India becomes a driving force

India represents a growth market to automakers as they struggle to sell their wares in debt-laden countries.

Maruti Suzuki dominates India's car sector with a market share of 45 per cent.

MUMBAI // As the demand for cars stagnates in developed economies, global car makers are increasingly shifting their focus to India, where sales touched a record last year, driven by strong demand from the country's free-spending middle class.

Sales for the previous fiscal year grew by 25 per cent to 2.5 million units, significantly higher than the previous forecast of 12 per cent, says the Society of Indian Automobile Manufacturers (SIAM), an industry lobby group based in New Delhi.

India's car sector, which employs 10 million people, has long been hailed as a major growth driver of the economy.

Expanding at a compounded annual rate of 14 per cent, it is expected to roar ahead of China - growing at 6 per cent - to become the world's fastest-growing car market between now and 2020, according to the global consultancy firm Ernst & Young.

At this rate of expansion, experts predict that by 2050 every sixth car in the world will be produced for the Indian market. At present only eight among every 1,000 Indians own a car, according to the credit rating agency Crisil, based in Mumbai.

Keen to tap this vastly under-penetrated market and to offset the sluggish demand for cars in developed economies, global car makers such as Toyota, Honda, Ford and Volkswagen are raising investments, boosting capacities and floating new models in India, recognised as a growing centre for making small cars.

As the Indian subsidiary of Japan's Suzuki reported its highest monthly sales in March, it reaffirmed a well-known but often overlooked fact: as the demand for cars shrinks in Japan, the parent company leans the heaviest on India among its five global subsidiaries to sustain future growth.

Maruti Suzuki, viewed as a jewel in the crown of its Japanese parent company, dominates India's car sector with a market share of 45 per cent. Buoyed by scorching demand, the company accounts for more than half of Suzuki's total annual profits - and its share is expected to grow.

Maruti Suzuki reported sales of 121,952 units last month, an increase of 28.2 per cent over the same month last year. It sold 1.2 million units in the entire fiscal year ended March 31, a growth of 24.8 per cent over the previous year.

But the company has tempered its outlook this year, as sales are expected to moderate because of growing competition, tight lending norms and rising fuel and vehicle prices.

"I don't think we will continue to grow at over 20 per cent in this fiscal," R C Bhargava, the chairman of Maruti Suzuki, said last week. "We cannot have such a high growth rate every year."

Only small cars or hatchbacks - the best-selling models - can easily navigate through the congested, pot-holed roads of Indian towns and cities, packed with handcarts, livestock, bicycles and pedestrians.

With growing competition, India is fast emerging as the new battleground for these car makers, all of which floated new models of not just small cars, but also affordable sedans last year.

Maruti introduced the Suzuki Kizashi, India's first luxury sports sedan in February, after it launched the WagonR, a more upmarket version of its best-selling Alto.

In the last fiscal year, Ford launched Figo, Toyota floated Etios, and Hyundai released its upgraded i10 models in the Indian market.

Amid the surging competition, rising commodity prices have added pressure to input costs, compelling many car companies to raise the prices of their models.

The cost of consumer finance has also risen sharply after the Reserve Bank of India raised interest rates eight times in the past 12 months to quell stubbornly high inflation, hovering around 8 per cent. But rate increases in the past six months have not significantly dented sales.

"Contrary to the popular belief that interest rates and car sales behave inversely, consumer spending in the auto sector has not shown a quantum change," said Mahantesh Sabarad, a car industry analyst with the Fortune Equity Brokers in Mumbai.

In the tight monetary environment, banks and financial institutions have curbed lending but the demand for car loans has not fallen sharply.

"The lender's behaviour has changed, not the consumer's behaviour," Mr Sabarad said. "That might cause a small decline in sales in the current year."