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FDI IN AUTOMOBILE INDUSTRY AND ROAD

FATALITIES IN INDIA

By

G.T. Manjula,

School of Economics and Management

South West Jiao Tong University

111, 1st Section, Northern Second Ring Road,

Chengdu, Sichuan 610031

China

Affiliations: Bachelors of Engineering in Electronics, Bangalore UniversityMaster of Business Administration, Webster University of America

Pursuing PhD in Finance, South West Jiao Tong University



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ABSTRACT

This paper attempts to explore the possible influence of FDI inflows into Indian automobile

industry on sharp rise in road traffic fatalities lately. The increase of road accidents is closely

linked with the rapid growth of population, economic development, industrialization and

motorization experienced by the country. The automobile sector in India has been attracting

huge FDI lately and automobile sector has been growing rapidly due to large proportion of

youth opting for ownership of automobiles including cars and two-wheelers due to impressiveincrease in per capita income during the last two decades. This has lead to increased accidents

on roads in India.

After highlighting the inflow of FDI into automobile sector and its growth and expansion, we

have shown an alarming increase in road accidents. Then a regression analysis is conducted

with road accidents in India by treating it as endogenous variable and FDI, number of vehicles

and per capita income as exogenous variables. The analysis is done with time series data for all

the variables after conducting the necessary statistical tests. The results show a positive relation,

which supports the claim of this paper that FDI is one of the reasons for increased road

accidents in India.

KEY WORDS: Road accidents, FDI, India, Vehicles.



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1. INTRODUCTION:

Attracting foreign direct investment, (FDI), has become an integral part of the new economic

development strategy of India during the post-reform period. Foreign direct investment has

raised the pace of economic growth of India to a higher plateau since the 1990’s. For the past

two decades there has been a surge in the economic prosperity of India due to an impressive

inflow of FDI. The amount of foreign direct investment reached USD 1.95 billion in March 2009.

The major sectors which have attracted FDI into India include services, telecommunication,

housing and real estate, power and automobile industry. Table 1 shows the sectoral inflows of

FDI into India in the first decade of the 21st Century.

Table 1: Ranking of Sector-wise FDI Inflows into India

(From April 2000 to December 2009)

Source: Fact sheets on FDI, Department of Industrial Policy and Promotion



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It may be observed from Table 1 above that the automobile sector ranked 7 th in the total inflow

of FDI into the Indian economy.

Chart 1: Sectors Attracting Highest FDI Inflows From 1991 to 2005

Source: www.dipp.nic.in/fdi_statistics/India_top_sectors.pdf

From Chart 1 we can see that the transport industry has been receiving huge FDI inflows after

electrical equipments sector. As the Indian economy has been rapidly expanding, it has been

experiencing rapid growth of automobile industry which has been producing and selling ever

more number of automobiles in the country. Presently, India is the world's largest manufacturer

of tractors, second-largest manufacturer of two-wheelers, and fifth-largest manufacturer of



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commercial vehicles. The production of motor vehicles in India has risen from two million in

1991 to 9.7 million in 2006, nearly seven per cent of global automobiles production and 2.4 per

cent of four wheelers production, ( Suman, 2007). Table 2 below shows the trend growth of

registered automobiles in India.

Table 2: Total Number of Registered Vehicles in India: 1951 to2004

As the Indian economy was booming in the first decade of the 21 st Century, sales of passenger

vehicles and commercial vehicles in India skyrocketed till 2008. This was facilitated by easy

availability of bank loans for buying automobiles. Two decades ago there were only about 12

brands of passenger cars. Today the number of brands has increased to as many as 80. The

automobile industry in India happens to be the ninth largest in the world. Following Japan, South

Korea and Thailand, in 2009, India emerged as the fourth largest exporter of automobiles. India

has an annual production of approximately about 2.3 million units. Confederation of Indian

Industry has reported that Indian automobile industry embarked on a new journey since 1991

with delicensing of the sector and subsequent opening up for 100 per cent FDI through automatic



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Many Indian automobile manufacturers have spread their operations globally as well; asking for

more investments in the Indian automobile sector by the MNCs. India is also becoming the

ultimate outsourcing destination for global automobile companies like Ford, Mitsubishi, Toyota,

Hyundai etc. The entry of foreign brands into Indian automobile sector has become a great high-

tech showpiece. As new technology floods into vehicles, consumers are starting to become

indifferent to safety features in their cars and bikes. Attractive new features in new brands have

become distractions to drivers thus leading to accidents. It is estimated that road accidents cause

an estimated loss of 1 per cent of the country's gross domestic product. According to the World

Bank, developing countries lose approximately $100 billion every year due to road crashes,

which is twice the amount of all development aid provided by donors to developing countries.

Table 3 below shows the number of road accidents and fatalities in India from 1994 to 2004.

Table 3: Number of Road Accidents in India from 1994 to 2004

Graph 1: Road Accidents and Number of Vehicles in India from 1994 to 2004



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vehicles are the major causes for road fatalities. (Mishra, 2003). Very limited research has been

attempted to investigate the influence of growth and expansion of automobile industry in a

country on road fatalities. This paper has attempted to fill this gap. In the past two decades, India

has witnessed rapid urbanization, motorization, industrialization and migration of people

spurred by rapid socioeconomic development. With mechanization and revolution in technology,

traditional ways of living and working are being altered (Gururaj, 2005).The growth in the

number of motor vehicles that accompanies economic growth usually adds to an increase in road

traffic accidents (Kopits, and Cropper, April 2003). India is witnessing phenomenal growth of

the vehicular traffic due to population growth and far reaching socio-economic transformation

not only in urban India but also rural Bharat. (Valli, August 5, 2004). The inevitable

consequence of such sharp increase in the number of vehicles is increase in the number of

accidents. The Indian government permits 100% FDI on the automatic route in mass rapid

transport system in all metros including associated real estate development. Though

transportation does not have an intrinsic purpose in itself and is rather intended to enable other

economic activities such as production, consumption, leisure, and dissemination of knowledge to

take place, (Yevdokimov, 2007), in India ineffectively regulated transportation system is posing

a threat to the society and a invisible burden on the economy of the country due to its negative

impact. So in this paper, we have tried to relate the FDI inflows to the number road accidents as

an inevitable side effect of sharp increase in the number motor vehicles produced and allowed to

ply on roads. Road accidents are caused by many factors such as drunken drivers, poor traffic

management, bad roads, total lack of observance of traffic rules, lax legal deterrents, corrupt

traffic police, jaywalking pedestrians and a deadly mix of slow and fast-moving traffic etc.



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However, this study is limited to an investigation of the possible influence of FDI inflows as one

of the causes of road accidents in India.

3. STATISTICAL ANALYSIS:

The hypothesis of this paper is that road accidents in India are rising with the increase in

economic growth caused by FDI inflows into the country and increase in the total number of

vehicles due to increase in per capita income of the people. Time series data is considered with

eleven observations. A linear relationship between the road accidents, FDI inflows and number

of vehicles on the road and per capita income can be represented in the form of the following

regression equation with residual ε.

Rd = α + β 1 FDI + β 2 TV+ β 3 PI + ε

Where:

Road Fatalities (Rd) = φ, (FDI), FDI inflows into India, (TV), total number of vehicles and (PI),

per capita income.

We have used the data for all these variables for period of eleven years

from 1994 to 2004. After running regression, we have obtained the following regression results:

Road fatalities = 290.059 + 0.010598251FDI + 0.1408592 TV -0.002462046

The results show a strong correlation between road fatalities and total number of vehicles

registered, (meaning purchased), each year, and a moderately high correlation between road

accidents and FDI inflows, and finally between road fatalities and per capita income. The results

do not violate any of the assumptions of linear regression for the time series data. The F-



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statistics and p-value of F-statistics show that the model is significant and the road accidents are

influenced strongly by both FDI inflows and the number of vehicles, but beta value is negative

for per capita income, indicating that increase in per capita income does not affect the number of

accidents on the roads. The beta values for FDI inflows into the country and total number of

vehicles are positive though the degree to which they exert influence on road fatalities is low.

But since they are positive one cannot ignore the fact that these two variables, i.e. FDI inflows

and total number of vehicles do influence the occurrence of road accidents. In other words, this

analysis shows that the total number of vehicles does increase the number of road accidents. The

economic boom in the country has lead to the increased purchase and ownership of vehicles

which consequently has led to serious impact on the safety of vehicle owners and drivers.

4. CONCLUSIONS:

The forgoing empirical exercise shows that road accidents are influenced positively by

FDI inflows and total number of vehicles owned by the people. Considering the various factors

causing road accidents; this result is quite significant. Road accidents in India have been on a

continuous rising trend which entails economic cost to the country and social cost to the victims

and their families. The government policies on Indian automobile industry have been framed in

order to encourage the expansion of the automobiles sector in India. The policies adopted by the

Indian government for the growth and development of the automobile sector have led to a large

number of foreign producers investing in automobile production in India. Though exports of

automobiles produced in India have also increased, domestic sales have increased phenomenally

for two wheelers and other automobiles. Along with such expansion of automobile production,

the government of India has not put in place an effective transport regulation system in the



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country. The Central government has enacted the regulatory legislation but has entrusted its

implementation to the state governments. The state governments as usual have been ineffective

in regulating the use of automobiles on the roads. This has led to more traffic accidents and

fatalities, apart from noise and air pollution. The costs of burning more fuel due to vehicular

queueing at signal points and during traffic jams are on the rise necessitating more oil imports.

All these tangible and intangible costs have to be assessed before they assume monstrous

proportions.

India should focus more on improving its infrastructure so that the positive economic progress is

enhanced. This will be possible if smooth flow of traffic ensures safety of people and saving of

their destination time. The Indian government should take necessary steps to reduce the total

number of vehicles plying on the roads by increasing tax on vehicle ownership particularly on

multiple vehicle ownership to discourage such ownership of vehicles. The central government

should revamp the present system of regulating transport system in the country if necessary force

the state governments to enforce regulations effectively.

Indian government should prioritize road safety, sanction more funds for road construction and

maintenance and should focus more on better road designs. Reduction of accidents on roads and

fatalities promotes the country’s economy, public health and safety. . Activities such as building

new roads, widening existing roads, putting in new interchanges, or constructing bridges will

generate various benefits. More FDI should be routed to road construction industry, rather than

for the expansion of automobile sector.

The Indian government should work towards providing the cities with subways, pedestrian

bridges, paved pavements and zebra crossings all of which reduce the road fatalities.



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Annexure

Statistical Results:

The detailed results of the statistical analysis are presented in the following tables.



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Biographical sketch:

Manjula G.T. is a Doctoral student at South West Jiao Tong Universityin China at the Department of Economics and Business Administration.She received her Bachelors of Engineering in Electronics Degree fromBangalore University, India in 1990. She obtained variouscertifications in IT. She worked as a lecturer at Polytechnic for theElectronics and IT department in India. From 1996 to 2000 she workedfor NCC international Diploma, UK, at Brunei for Micronet

International College as a Senior lecturer, where she volunteered to teach Accounts, as being an

Engineer ,she had strong Mathematics background. She succeeded in turning the marginal gradesof students to good grades, which motivated her to go into in-depth study in the area of accountsand finance and she took a fascination for it. From 2002 to 2006 she worked in China as a Seniorlecturer and guest lecturer for several universities in Chengdu, Sichuan Province teaching IT,accounts and finance. She obtained her MBA degree from Webster University of America, inDecember 2007. From 2008 till date she has been working as a guest lecturer for severalUniversities in Chengdu, China.

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