth in the services sector was below 10.7% recorded in the first quarter of last fiscal
as pent-up demand for THTC services has consistently slipped.
Fixed investment, as measured by gross fixed capital formation (GFCF), picked up in the first quarter
of fiscal 2025 to 7.5% vs 6.5% in previous quarter, suggesting recovery in private investment as
conditions improved, driven by rising capacity utilisation in the manufacturing sector and foreign
direct investment. It also suggests that household investments remain healthy, driven by a robust
real estate sector. However, growth in fixed investment was below 8.5% recorded in the first quarter
of last fiscal, as fiscal consolidation and election focus resulted in reduced government spending
(central capex fell 35% year-on-year while state capex contracted 14.6% in the first quarter of fiscal
2025).

Outlook on GDP

After a strong GDP growth in the past three fiscals, GDP growth is expected to moderate to 6.8% in
fiscal 2025. The growth will still be higher than the pre-pandemic decadal average of 6.7%,
continuing to position India as the fastest growing major economy. Investments, a key factor that
boosts growth, are expected to moderate as the government focuses on fiscal consolidation.
Investment prospects hinge on a sustained pickup in private capex. Conditions remain conducive
for private investment, with capacity utilisation in manufacturing at a decadal high. The
transmission of past rate hikes by the RBI to the broader lending rates continues.

On a positive note, last year’s laggards’ agriculture and consumption are poised to rise. Rural
demand is expected to drive consumption. Monsoon has progressed well and is 8% above long
period average between the monsoon period (1st June to 30th September 2024. Kharif sowing, too, is
higher year-on-year. Along with increasing agricultural production, it will help ease food inflation this
year, which is critical to raise discretionary spending. In addition, government spending on
employment and asset generating schemes (PM Awas Yojna for urban and rural areas) should
provide additional support to consumption growth.

However, unlike last fiscal, rural consumption is expected to outpace urban, as higher interest rates
impact urban areas more. The signs of this are visible in the RBI’s consumer confidence survey for
urban areas released in August. Net-net, high rural demand and easing food inflation are expected
to lift consumption over the anaemic 4% growth seen last year.

The lowering of fiscal deficit will mean curtailed fiscal impulse to growth, but good quality of
spending would provide some support to the investment cycle and rural incomes. CRISIL MI&A also
expects a normalisation of the net indirect tax impact on GDP, after strong growth witnessed in the
last -fiscal. Exports will have to navigate through mixed trends of improving global trade flows but
slowing global growth. Recent data for the US indicate its labour market is cooling, which points to
slower growth ahead. S&P Global expects global GDP growth to slow to 3.2% in 2024 from 3.4%
previous year, weighed by interest rates staying elevated for longer. Any spike in the prices of
commodities, particularly crude oil remains a risk for the country's growth.

Risks to Growth
Monsoon Deviation

Rainfall over the country during monsoon season (June-September), 2023 was 94% of its long period
average (LPA). Deficient rainfall has a significant impact on the rural demand. However, as per the
data from the India Meteorological Department's (IMD's) the 2024 South-West Monsoon season has
received above-normal rainfall at 8% higher of the Long Period Average (LPA) for the 1st of June to
30th September period.
Inflation pressure

Retail inflation data released by NSO in August 2024 showed core (which excludes food and fuel)
Consumer Price Index inflation eased 10 bps to 3.3% in August . Headline Consumer Price inflation
inched up to 3.7% in August from 3.6% in July as the food inflation rose to 5.7% in August 2024 as
compared to 5.4% in July due to August’s fading base effect.

External drag on growth

The MPC believed global growth momentum has been resilient, but the recent escalation in
geopolitical tensions has added to the downside risks. Recent rate cuts by major central banks
particularly the United States (US) Federal Reserve (Fed) has supported foreign portfolio
investor (FPI) flows to India. While global market conditions remain volatile, the rupee has
remained stable, driven by benign current account deficit and robust foreign exchange
reserves. Geopolitical tensions like conflicts in Israel will continue to disrupt global trade.

Impact of higher interest rates

The revamped Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) kept the repo rate
unchanged during its review meeting in October. However, it changed the policy stance to 'neutral'
from 'withdrawal of accommodation'.

Easing food inflation coupled with benign non-food inflation, is expected to move the MPC to cut
the repo rate in December. Kharif arrivals from October, along with prospects of healthy rabi
production, are expected to soften food prices in the second half of this fiscal. That said, any
volatility in food prices due to weather shocks (such as excess rains), and international commodity
price movements will be monitorable.

Yet, monetary easing by major global central banks will give the RBI space to ease its policy. After
the Fed's 50 basis points (bps) rate cut in September, S&P Global expects another 50 bps cut in
2024, and 125 bps cuts in 2025.

India to remain a growth outperformer globally

Despite slowdown in the near term, India’s growth is expected to outperform over the medium run.
CRISIL MI&A expects GDP growth to average 6.8% between fiscals 2025 and 2029, compared with
3.2% globally as estimated by the IMF. India’s economic outlook remains positive, supported by
structural reforms aimed at positioning it as one of the fastest-growing major economies. According
to Finance Ministry, India is expected to become the 3 rd largest economy in the world with a GDP of
USD 5 trillion by fiscal 2028, from a nominal GDP of USD 3.6 trillion in fiscal 2023–24.
India is one of the fastest growing emerging economies (GDP growth, % year-on-year)

15.
0
9.
10. 8. 8.
7 8.
0 0 3 6. 7. 7. 6.
8 0 2 0 5
6.
5. 5
0 3.
9
0.
0 CY2015 CY2016 CY2017 CY2018 CY2019 CY2020 CY2021 CY2022 CY2023 CY2024E
CY2025P
-
5.0 -
5.8
-
10.0

-
15.0
Brazil China, People's Republic India
Indonesia of Japan South
United United States Africa
World
E: estimated; P: projected
Note: GDP growth based on constant prices
Source: IMF (World Economic Outlook – July 2024 update), CRISIL MI&A

Drivers for India’s economic growth:

Government investments will continue to be the biggest contributor to growth. As the government
pursues fiscal consolidation, its role in boosting overall capex will partly diminish compared with the
past few years. Nevertheless, it is expected that private sector will gradually play a larger role than in
the recent past.
 The government's future capital expenditures are expected to be supported by factors such
as tax buoyancy, simplified tax structures with lower rates, tariff structure reassessment,
and tax filing digitization.
 Medium-term growth is anticipated to be bolstered by increased capital spending on
infrastructure and asset development projects, leading to enhanced growth multipliers.
 Strong domestic demand is expected to drive India’s growth over peers in the medium term.
 Investment prospects are optimistic, given the government’s capex push, progress of
Production-Linked Incentive (PLI) scheme, healthier corporate balance sheets, and a well-
capitalised banking sector with low non-performing assets (NPAs). India is also likely to
benefit from diversification of the supply chain from incoming FDI flows, as global supply
chains get reconfigured with focus shifting from efficiency towards resilience and friend
shoring.

 Rising employment rates and a notable increase in private consumption, buoyed by growing
consumer confidence, are poised to drive GDP growth in the upcoming months.

The Budget 2024 has also tried to incentivise employment generation in the economy,
which should over time spur consumption demand and act like an indirect support to
push up private investments.
 Near Term Review and Outlook on Inflation
The Consumer Price Index (CPI) inched up to 3.7% in August 2024 from 3.6% in July 2024, it remained
below the Reserve Bank of India’s (RBI) target of 4% for the second straight month. While the base
effect has been supportive since July (mainly led by the food index), it somewhat faded in August,
causing inflation rate to see a slight bump up.

Food inflation rose to 5.7% in August 2024 from 5.4% in July 2024. That said, the sequential decline in
prices kept a check on food inflation. Within food, the foodgrains inflation eased to a two-year low of
8.6%, while that in vegetables rose, compared with July.

Food inflation rises marginally

Food inflation ticked up to 5.7% in August 2024 from 5.4% in previous month, due to August’s
fading base effect. The fading base effect in vegetable inflation was the primary driver of
higher food inflation in August. Vegetable inflation rose to 10.7% in August 2024 from 6.8% in
July, though it remained below the June print of 29.3%.
Sequentially, vegetable prices declined 0.5% (seasonally adjusted) month-on-month. Inflation in tomato stood at -
47.9% in August 2024 as compared to -43% in July. Onion (54.1% in August 2024 vs 60.6% in July) and potato
(64% in August 2024 vs 65.8% in July) inflation remained high but eased relative to the previous month.
Foodgrain inflation slowed down to 8.6% in August 2024 from 9.5% in previous month, displaying broad-based
easing across key categories. Cereals inflation eased to 7.3% in August from 8.1% in July, driven by easing
inflation in non-public distribution system rice (9.5% in August vs 10.9% in July). Pulses inflation dropped for
the third straight month to its lowest value since September 2023.
Edible oil inflation was broadly steady at -0.9% in August 2024 vs -1.1% last month. Sugar inflation dropped to
4.7% in August from 5.2% in July 2024, in line with the fall in international sugar prices. A high base drove
down inflation in spices to -4.4% in August 2024, a record low.

Fuel inflation negative

Fuel prices remained in deflation, falling 5.3% year-on-year in August 2024 vs 5.5% decline in July.
Prices of liquified petroleum gas (LPG) declined 24.6% year-on-year in August 2024, with
government subsidies keeping LPG prices in deflation for the past year. From September, the high
base effect is expected to slightly fade as a subsidy of Rs 200/cylinder was kicked off on August 30,
2023. That said, the additional Rs 100/cylinder subsidy that came into effect in March 2024 should
keep LPG inflation negative. Electricity inflation remained steady at 4.9% in August as compared to
4.8% in July, owing to neutral base effect for the category. Electricity tariffs were hiked sharply
from May-July 2023, which has since normalised.

Core inflation eases a touch

Core inflation eased 10 bps to 3.3% in August 2024. Services inflation (3.6%) was higher than core goods
inflation (3%), due to the impact of tariff hikes by major domestic telecom companies. Excluding the
impact of the tariff hikes, services inflation remained close to core goods inflation at 3.1% in August
2024.

Core inflation eased 10 bps to 3.3% in August 2024. Services inflation (3.6%) was higher than core goods
inflation (3%), due to the impact of tariff hikes by major domestic telecom companies. Excluding the
impact of the tariff hikes, services inflation remained close to core goods inflation at 3.1% in August
2024

Inflation in personal care and effects eased for the first time in six months in August at 7.9% vs 8.4% in
July 2024. However, inflation in the category remains well above other key core categories. Inflation
in precious metals, such as gold eased to 19.5% in August 2024 as compared to 20.8% in July 2024
and silver eased to 16.6% in August 2024 as compared to 21.4% in July 2024.
Wholesale Price Index (WPI) inflation softens
Wholesale prices edged down in August, easing to a four-month low as food as well as non-food
inflation cooled. The Wholesale Price Index (WPI) inflation eased to 1.3% in August 2024 from
2% in July. Wholesale food inflation slowed to 3.3% in August 2024 from 3.6% a month earlier
led by lower food grains inflation (10.3% in August 2024 vs 11.1% in July) and deeper deflation
in vegetable prices (-10% in August 2024 vs -8.9% in July).
Non-food inflation eased for the first time in five months to 0.5% in August 2024 from 1.4% in
July 2024. Sequentially, non-food prices were broadly steady. Wholesale fuel and power
inflation turned negative in August, improving to -0.7% from 1.7% a month earlier, helped by a
sharp fall in crude oil inflation (-1% in August 2024 vs 9.2% in July) in line with global trends.
The wholesale index for manufacturing products also eased to 1.2% in August 2024 from 1.6%
in July.
CRISIL’s WPI input-output ratio inched up to 0.96 in August 2024 from 0.95 in July. Both input
and output prices eased in August, though the decline in output prices was steeper due to a
sharp correction in vegetable prices. Excluding food, however, output prices rose 0.2% month-
on-month in August 2024 while input prices fell. Hence, the core input-output ratio, stripped of
food prices, eased to 0.98 in August 2024 from 0.99 in July, indicating input cost pressures on
non-food producers had softened.

Outlook on inflation

A high base has helped keep inflation under 4% since July. But September onwards, this effect is
expected to fade considerably. Any further easing of inflation will depend on sustained softening of
food prices. For the fiscal, a steady progress of monsoon and kharif sowing should bring down food
inflation, compared with the past fiscal.
Daily food prices data shows that the prices of key food items, such as cereals, pulses, tomatoes and
milk have been declining in September. A sustained drop in food inflation should help align the
headline inflation to RBI’s target of 4%, allowing RBI to initiate rate cuts. Non-food inflation is
expected to remain benign as commodity prices are projected to remain soft. CRISIL expects crude
oil prices to average USD 80-85 per barrel, close to the levels of the previous year. In our base case,
we expect two rate cuts this fiscal, with the first one in October unless risks arising from the
geopolitical situation and weather shocks push the rate cut decision.
CPI trendline

6.7
6.2 %
% 5.5 5.4
4.8 % %
4.5
%
%
3.6 3.4
% %

FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25E

Source: Ministry of Statistics and Programme Implementation (MOSPI), CRISIL MI&A Research

The MPC noted encouraging signs for food inflation easing on the back of an expected bumper rabi
output in the current season and a normal monsoon. However, it will remain vigilant about
unpredictable weather events, the frequency of which has increased in recent years. The MPC kept
its consumer price index (CPI) inflation forecast unchanged at 4.5% for fiscal 2025.
Factors with a Direct Bearing on Automotive Industry Demand in India
Fluctuations in crude oil prices and INR USD exchange rates directly affect the auto demand by
raising fuel costs and import costs. Monsoon has a direct impact on agriculture related factors like
crop yields and food prices, which in turn impact auto demand by shaping consumer spending
behaviors and economic stability. Similarly, auto finance rates are pivotal in determining
affordability. Moreover, Private Final Consumption Expenditure (PFCE) and per capita income serve
as a vital factor in consumer purchasing power, directly influencing affordability and automotive
demand.

Crude oil
Brent crude oil prices have generally risen since end of CY2021. They became even higher with the
Russia- Ukraine conflict, which led to the prices averaging USD 100 per barrel (bbl) in CY2022. The prices
averaged USD 106 per barrel in the first half of CY2022 owing to the Russia-Ukraine conflict, which
resulted in a significant shift in the overall crude oil supply chain. However, increasing recessionary fears
stemming from inflation coupled with interest rate hikes globally have cast a significant shadow over
consumption and economic growth, pushing prices downward to USD 94 per barrel, a decline of 11% in
the second half of CY2022.
In CY2023, with the de-escalation of the crisis and balancing of global crude oil trade, the brent crude oil
price was
82.6 USD/barrel in the year. Moderating demand coupled with steady global supply and the volatile
global crude oil prices, CRISIL MI&A expects prices to remain rangebound average around USD 80-85 per
barrel in CY2024. In H12024, prices averaged at ~ USD 84 per bbl marginally up by ~2% from last year’s
prices. The impact of the geopolitical uncertainties has resulted in prices jumping from USD 80 per bbl in
December to USD 90 per bbl at the start of April-24. With effect of geopolitical risk stabilizing and stable
demand scenarios, prices are expected to average in the range of USD 80-85.

Crude oil price trend

11 108.
2 9 98. 99.
9 8
82.6 80-
85
7 70.
1 64. 4
$/barrel

54. 0
52.
4 44. 4
42.
US

1 3

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
E
Note: E: Estimated, Price data is for CY: Calendar Year
Source: Industry, CRISIL MI&A Research

Global crude oil demand, which stood at ~100.2 million barrels per day (mbpd) in 2023, is set to
increase 1-2 mbpd in 2024, owing to steady growth in economic activity. As per S&P, global gross
domestic product (GDP) is projected to expand 3.2% on-year in 2024 leading to pick-up in crude oil
demand from the transportation segment coupled with positive sentiment from consumer demand,
also supporting the increase is the onset of the festive season.
In fact, crude oil demand in countries such as India surpassed pre-Covid-19 levels of 2019 in 2023
and is expected to continue the momentum To be sure, demand was on a rising trajectory following
the subsiding of Covid-19 infections, with the momentum continuing in 2023. During the year,
increase in crude oil demand in China more than made up for a slowdown in demand among other
key consumers such as the US and Europe, translating in global demand breaching the pre-
pandemic level.

Crude oil demand in the US is projected to improve marginally from ~19.0 mbpd in 2023 to 20.5-
21.0 million barrels per day (mbpd) in 2028, because of moderating economic growth rate at 2.5% in
2023 from 1.9% in 2022. Slower demand would be coupled with stringent fuel efficiency norms and
increase in sales of electric vehicles in the country in long term.

Crude oil demand is on the decline in most developed countries as environmental concerns are
affecting fossil fuel consumption. In Germany and the UK, demand is expected to moderate over the
next four to five years, primarily because of improvements in vehicle fuel efficiency and the rising
penetration of electric vehicles (EVs). The transportation sector accounts for approximately 60% of the
EU's crude oil requirement, which would further be impacted by slowing GDP growth.

Rising crude oil prices typically lead to higher fuel costs, impacting consumer preferences towards
more fuel- effective vehicles. Increased production cost for automakers and potential shift in
consumer spending due to inflation and economic conditions further influence automotive demand.

Crude oil has for long held sway in satiating the world's energy needs. However, certain factors
will impact the long-term oil demand going forward. Factors such as slowing global GDP,
structural changes, aggressive push towards electric vehicles (EVs), significant increase in
efficiencies, and an ageing population, which has the propensity to consume less crude oil-based
products and services, will likely weaken demand.

INR USD exchange rate for next one year

The rupee averaged USD 83.9 in August compared with USD 83.6 a month earlier. The dollar index
weakened to
102.2 from 104.6 in July, the trade deficit was wider (USD 29.7 billion in August 2024, from USD 23.6
billion) led by higher imports while August saw lower FPI inflows. The rupee depreciated 1.3% year-
on-year, against a 4.1% year- on-year fall in August 2023. So far in 2024, the rupee has been one of
the better performing emerging market currencies, seeing only a 0.9% decline, on average, against
the dollar.

CRISIL expects the rupee to average 84 against the dollar by March 2025 compared with 83 in
fiscal 2024. While the current account deficit is expected to remain manageable, it may face some
risks amid the uneven global growth scenario and geopolitical uncertainties. That said, India’s
healthy domestic macros will cushion the rupee.

The INR/USD exchange rate impacts auto demand by affecting import costs. A weaker INR raises
input costs and fuel prices, which reduces domestic demand while enhancing export
competitiveness. While increase in fuel prices directly impacts the consumer demand, rise in input
costs may not always have a direct impact, as OEMs do not always pass these costs to the
consumers. Any price increase that is passed on by the OEMs directly affects the consumer’s
purchasing decision.
 Rupee-dollar exchange rate

82. 82. 82-

74. 76. 3 8 86
69. 70.
64. 2 2
9 9
4

FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25E

Source: RBI, CRISIL MI&A

Agricultural Variables

With 86% of land holdings, small and marginal farmers dominate the Indian agricultural landscape.
These farmers rely on monsoon for irrigation; hence, its timely arrival and adequacy are needed for a
good crop. Any negative impact on crop supply due to low rainfall has a cascading effect on the
Indian economy, as it leads to higher food prices and subsequently lower discretionary spending. As
per the India Meteorological Department (IMD), monsoon deviation was 6% in fiscal 2023.

Monsoon has been favorable over the past few years with deviation in the acceptable range. Fiscal
2024 witnessed an uneven spread of rainfall during the initial months. Rabi output was favorable in
fiscal 2023, supported farmer income during the early months of fiscal 2024. In the last fiscal, kharif
sowing was initially delayed owing to delay in monsoon. However, sowing has picked up in later
months. Moreover, higher minimum support price (MSP) during last fiscal and good price in the
mandis have maintained on-ground positivity. In fiscal 2024 as per IMD monsoon deviation was -6%.

The IMD received southwest monsoon, 8% higher rainfall then it’s long period average (106% of the
LPA) in the June to September 2024 period to become above normal. From a region-wise perspective,
the rainfall distribution turned more equitable with the deficit in the north-west region somewhat
reversing, excesses in the southern peninsula easing and the deficit in the north-east region
moderating.
Healthy, timely and well-distributed rainfall can lift agriculture income by bolstering rural
demand, which was impacted in the past fiscal and is currently showing some signs of revival.
Robust crop output can control food inflation, which has been high. Combating food inflation,
with non-food inflation already being low, can provide policy room for interest rate cuts.
Rainfall Deviation TrendAuto finance rates

The sharp rise in repo rates has increased the financing rates across auto segments. Interest rates have
reached the pre-pandemic levels and are expected to remain firm in the short term. Demand for
durable goods most often purchased on credit and higher interest rates makes auto loans more
expensive impacting purchasing decisions of customers.

10 9%
% 8%
6%

-
- 1%
- 3% -
5% - 6%
9%
-
16% FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25
FY16

Average auto finance rates offered by banks for two wheelers

14.0%
14.0%
14.0%
14.0%
14.0%
14.0%
14.0%
13.9%
13.8%
13.7%

13.3%
13.3%
13.3%
13.3%
13.3%
13.3%
13.3%
13.3%

13.3%
13.3%
13.3%

13.3%
13.5%
13.5%
13.1%
13.1%
12.7%
11.9%
11.9%
11.7%
11.6%
11.6%
11.6%

11.6%
11.6%
11.6%
11.5%
11.5%
11.5%
11.5%

11.5%
11.5%
May

Oct
Nov

May

Oct
Nov

May

Oct
Nov

May
r

Jun

Sep

Sep
June

Dec

Mar

June

Dec

Mar

Jun

Sep
Jul

Dec

Mar

Jun
Jul
July
Ap

Aug

Jan
Feb

Apr

Aug

Jan
Feb

Apr

Aug

Jan
Feb

Apr

Aug

FY22 FY23 FY24 FY25

Source: Industry, CRISIL MI&A

Private final consumption expenditure

Private final consumption expenditure (PFCE) increased by 7.4% quarter-on-quarter in Q1 of fiscal
2025 as compared to 4% quarter-on-quarter growth in previous quarter (Q4 fiscal 2024). However, it
has decreased by 1.6% as compared to Q4 fiscal 2024. High frequency indicators show revival in
rural demand. Rising agriculture growth and declining job demand under National Rural Employment
Guarantee Act (MGNREGA) indicate improvement in rural conditions. Tractor sales rebounded this
quarter after several months. Two-wheeler sales continued to show healthy growth, albeit with some
moderation. The Reserve Bank of India’s (RBI) survey released in August indicates that consumer
confidence in urban areas weakened in May. Support from bank retail credit growth, while healthy,
moderated in the first quarter of fiscal 2025.
Sectoral IIP data showed consumer durables slowing and non-durables contracting in the first
quarter, indicating a long road ahead for consumption recovery. Despite slowing IIP growth,
merchandise imports rose, suggesting rising consumption could have been met by the latter. Rising
consumption also ties up with higher services growth relative to the previous quarter.

PFCE reflects the overall consumption patterns and spending capacity of households within an
economy. When PFCE increases it often translates to increased demand for various goods and
services.

PFCE Quarterly Trend for India

30.0
%

20.0
% Q1
FY25

-
0.0 1.6%
%
-
10.0%

-
20.0%
Jun-18

Jun-19

Jun-20

Jun-21
Mar-

Dec-

Dec-

Dec-
Mar-

Mar-

Mar-
Sep-

Sep-

Sep-

Sep-
18

18

18

19

19

19

20

20

20

21

21
Note: Mar refers Q4, June refers to Q1, Sep refers for Q2, Dec refers to Q3
Source: Industry, CRISIL MI&A

Per Capita Income

As per the provisional estimates by NSO, the per capita income (per capita NNI) is estimated to
have grown by 7.4% in fiscal 2024, compared with 5.7% in fiscal 2023. In fiscal 2021, per capita
income declined 8.9% owing to GDP contraction amid the pandemic’s impact. Per capita income
rose by 7.6% in fiscal 2022 on the lower base of fiscal 2021.

According to the International Monetary Fund’s estimates, India’s per capita income (at current
prices) is expected to grow at 9.4% CAGR over CY2024 to 2029.

As per CRISIL MI&A, Indian economy is expected to surpass USD 5 trillion mark over the next seven
fiscals (2025- 2031) and inch closer to USD 7 trillion. A projected average GDP growth of 6.7% in this
period will make India the third-largest economy in the world and lift per capita income to the upper
middle-income category. By fiscal 2031, India’s per capita income will rise to ~USD 4,500, thereby
making it an upper middle-income nation.

At the macroeconomic level, the rise in per capita income implies that as incomes increase, the
proportion of expenditure allocated to discretionary items such as consumer durables and
automobiles will also increase. This will lead to an enhancement in consumption patterns,
characterized by a growing demand for discretionary goods.

Rising Middle Class Population

As per Crisil estimates, India’s GDP is expected to grow 6.7% between FY25 - FY31 to make it the
third largest economy with a GDP inching closer to USD 7 trillion and lift per capita income to the
upper middle-income category. By fiscal 2031, India’s per capita income will rise to ~USD 4500,
thereby making it an upper middle- income nation. (As defined by World Bank, lower middle-income
countries are those with per capita income of USD
1,000 to USD 4,000 and upper middle-income countries are those with per capita income of above USD
4,000 to
~USD 12,000)

As per PRICE ICE 360° survey report, India is poised for significant economic growth, if political and
economic reforms yield the desired outcomes. With a projected conservative annual growth rate of
6-7%, the country could see substantial increases in average annual household disposable income,
reaching around INR 20 lakh (USD 27,000) at 2020-21 prices. By the time India celebrates its
centenary year of independence in 2047, the population is expected to exceed 1.66 billion. This
growth trajectory will not only elevate the Indian Middle Class to the largest income group
numerically but also position it as a key driver of economic, political, and social development.

Estimates from PRICE's ICE 360° Pan-India primary surveys indicate that the population of the
Destitute and Aspirer groups is projected to decline from approximately 928 million in 2020-21 to
647 million by 2030-31 and further to 209 million by 2046-47. In contrast, the Rich segment is
expected to increase significantly from 56 million to an estimated 169 million and 437 million.
Meanwhile, the Middle Class is anticipated to expand substantially to nearly 1.02 billion by 2046-47,
up from 715 million in 2030-31 and 432 million in 2020-21.

The Indian Middle-Class category, which is further divided into two categories, one with an annual
household income ranging between Rs 15 lakh and Rs 30 lakh, has experienced an annual growth
rate of 6.4% between 2015-16 and 2020-21. Another subgroup, with an annual household income
between Rs 5 lakh and Rs 15 lakh, has seen a growth rate of 4.8% annually during the same period.

By the end of this decade, the demographic structure of the country will shift from an inverted
pyramid, which represents a small wealthy class and a large low-income class, to a rudimentary
diamond shape. In this new structure, a significant portion of the low-income class will transition to
the Middle Class. Consequently, the income distribution will feature a small lower layer comprising
the Destitute and Aspirer groups, a substantial Middle Class, and a sizable wealthy Rich layer at the
top by end of decade. The growth rate of the population is notably higher for the upper income
groups compared to the lower income groups. In fact, the growth rate for the lowest income groups
may even be negative.

India’s Income Pyramid

Note: *: Annual household income at 2020-21 prices

Source: ICE 360 survey PRICE, CRISIL MI&A
Percentage of households owning two-wheelers

7
7 5
households own two

0
wheelers, 2020- 21

5
4
per cent of

3
7
3
4

Destitutes (< Rs. Aspirers (Rs. 1.25 -5 Middle Class (Rs. 5- Rich (>Rs. 30 Tota
lakh)
1.25 lakh) lakh) 30 l
lakh)
Source: ICE 360 survey PRICE, CRISIL MI&A

India’s per capita disposable income is expected to grow by 8% in fiscal 2024 to be about INR 2.14
lakhs. This would peg India as a lower middle-income country as per World Bank. According to the
International Monetary Fund’s estimates, India’s per capita income (at current prices) is expected
to grow at 9.4% CAGR over CY2024 to 2029.

At the macroeconomic level, the rise in per capita income implies that as incomes increase, the
proportion of expenditure allocated to discretionary items such as consumer durables and
automobiles will increase. This will lead to a qualitative enhancement in consumption patterns,
characterized by a growing demand for discretionary goods. The rise in per capita income and
discretionary spending are expected to lead to a corresponding increase in demand for premium
products and experiences.

The improvement in per capita income over the years has helped 2W penetration to expand.
According to the National Family Health Survey 2019-21 the share of households owning a 2W
reached 49.7%. This was an improvement over 37.7% which was recorded in 2015-16 survey.
Further improvement in the per capita income will expand the 2W penetration going ahead.

Policies Impacting the Indian Automobile Industry

Government policies impacting the automobile industry, including those related to infrastructure
and supply chain, self-reliant manufacturing, foreign direct investment and tax related policies
have an impact on vehicle manufacturing and supply. The Government of India has announced and
implemented several initiatives such as National Infrastructure Pipeline, Gati Shakti Scheme and
National Logistics Policy to improve the transportation infrastructure in the country.

Union budget 2024-2025

Government announced Union Budget 2024-2025 in July 2024 with key priority areas being skill
development, employment, manufacturing and services, infrastructure development and innovation.
Automotive industry has largely reacted positively to the budget announcements. The emphasis of
this budget to strengthen the MSME sector through credit support scheme and new assessment
model for public sector banks for credit is expected to nourish automotive supplier base. Further, an
outlay of INR 1.52 lakh crore for agriculture and provision of INR 2.66 lakh crore for rural
development is likely to support rural demand for auto sector. Also, the government measure for
employment and up-skilling through Employment Linked Incentive Program and Skilling Program is
expected to
support auto manufacturing and closing employment gaps in the sector. Incentivising job creation
for manufacturing is expected to help auto OEMs, suppliers and start-ups equally.

India has definite target in terms of adoption of alternate fuel vehicles and EVs. To strengthen the
domestic EV manufacturing ecosystem, foster development of EVs and give a fillip to processing and
refining of critical minerals, budget fully exempted custom duties on 25 rare earth minerals like
lithium and reduced BCD on two of them. The budget also outlined the establishment of a Critical
Mineral Mission for production, and recycling of minerals. This is expected to advance innovation and
development in the advanced automotive components sector, enhancing the competitiveness of EV
sector. Overall, the focus on rural development, development of skilled labour pool, employment
generation and better financing environment for MSMEs are key positives for auto sector.

Improving infrastructure for increasing efficiencies in logistics

The government’s capex push has been focused largely on transport-related sectors, such as roads,
railways, and urban infrastructure. This is being complemented with policies geared towards improving
and integrating different segments of the logistics ecosystem. All these are expected to reduce
bottlenecks and improve competitiveness of domestic production and trade via reduced logistics costs
and improved connectivity.

 National Infrastructure Pipeline: CRISIL MI&A expects aggregate (government plus private)
spending on infrastructure to double by 2030, i.e. from ~INR 67 trillion between fiscals 2017
and 2023 to ~INR 143 trillion during fiscal 2024 to 2030, primarily driven by spends on ‘core’
infrastructure, i.e. roads, railways, airports, ports, urban infrastructure, irrigation,
warehouses, and telecom.

 PM Gati Shakti - National Master Plan for Multi-modal Connectivity: Gati Shakti Scheme or
National Master Plan for multi-modal connectivity plan, was unveiled in October 2021, with
an objective of curtailing the logistics cost for the country, by coordinating the infrastructure
creation activity across different government entities. Major characteristics of the scheme
are:
o Digital platform for coordination across 16 ministries, including roadways and railways
o ‘Gati Shakti’ platform will subsume the infrastructure projects announced under
the National Infrastructure Pipeline (valued at INR 111 trillion)
o Existing infrastructure schemes across ministries, such as Bharatmala (Roads),
Sagarmala (Ports),
UDAN (Air), Inland Waterways, Dry ports etc. will be incorporated in the platform
o The platform will also provide spatial data and implementation status for different
projects
o Eleven industrial corridors and two defence corridors are also planned in the
scheme, covering clusters for textile, pharmaceutical, fishing, electronics,
agriculture etc.

 Key targets set for different heads under the scheme are:
o Ports: Capacity of the major ports to be increased from 1,282 million tonnes in fiscal
2020 to 1,759 million tonnes in fiscal 2025

o National Waterways: Cargo movement to be ramped from 74 million tonnes to 95

million tonnes during fiscal 2020-25 period
o Railways: Target of 1,600 million tonnes by fiscal 2025, vis-à-vis 1,210 million tonnes in
fiscal 2020
o MMLPs: Indian railways will setup 500 multimodal cargo terminals by fiscal 2025
o Others: Gas pipeline length to be doubled from 17,000 Km to 34,500 Km within the
country, incremental renewable capacity of ~150 GW, power line capacity target of
~452,000 circuit Km by fiscal 2025
An integrated platform to monitor the progress of projects and logistics initiatives spanning across
different ministries will certainly aid in increasing coordination and planning infrastructure creation
and connectivity.

 National Logistics Policy (NLP): National Logistics Policy (NLP) was launched in September
2022 to complement PM Gati Shakti National Master Plan (NMP). NLP addresses the soft
infrastructure and logistics sector development aspect, including process reforms,
improvement in logistics services, digitization, human resource development and skilling.
The targets of the NLP are to: (i) Reduce cost of logistics in India; (ii) improve the Logistics
Performance Index ranking – aim to be among top 25 countries by 2030 (India was ranked
38 out of 139 countries in 2023), and (iii) create data driven decision support mechanism for
an efficient logistics ecosystem. A Unified Logistics Integrated Platform has been set up
under this, which, as of September 2023, had integrated 34 logistics portals/digital systems
across 33 ministries/ departments, and had over 600 industry players registered. Twenty-
one states have also notified their own logistics policies, in line with the NLP.

The infrastructure policies would enhance the logistical efficiency there by strengthening the
supply chain for automobiles and auto components. These initiatives will further lower the logistical
cost and the lead time in components/automobile transit. In the case of raw materials, this allows
various stakeholders in the ecosystem to have a clear understanding of raw material availability
and necessary logistics for the same. Thus, these policies augment the efficiency in production,
and supply.

Decoupling of global supply chains

As traditional supply chains are threatened by large scale global events, rising trend in
protectionism and wage inflation, there is a greater need for rethinking supply chain models to
remain competitive. In the wake of global disruptions such as Covid, geopolitical crises,
environmental disruptions, etc., significant decoupling of supply chains is happening to bring key
supply links closer home, particularly the ones situated in China.

To establish collective supply chains that would improve their resilience in the long term, 18
economies, including India, the US and the EU unveiled a roadmap in July 2022 which included steps
to counter supply chain dependencies and vulnerabilities. This was done as a part of the ongoing
supply chain de-risking strategy of global companies/multinationals, wherein global companies are
diversifying their businesses away from their reliance on a single large supplier, to alternative
destinations. Beijing’s Zero-Covid policy and the resultant disruptions to global supply chains,
container shortage and higher lead times have served as an impetus to this strategy.

This reorientation has benefitted other Asian economies in southeast Asia and India. India can take
advantage of the same as the enormous quantum of Chinese exports coupled with India’s cost
advantage in manufacturing, would serve as a highly lucrative opportunity for Indian
manufacturers. Realising this opportunity, the government has introduced many reforms and
incentive schemes to increase domestic manufacturing and attract global manufacturing firms to
India.

Lowering supply chain dependency on China

India including other nations are actively pursuing strategies to reduce supply chain dependency
on China in the wake of pandemic and growing geo-political tensions.
This includes diversifying the supply chain by sourcing inputs from various countries with a goal of
reducing the risk of over relying on a single country for sourcing and manufacturing. Furthermore,
India is also trying to strengthen the domestic manufacturing environment through various policy
initiatives. Key strategies adopted by India to diversify the supply chain includes:

 Foreign investments: India is attracting multi-national companies those who are actively
seeking to diversify their manufacturing bases away from China. Government is aiding these
companies in terms of tax
 benefits and incentive schemes. India have also regulated the FDI to attract investments
from various countries across sectors.

 Domestic manufacturing: Government is pushing domestic companies to develop products

locally and bring certain level of localisation in the products, thereby reduce dependence
on China. This involves introduction of initiatives and schemes like Make in India,
Atmanirbhar Bharat, China plus one, PMP and PLI.
 Trade diversification: India is actively engaging in trade pacts and FTA to diversify their
trade partners. Strengthening trade ties with developing and developed economies offers
alternatives to souring of goods and technology.

To reduce the dependency on China and prepare for potential future supply chain challenges, 14
nations under the Indo-Pacific Economic Framework (IPEF), including the United States, Japan and
India, have reached an agreement aimed at augmenting supply chain resilience and diversification.
The agreement involves sharing information with each other and coordinating responses during the
time of crises. Under the agreement, the participating countries would establish an IPEF supply
chain council, supply chain crisis response network, and labour rights advisory network that will
provide a framework to strengthen supply chains and prevent potential disruptions.

China plus one trend

The China Plus One Strategy, also known as Plus One or C+1, is a supply chain strategy that
encourages companies to minimize their supply chain dependency on China by diversifying the
countries they source parts from. The goal here is to reduce the risk of over relying on a single
country for sourcing and manufacturing.

Many Western countries, including the US, have heavily relied on China when it comes to
outsourcing their manufacturing. Low labour and production costs are one of the major reasons for
this, as well as factors like China’s strong domestic market, supply chain, infrastructure, free trade
and tax agreements, and high growth potential. Regardless of the reasoning behind this reliance,
people noticed that the global dependency on China was becoming a risk in as early as 2008, with
the official China Plus One strategy being first introduced in 2013. This new strategy would allow
businesses to continue to invest in China, while spreading their operations across multiple countries,
which are considered the “Plus One.” By establishing additional sourcing and manufacturing
locations outside of China, companies found a way to mitigate business risks, access new consumer
markets, and explore other innovation and technology, all while keeping their operations cost-
effective.

Today, geopolitical, and economic factors drive much of the urgency behind businesses
implementing a China Plus One approach. The approach gained traction due to the US–China trade
war, fuelled by U.S. President Donald Trump in 2018. As tensions escalated throughout Trump’s
presidency, businesses became uncertain about how their supply chain and operations would be
affected, accelerating the adoption of China Plus One. Additionally, the COVID-19 pandemic exposed
vulnerabilities in global supply chains, especially for those who relied on China alone. Companies
with diversified supply chains were better equipped to navigate disruptions caused by China’s “Zero-
Covid” policy, which lead to long lockdowns and factory closures. Other issues, such as rising labour
costs in China and various Chinese political movements, have also contributed to the rise of China
Plus One in recent years.

Make in India
The ‘Make in India’ initiative was launched in September 2014 to give a push to manufacturing in
India and encourage FDI in manufacturing and services. The objective of the initiative was to
increase the share of manufacturing in GDP to 25% by 2020 by boosting investment, fostering
innovation, and intellectual property. The
other objective was building best-in-class infrastructure for manufacturing across sectors, including,
but not limited to automobile, auto components, aviation, biotechnology, chemicals, construction,
defence manufacturing, electrical machinery, electronic systems, food processing, mining, oil and
gas, pharmaceuticals, renewable energy, thermal power, hospitality, and wellness.

To achieve this objective, a dedicated Investor Facilitation Cell was set up to assist investors in
seeking regulatory approvals, hand-holding services through the pre-investment phase, execution,
and after-care support. Key facts and figures, policies and initiatives and relevant contact details
were made available through print and online media. Indian embassies and consulates proactively
disseminated information on the potential for investment in the identified sectors in foreign
countries while domestically, regulations and policies were modified to make it easier to invest in
India.

FDI inflows have received an impetus, as India jumped to the eighth position in the list of the worlds’
largest FDI recipients in 2020 compared with 12th in 2018, according to the World Investment
Report 2022. According to Press Information Bureau’s press release of December 2023, FDI inflow to
India increased to USD 85 billion in fiscal 2022 but decreased to USD 71 billion in fiscal 2023. Total
FDI inflow to India in fiscal 2024 remained rangebound as USD 71 billion (provisional figure). As per
the latest release by Department of Promotion of Industry and Internal Trade (DPIIT) from April 2024
to June 2024 in fiscal 2025 total FDI inflow to India is USD 22 billion.

According to Ministry of Commerce & Industry, FDI inflow in the last 9 fiscal years (2014-23: USD
596 billion) has increased by 100% over the previous 9 fiscal years (2005-14: USD 298 billion) and
is nearly 65% of the total FDI reported in the last 23 years (USD 920 billion).

However, the share of manufacturing in GDP has not attained the intended levels of 25%. Hence,
additional policies were announced, and targets rolled forward initially to 2022 and then to 2025.
Domestically, multiple steps were taken to make sectors more attractive and ease investment
processes. Some of the major steps taken included announcement of the NIP and reduction in
corporate tax; various sectors such as defence manufacturing, railways, space, and single brand
retail have been opened for FDI. Measures to boost domestic manufacturing were also taken
through Public Procurement Orders (PPO), Phased Manufacturing Programme (PMP) and Production
Linked Incentive (PLI) schemes, etc. Many states also launched their own initiatives on similar lines
to boost manufacturing in their respective states.

Foreign Direct Investment (FDI)

FDI plays a pivotal role in economic growth, aiding development and shaping of the economic
landscape. Through FDI route, international corporations can invest in India, capitalizing on the
country's investment incentives offered by Indian government, including tax incentives and
relatively competitive labour costs. This fosters job creation and offers various additional
advantages along with facilitating the acquisition of technological expertise from global peers.
Government bodies, such as Department for Promotion of Industry and Internal Trade (DPIIT),
Reserve Bank of India (RBI) and Securities and Exchange Board of India (SEBI) formulates the
regulations, and guidelines for FDI. DPIIT frames and implements policies to promote and regulate
foreign investment in India across sectors. RBI manages the monetary aspects of foreign
investments and SEBI regulates FDI in the capital market.

There are two FDI routes in India, the Government route and the Automatic route. The Automatic
route allows foreign investors to invest in sectors without requiring prior approval from Indian
government. Under this route, investors are only required to notify the RBI within a specified time
frame. Whereas the Government route mandates prior approval from the Indian government or
relevant authorities for investments in India. In April 2020, the DPIIT amended the FDI Policy, that
the countries which shares a land border with India which include China, Bangladesh, Pakistan,
Bhutan, Nepal, Myanmar, and Afghanistan, can invest only under the Government route. Shortly, it
will be mandatory to obtain government approval for investments from these countries. FDI
proposals from these countries must go through tight scrutiny and government has set up an inter-
ministerial panel to review
these proposals. All ministries and departments have been recommended to have dedicated FDI
cells to process these proposals quickly. This policy thus restricted entry and expansion of Chinese
OEMs including MG and Great Wall Motors in India by restricting them to invest or raise funds from
China.

Summary of FDI in key Indian sectors

Sector FDI Cap Route
Automobile 100% Automatic
Airports -Greenfield projects 100% Automatic
Satellites- establishment and operation, subject to
74% Government
the guidelines of Department of Space/ISRO
Hospitals Sector 100% Automatic
Government up to 100% of local
Defence 49% +
defence ventures after obtaining
approval
Source: Department for Promotion of Industry and Internal Trade (DPIIT), CRISIL MI&A

Atmanirbhar Bharat Campaign

Atmanirbhar Bharat Abhiyan or the self-reliant India campaign was launched in May 2020 amid the
Covid-19 pandemic, with a special and comprehensive economic package of INR 20 trillion,
equivalent to 10% of the country’s GDP.

The scheme was launched with the primary intent of fighting the pandemic and making the country
self-reliant based on five pillars: economy, infrastructure, technology-driven system, demography,
and demand. The stimulus package announced by the government under the scheme consisted of
five tranches, intended to boost businesses, including Micro, Small and Medium Enterprises
(MSMEs), help the poor (including farmers), boost agriculture, expand the horizons of industrial
growth, and bring in governance reforms in the business, health, and education sectors.

The mission emphasises the importance of encouraging local products and aims to reduce import
dependence through substitution. It also aims to enhance compliance and quality requirements to
meet international standards and gain global market share.

The government has also rolled out other reforms — namely, supply chain reforms for
agriculture, rational tax systems, simple and clear laws, capable human resources, and a
strong financial system. These reforms will further promote business, attract investment, and
strengthen Make in India initiative.

PLI scheme to provide boost to industrial investments in the short-to-medium term

The PLI scheme’s primary objective is to make manufacturing in India globally competitive by
removing sectoral obstacles, creating economies of scale and ensuring efficiency. It is designed to
create a complete component ecosystem in India and make the country an integral part of the
global supply chain. Furthermore, the government hopes to reduce India’s dependence on raw
material imported from China. The scheme is expected to boost economic growth over the medium
term and create more employment opportunities, as many of the sectors covered under the
scheme are labour-intensive. It will be implemented over fiscals 2022 to 2029.
The PLI scheme is a time-bound incentive scheme by the government which rewards companies in
the 5-15% range of their annual revenue based on the companies meeting pre-decided targets for
incremental production and/or exports and capex over a base year. The stronger-than-expected
pick-up in demand and larger companies
gaining share over smaller companies led to revival of capex in fiscal 2022. The rise in fiscal 2024
was on account of the expansion plans underway by India Inc.

Construction spends across industrial investments are seen rising 6-8% in fiscal 2024, driven by
expansion in the oil and gas and metals segments. The growth is on a low base of fiscal 2023 where
the sector faced a slight bump owing to geopolitical issues in the previous two fiscals. However, the
PLI scheme is expected to provide the necessary boost to the sector.

Based on an analysis of eight key sectors, CRISIL MI&A estimates construction investment in the
industrial segment at INR 4.0-4.1 lakh crore between fiscals 2023 and 2027, rising 1.3 times over
spends seen between fiscals 2018 and 2022. The rise in investments is projected on account of
inclusion of the PLI scheme in the capex investments of the industrial sector.

Budgeted incentives for each sector under the PLI scheme

Sector Segment Budgeted (INR bn) *
Advance chemistry cell (ACC) battery 181.0
Automobile 751.4
Automobiles and auto components 570.4
Mobile manufacturing and specified electronic 409.5
components
Electronics 545.2
Electronic/technology products/IT hardware 73.25
White goods (ACE and LED) 62.4
Critical key starting materials/drug intermediaries and
69.4
active pharmaceutical ingredients
Pharma and medical equipment 253.6
Manufacturing of medical devices 34.2
Pharmaceutical drugs 150.0
Telecom Telecom and networking products 122.0 122.0
Food Food products 109.0 109.0
Textile Textile products: man-made fibre (MMF) and technical 106.8 106.8
textiles
Steel Speciality steel 63.2 63.2
Energy High-efficiency solar PV modules 240.0 240
Aviation Drones and drone components 1.2 1.2
Total 2,192

*Note: Approved financial outlay over a five-year period

ACE: Appliance and consumer electronics; LED: Light-emitting diode
Source: Government websites, CRISIL MI&A

An outlay of union budget of INR 751.4 billion for automobiles, auto components and ACC:

 INR 570.4 billion allotted for enhancing India’s manufacturing capabilities or automobile and
auto component industry - Advanced Automotive Products (AAT). The scheme has two
components viz. Champion OEM Incentive Scheme and Component Champion Incentive
Scheme. A total of 95 applicants have been approved under this PLI scheme.
 INR 181 billion under the 'National Programme on Advanced Chemistry Cell (ACC) Battery
Storage’ for achieving manufacturing capacity of 50 Giga Watt Hour (GWh) of ACC. Four
companies have been selected till date for incentive under the PLI Scheme for ACC
battery storage.
PLI scheme for the automotive industry: The PLI scheme for the automotive industry intends to
promote high- tech green manufacturing, Advanced Automotive Technology (ATT) vehicles such as
electric and hydrogen fuel cell vehicles. This scheme excludes conventional petrol, diesel, and CNG
segments (internal combustion engines), as they have sufficient capacities in India in the auto
components category, more than 100 ATT components including hydrogen fuel cells, hydrogen
injection systems, EV motors and lightweight cryogenic cylinders are eligible for PLI.

The PLI scheme targeting auto parts includes the following component schemes:

 Champion Original Equipment Manufacturers (OEM) Scheme: It is a sales value-linked plan,

applicable to battery electric and hydrogen fuel cell vehicles of all segments.
 Component Champion Incentive Scheme: It is a sales value-linked plan for advanced
technology components, complete- and semi-knocked down (CKD/SKD) kits, vehicle
aggregates of two-wheelers, three-wheelers, passenger vehicles, commercial vehicles,
and tractors, including automobiles meant for military use and any other advanced
automotive technology components prescribed by the Ministry of Heavy Industries –
depending upon technical developments.

PLI scheme for the Automotive and Advanced Chemistry cells (ACC): The policy on Advanced Chemistry
Cell (ACC) Battery Storage was approved by the Government of India on May 2021 with budgetary
outlay of INR 181.0 billion for setting up manufacturing facilities with a total manufacturing capacity
of 50 Giga Watt Hour (GWh). This policy will strengthen the ecosystem for electric vehicles and
Battery Storage in the country. The policy aims to enhance India’s manufacturing capabilities of ACC
by setting up of Giga scale ACC battery manufacturing facilities in India with emphasis on maximum
domestic value addition.
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