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%
300 12.0%

8.3% 9.7% 8.2%

250
6.5% 6.8%
8.0% 7.0%
200 6.8% 7.0%
3.9%
INR Trillion

GDP (%)
150 2.0%

100
-5.8% -3.0%

180-190

235-245
50
161
105

114

123

131

140

145

137

150

174

0 -8.0%
FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25E FY29P

GDP at constant (2011-12) prices GDP(% y-o-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%
INR Trillion

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

9.7
10.0 8.0 8.3
6.8 7.0 8.2 7.0 6.5
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 of India

Indonesia Japan South Africa
United Kingdom United States 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.

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

112 108.9
98.9 99.8

82.6 80-85
71 70.4
US $/barrel

64.0
52.4 54.4
44.1 42.3

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

82.3 82.8 82-86

74.2 76.2
69.9 70.9
64.4

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 Trend

10% 9% 8%
6%

-1%
-3%
-5% -6%
-9%

-16%
FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25

Note: When the rainfall averaged over the country is within ±19% from its long period average (LPA).
Source: IMD, CRISIL MI&A

Auto 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.

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%
13.5%
13.5%

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

13.3%
13.3%
13.3%

13.3%
13.3%
13.1%
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%

Feb

Feb

Feb
Apr

Apr

Apr

Apr
Aug
Sep
Oct
Nov
Dec

Aug
Sep
Oct
Nov
Dec

Aug
Sep
Oct
Nov
Dec

Aug
Sep
June

June
May

Jun

Jan

Mar

July
May

Jan

Mar

May
Jun
Jul

Jan

Mar

May
Jun
Jul

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
10.0% FY25

-1.6%
0.0%

-10.0%

-20.0%

-30.0%
Jun-19
Jun-18

Jun-20

Jun-21

Jun-22

Jun-23

Jun-24
Mar-18

Mar-19

Mar-20

Mar-21

Mar-22

Mar-23

Mar-24
Dec-18

Dec-19

Dec-20

Dec-21

Dec-22

Dec-23
Sep-18

Sep-19

Sep-20

Sep-21

Sep-22

Sep-23
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

75
70
own two wheelers, 2020-
per cent of households

53
47
34
21

Destitutes (< Rs. Aspirers (Rs. 1.25 -5 Middle Class (Rs. 5- Rich (>Rs. 30 lakh) Total
1.25 lakh) lakh) 30 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 the
74% Government
guidelines of Department of Space/ISRO
Hospitals Sector 100% Automatic
Government up to 100% of local defence
Defence 49% +
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 components 409.5
Electronics Electronic/technology products/IT hardware 73.25 545.2
White goods (ACE and LED) 62.4
Critical key starting materials/drug intermediaries and active
69.4
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 textiles 106.8 106.8
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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