Boosting India's economic expansion and creating employment opportunities for millions of youth is one of the major challenges facing the administration of Prime Minister Narendra Modi. Since he came to power in 2014, critics have consistently complained that Modi is presiding over a jobs crisis.     

"Make in India" was Modi's flagship economic initiative that aimed to transform the country into a global manufacturing hub and, in the process, generate jobs.

As part of the plan, the government vowed to increase the share of manufacturing in India's gross domestic product (GDP) to 25% by 2022, from about 16%, and create 100 million jobs in manufacturing.

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Despite the government's ambitious target, many manufacturing sectors appear to be facing a crisis. Figures released this week by the automotive industry showed that the branch suffered its worst sales performance in nearly 19 years in July.

Passenger car sales in India last month dropped 30% year-on-year to 200,790 vehicles from 290,931 units during the same period a year earlier, showed data released on Tuesday by the Society of Indian Automobile Manufacturers (SIAM). It was the worst sales performance since a 35% decline in December 2000.

This was the ninth consecutive decline in monthly passenger car sales, an indication of the dramatic drop in demand in the world's fourth-largest automobile market.

Weak demand

Observers blame the auto slowdown on weakening economic growth and a liquidity crunch, brought about by a collapse of some non-banking financial companies that used to account for a significant share of automobile financing. 

Weak economic activity, coupled with escalating global trade tensions, led India's central bank to cut the country's growth projection for 2019-20 to 6.9% this month from its June forecast of 7%.

Automakers are also struggling to comply with a host of new environmental and safety policies, which have prompted a hike in vehicle prices. 

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As part of its efforts to reduce air pollution, the Indian government plans to enforce its stringent Bharat Stage 6 (BS 6) fuel emission norms by 2020. They are regarded as the most advanced emission standards for automobiles and are equivalent to Euro 6 norms currently in place across countries in the European Union.

The transition to BS 6 could make vehicles more expensive for buyers, which in turn puts pressure on sales, say experts. The norms also entail an overhaul of diesel engine technology. They have already prompted Maruti Suzuki, India's biggest car company, to announce an end to the sales of their diesel cars from next year.

"The subdued demand, recent investments made for transition from BSIV to BSVI, and a lack of clarity on policy for electrification of vehicles, especially for two and three wheelers, has left the industry unsure of its future and has caused it to stop all future investments," the Automotive Component Manufacturers Association of India (ACMA), the apex body representing the interest of the Indian auto parts industry, said in a statement in July.

Jobs at risk

The distress in the auto market has broader implications for the entire economy as the sector accounts for about half of the nation's manufacturing output.

"The automobile industry contributes almost 49% to the manufacturing GDP and 13-14% to the GST [Goods and Services Tax] collections," Vishnu Mathur, director general of SIAM, told reporters on August 13. Noting that the industry employs over 37 million people directly and indirectly, he said that any slowdown "will have major repercussions on the economy."

Mathur pointed out that at least 7% of temporary workers employed by 15 automakers have lost their jobs in recent months. "It is a conservative estimate based on our initial analysis," he said.

Maruti Suzuki cut its temporary workforce by 6% over the past six months, Reuters reported recently. A slowdown in car sales also has a negative effect on a number of related businesses — from steelmakers to auto parts makers and car dealerships.

"The automotive industry is facing an unprecedented slowdown," Ram Venkatramani, president of ACMA said in the statement. "If the trend continues, an estimated 10 lakh [1 million] people could be laid off," he added.

The automotive component industry contributes 2.3% to India's GDP, 25% to its manufacturing GDP and provides employment to 5 million people, ACMA noted.

With the sector in crisis, calls are growing louder for government intervention. Automotive representatives have already met Indian Finance Minister Nirmala Sitharaman to press their demand for a stimulus package for the industry, including tax cuts, subsidies and other incentives.

"We hope the government would come out very soon with a revival package of a sort to arrest the de-growth and to bring the industry back to a growth path," SIAM's Mathur said. 

A tough market

But PM Modi says demand for cars will rebound in the coming months. "The slowdown is transient…I believe that both demand and the industry will bounce back strongly and soon," Modi told India's The Economic Times newspaper.

What happens in India's auto market is of great interest to global carmakers as well. India has one of the fastest-growing auto markets in the world and McKinsey forecasts that India will overtake Japan to become the world's third-largest car market by 2021, behind only China and the US.

While many view India as the auto market offering the best growth potential over the next decade, cracking the market hasn't been easy for foreign carmakers. Automakers like Volkswagen and Fiat Chrysler have not fared well in India, where consumers generally prefer relatively cheaper and smaller cars that can better navigate the country's narrower roads.

And premium vehicles are a niche market, with sales of luxury brands like Mercedes, Audi, BMW, Volvo and Jaguar Land Rover accounting for just about 40,000 cars last year.