Despite a slowdown in recent years, India is expected to become a major automobile manufacturing hub and the third largest market for automobiles by 2020, according to a report published by Deloitte.

The report says that the global automobile industry is changing and the focus is expected to turn to India where automobile demand and manufacturing are growing. It says that various factors including higher income growth, large work force and low oil prices are likely to drive the sector forward in the coming years.

According to official sources, India is currently the seventh-largest automobiles producer in the world with an average annual production of 17.5 million vehicles, and is on way to become the fourth largest automotive market by volume, by 2015. India is also a large exporter of automobiles, with exports reaching around 2.3 million vehicles in 2013-14.

According to the Deloitte report, India has already established itself as a manufacturing hub for small-vehicle production, and entry of more original equipment manufacturing (OEM) players could make India one of the top-10 automobile production sites in the world in the coming years.

While, India’s rank in World Bank’s Ease of Doing Business is at the lower side (142 out of the total 189 countries), Deloitte Touche Tohmatsu Limited’s 2013 Global Manufacturing Competitiveness Index places India at the fourth position. Moreover, India’s place is expected to improve to second in the next five years.

The report says that implementation of reforms such as GST, infrastructure development, and labour reforms, announced by the Modi government is expected to boost manufacturing in India and draw more investments. “A focused and comprehensive manufacturing strategy and infrastructure development may unlock the potential of India’s manufacturing sector,” it says.

India’s 2002 Auto Policy has played a key role in strengthening the automobile sector by providing tax reliefs, reduction of export tariffs and financial support. Further, the Automotive Mission Plan 2006-16 continues to propel the sector, attracting more and more OEM companies to come to India, says the report. Interest rate cuts, deregulation of fuel prices and revival of the mining sector could boost demand for automobiles in India in coming years. “India is expected to grow the fastest in the sector among leading emerging economies during 2014-40,” says the report.

However, there are challenges to post continuous growth in this segment, says the report. Manufacturers will have to develop strategies to beat growing competition, meet demand for safety and technology, and expand their product basket at competitive prices. On the government side, clear policy direction, incentives to boost investment, environment and energy policies, and political stability in the next five years will play an instrumental role in making India an automobile hub, says the report.