A CASE STUDY ANALYSIS: The Demand

Function in the Indian Auto Industry

CHIKONDI WEZI NGWIRA

R2007D11076133
MBA 708 - MANAGERIAL ECONOMICS
CHARIS KYRIACOU
14th March 2021
 TABLE OF CONTENTS
INTRODUCTION...............................................................................................................................3
DETERMINING FACTORS OF DEMAND FOR PASSENGER CARS IN INDIA.....................3
THE ROLE OF THE NON-URBAN INDIA IN THE AUTO MARKET DEMAND
FORMATION......................................................................................................................................5
RECOMMENDATION.......................................................................................................................5
THE LAW OF DEMAND, TECHNICALLY SPEAKING, CAN NOT WORK IN AN AUTO
MARKET (FOR OR AGAINST?)....................................................................................................5
VARIOUS DEMAND ASPECTS THAT ARE IMPORTANT WHEN PLANNING TO ENTER
THE INDIAN AUTO MARKET.......................................................................................................6
CONCLUSION....................................................................................................................................7
REFERENCES....................................................................................................................................8
INTRODUCTION
Following India’s increasing openness, income of the people, the introduction of new and
existing models, simple availability of finance and relatively low rate of interest, and price
discounts that are provided by manufacturers and dealers, the Indian automotive industry has
grown dramatically since 1991. Purchaser demand, the nature of the product, the number of
competing sellers, obstacles to new competition as well as economies of scale are the most
significant in the industry when determining demand. The main variables that determine
demand in the automotive industry are revenue and prices. While the market for automobile
is affected by a variety of factors, this report focuses on examining the role of non-urban
India in influencing demand of the auto-market in the country.

DETERMINING FACTORS OF DEMAND FOR PASSENGER CARS IN INDIA

When it comes to economics, demand is defined as a consumer’s willingness to purchase a
product. Determinants of demand are factors that cause fluctuations in the economic demand
of a product or a service. Demand is driven by a lot of factors that influence a consumer’s
decision to buy a product. In economics on the other hand, it is boiled down to 5 main
determinants of individual demand and a sixth one for aggregate demand. (Anderson, 2020)

 Price of the commodity

This is considered the major factor that influences the quantity demanded of any
product or service.
 Consumers Income
When wages increase, so does the amount of products that customers want. Similarly,
a decrease in income is followed by a decrease in consumption. This is not a linear
relationship between income and demand. The proportion of change in demand levels
is determined by marginal utility.
 Costs of similar goods or services
Items that are complementary to one another – A reduction in the quantity demanded
of a complementary product would result from an increase in the price of one product.
Example: increasing bread prices will lower butter demand. This is due to the
complementarity of the products. Replacement product – an increase in the price of
 one product will increase the demand for a replacement product. Example: rising
bread prices will boost cassava demand and lower bread demand.
 Expected price
The anticipations of higher revenues or an increase in the prices of goods will result in
an increase in the quantity demanded. Similarly, anticipations of decreased income or
decrease in goods prices will decrease the amount demanded.
 Number of consumers in the market
The number of consumers in the market affects the total demand significantly. With
the number of buyers rising, demand is rising. This is also true regardless of the
changes in commodity prices. (Toppr, 2021)

The following equation shows the relationship existing between demand and the five
determining factors.

Qd= f (P,M,Pr,T,Pe,N) Where f means “is a function of”‟ or depends on,”

Qd= Quantity demanded of a product or service

P= Price of the product or service

M= Consumers income

Pr= Price of related product and services

T= Taste patterns of consumers

Pe= Expected price of the product/ service in some future periods

N= Number of consumers in the market

For the Indian auto-market, there are a number of determinants of demand for the passenger
car. Income and cost of ownership are two key factors that have affected demand for
passenger vehicles over the last two years. Typically, these factors counteract and produce
relatively stable industry growth. Ownership costs have increased sharply since 2010
according to CRISIL (2013). In regards to income, the car market is already divided into
different segments which are the economy segment, the mid-segment and the premium
segment. These segments allow customers to purchase cars that fit their budget.

In developing countries, industrialisation and economic developments can have a major

impact on motor vehicle numbers and growth rates. In many ways the motorization rate is
affected by economic growth and development. Firstly, the demand for consumer products
tends to rise as national incomes increase. More revenue provides economic opportunities for
individuals and households to buy more luxurious items such as cars. As the motoring rate
increases as more and more people are buying motor vehicles. GDP also has a positive
connection with the sales of passenger cars. High GDP shows that passenger car sales are
higher. The relations between inflation and passenger car sales were also discussed by (Nawi,
Baharom, Bashir Ahmad, Mahmood, Nair, & Nurathirah, 2013) and the results were
supported by the analytical theories. The rate of inflation is negative with the sales of
passenger cars. This comes to show that the greatest determinant of demand for the passenger
cars in India is consumer income.

THE ROLE OF THE NON-URBAN INDIA IN THE AUTO MARKET DEMAND

FORMATION
The non-urban India plays big role in the formation of demand in the auto-market in the
terms of income. Due to the large increase in per capita non-urban income, the non-urban
society has become a potential market as it consists of a variety of potential buyers who have
different attitudes towards price of the products, as well as different tastes or preferences.
Take for example the plantation owners who would prefer to purchase tractors to help them
in the farming activities as opposed to the rich farmers who would prefer to purchase a heavy
looking vehicle that shows sturdiness and durability. In rural and semi-urban areas, the
penetration of passenger cars is extremely low and could provide fresh markets this is
because unlike in the urban areas where people would rather own cars to travel around, the
non-urban India use public transportation as it is cheaper.
RECOMMENDATION

THE LAW OF DEMAND, TECHNICALLY SPEAKING, CAN NOT WORK IN AN

AUTO MARKET (FOR OR AGAINST?)
The law of demand in the case of auto-markets can not necessarily apply as it states there is a
negative relationship between the price of a product and the quantity demanded per time
period. If we look at the Indian auto market, it is clear that the high price does not necessarily
influence demand as factors like brand image, lifestyle and tastes play another important role
as well to influence demand. For example, a rich farmer in the non-urban area may choose to
buy a truck even though it is more expensive because of the bad conditions of the roads in his
area whereas an urban buyer will choose a good-looking car that will shine as he drives
around in the city. It all comes down to the customer’s preference. The law of demand
assumes all other factors that affect demand apart from price remain constant which is not
always the case.

VARIOUS DEMAND ASPECTS THAT ARE IMPORTANT WHEN PLANNING TO

ENTER THE INDIAN AUTO MARKET.

When planning to enter a new market, there are a number of factors that need to be
considered so that the entry is a success.

As a new entrant into the Indian auto market, one will have a relatively poor supplier base, a
market full of competition, and wide capacity gaps to deal with demand uncertainty, diverse
and evolving requirements of customers (Patra & Rao, 2019) . It is important to not conclude
that the market, which is highly price-sensitive, is likely to continue to increase the industries
growth rates due to lower taxes and duties and a gradual indigenisation. Do not regard India
as an important export manufacturing base. One should not say that the highly price-sensitive
market will likely further increase industry growth rates by lower taxes and lower duties and
progressive indigenization and rising middle-class income. In addition to the average
consumer, overall GDP growth, the arrival of ultra-fast cars and the increasing maturity of
Indian equipment manufacturers are factors behind this increase. The path towards mass
motorisation will, however, vary widely from that of developed countries; new technologies,
business models and government policies must be developed in the first instance, paving the
way for increased car penetration. Other challenges, such as, the current global economic
crisis and high commodity prices, might slow the country down in the short term.
CONCLUSION
This study looked into the demand trends in the Indian Auto-industry. The various factors
that affect demand include income level of consumers, price of commodity, etc. The results
show that income has a beneficial effect on demand for cars as people's incomes have
increased in recent days. The increase in income will increase demand for sales of
commercial and passenger vehicles. On the other hand, higher fuel prices have a negative
relation to car demand and result in lower car sales. Increase in income has a positive effect
on sales, while the fuel price reduces the demand for automobiles. However, as commodities
such as petroleum increase in price, they also have a negative relationship with the
automotive production as they cause fuel prices to rise, leading to automotive demand and
production to fall. In short, the Indian market demand for cars is changing with the change in
income. There is a positive relationship between earnings and car demand. Although there are
number of factors that can affect demand of automobiles but GDP is the most influential
factor among them. All of these factors may influence automotive production indirectly
because they are consumer dependent.
REFERENCES

Anderson, S. G. (2020, April 28). 5 determinants of demand with examples and formula. Retrieved

March 14, 2021, from The Balance: https://www.thebalance.com/five-determinants-of-

demand-with-examples-and-formula-3305706

Nawi, A., Baharom, A., Bashir Ahmad, S., Mahmood, W. M., Nair, G., & Nurathirah, A. (2013).

Determinants of Passenger Car Sales in Malaysia. World Applied Sciences Journal(23), 67-73.

Patra, T., & Rao, M. (2019). Impact of Macroeconomic Factors on Automobile Demand in India.

Journal of International Economics, 97-105.

Toppr. (2021). Theory of Demand: Meaning and Determinants of Demand. Retrieved March 13,

2021, from Toppr: https://www.toppr.com/guides/business-economics/theory-of-

demand/meaning-and-determinants-of-demand/