Indian automobile industry embarked on a new journey in 1991 with delicensing of the sector and subsequent opening up for 100 percent FDI through automatic route. In view of this, the study attempts to estimate the economic performance of Indian automobile industry in terms of capacity utilization at an aggregate level. It estimates econometrically rate of capacity utilization in the industry at aggregate level and analyses its trend during the post liberalization period from 1991-92.
The study also tries to assess the impact of various factors influencing capacity utilization. In this paper, optimal output is defined as the minimum point on the firm’s short run average total cost curve and the rate of capacity utilization is merely ratio of its actual output to capacity output level. We use an econometric model to determine the optimal capacity output.
Our result shows that capacity utilization has been improved after the path breaking economic reforms initiated in 1991 at the rate of around 5 percent per annum but capacity grows more rapidly than output growth. In view of identifying several factors that influence capacity utilization, result suggests that coefficient of export-intensity variable, import penetration ratio are negative which indicate that capacity utilization was relatively lower in firms belonging to industry characterized by high export-intensity and import penetration.
A positive relationship is found between size and capacity utilization and similarly between market share and capacity utilization Indian automobile industry went aboard on a new journey in 1991 with delicensing of the sector and subsequent opening up for 100 percent FDI through automatic route. Since then ,almost all the global majors have set up their facilities in India taking the level of production from 2 million in 1991 to 9. 7 million in 2006[SIAM,2007-08].
The growth of Indian middle class with increasing purchasing power along with strong growth of economy over a past few years have attracted the major auto manufacturers to Indian market. Increase in income level, decline in tax and interest rates have helped to increase in personal disposable income . Change in mindset leading to changing investment / spending pattern from property investment to increasing consumerism ,explosive growth in communication have led to urbanization of rural consumers’ attitude and has increased the propensity to consume.
Therefore, increased disposable income and fast changing spending habits have led to the increased consumerism of capital good product for human comfort. The market linked exchange rate and availability of trained manpower at competitive cost have further added to the attraction to Indian domestic market. The growing of Indian market on one hand and the near stagnation in auto sector in market of USA, EU and Japan on the other hand have worked as a push factor for shifting of new capacities and flow of capital to the auto industry of India.
The increasing competition in auto companies have not only resulted in multiple choices for Indian consumers at competitive costs, it has also ensured an improvement in productivity by almost 20 percent a year in auto industry which is one of the highest in Indian manufacturing sector. The rate of capacity utilization (CU), measuring the extent to which actual output differs from capacity output, is one of the central variables in economic analysis.
As a yardstick for evaluating economic performance in a capital-scare economy like India, manufacturing capacity utilization is a key indicator which not only determines how much more output can be obtained by fuller utilization of existing capacity but also defines the required expansion of capacity for a targeted output and also explains changes in investment, inflation, level of resource utilization, assesses possible future demand for investment goods, a demand that tends to vary directly with increase in CU, permits economic analysts to adjust current productivity growth calculations for departure from full equilibrium.
etc. Therefore, the estimation of capacity output and its utilization will be very useful to evaluate the variations in the performance of an industry over a period of time Rigorous changes have been made in industrial policy of India Government with the initiation of major economic reforms since 1991. Relaxing of licensing rule, reduction of tariff rates, removal of restrictions on import etc. are among those which have been initiated at early stage.
After delicensing of the sector, with the enhancement of purchasing power of common masses in India, the Indian automobile market is flourishing gradually. Even better, ancillary sectors that extensively supply spares and inputs to the automobile sector are themselves booming, ensuring that this sector stays firmly on the growth path for times to come. In the past two years, more than a dozen multi-national firms have announced plans to enter the Indian market. Most of
them have formed joint ventures with Indian firms, while there are exceptions such as Hyundai which plan to form fully-owned units. Despite the large growth potential of the Indian market (analysts expect the growth to triple in the next five years), no one expects the industry to sustain the fragmentation caused by more than a dozen suppliers. Many of these new firms will not enjoy the scale economies and relationships with suppliers that Maruti does, so they have decided not to challenge Maruti at its price of $5,500 in the smaller car segment.
Most are planning to produce between 20,000 and 50,000 higher-end vehicles. The stiff competition is building up in the mid-sized car range (1,300 cc and above), where several of these multi-national and Indian companies are planning to go head-to-head. Although these newly announced vehicles at $12,000 or above remain expensive by Indian standards and planned capacity exceeds projected demand, new entrants are betting on the rising incomes of middle-class families.
The advocates of liberalization expect that this policy reforms will perk up industrial growth and performance significantly while critics argue that absolute elimination of restrictions on several matters will have an unwanted effect on future growth and performance of the industry. In this background, this paper attempts to measure capacity utilization of Indian automobile industry econometrically and tries to assess the impact of various factors influencing capacity utilization .
This study is conducted for the aggregates of an industry where Capacity Utilization(CU) has been taken as bench-mark in measuring performance on the assumption that all the firms in an industry behave alike and therefore industry level characteristics could be attributable to all the firms operating in that industry. It is not claimed that CU is the only specification for evaluating the performance of an industry where there exist profitability and productivity variables for evaluating industrial performance