CAUSAL EFFECT OF ECONOMIC INDICATORS ON INDIAN AUTOMOBILE SECTOR

Rama Krishna Yelamanchili

doi:10.32479/ijefi.9175

Abstract

In this paper we examine the co-movement and casual relationship between economic indicators and automobile index. We postulate that leading and coincident economic indicators will help explain, cause, and predict movements in automobile index. To test our hypotheses we source data for four coincident indicators, namely Index of Industrial Production (IIP); Index of Manufacture of Motor Vehicles, Trailers and Semi-trailers (MVI); Index of Manufacture of Other Transport Equipment (TEI); and West Texas Intermediate (WTI) crude oil price, for leading indicator we use Bombay Stock Exchange (BSE) sensitive index (SENSEX). We consider BSE’s AUTO index as proxy for Indian Automobile Industry. We collect monthly data of our study variables from April 2012 to June 2019. We break our full sample into two sub-samples based on break point in AUTO index and run separate analysis for each sample period. We find significant contemporaneous co-movements between SENSEX and AUTO index. In contrast to our hypothesis AUTO index cause SENSEX in all the three sample periods. Granger test confirms this result with different lags. In addition, we also find evidence for causation from AUTO index to MVI and TEI with five and three lags respectively in our second sub-sample period. Our results indicate that automobile industry influence Indian stock markets and automobile industrial production. Our results suggest that policy makers and regulators should be vigilant in making policies pertaining to automobile industry and should consider the repercussions of their decisions, because wrong policy decisions about auto industry may hurt the Indian economy. Keywords : Indian economy, Indian stock markets, automobile industry performance, policy implications, regulatory norms JEL Classifications : G11, G18, E23, E32 DOI: https://doi.org/10.32479/ijefi.9175

Highlights

The Indian automobile industry is recognized as a “sunrise industry” as it has emerged as one of the fastest growing sectors over the last few years
For full sample period we find that bombay stock exchange (BSE) sensitive index (SENSEX) gain 127%, industrial production (IIP) gain 31% and west texas intermediate (WTI) drop 47%
In our first sub-sample period we observe an interesting fact about AUTO index

Summary

Introduction

The Indian automobile industry is recognized as a “sunrise industry” as it has emerged as one of the fastest growing sectors over the last few years. The automobile sales in India have grown at a compounded annual growth rate of six percent over the period of FY11-FY17. This growth can be attributed to significant support the automobile industry received from Government of India (GOI) in the form of fully de-licensing, tax incentives for exports, and allowing 100% foreign direct investment (FDI) are few to mention. With such a kind of support the industry attracted FDI’s worth USD 20.85 billion during the period April 2000 to December 2018. It is expected that India will emerge as the world’s third largest passenger vehicle market by 2021 and create approximately 65 million jobs

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Results

Conclusion