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He also asked them to come forward and invest in the country's public transport system.
"There is economic viability in new technology. Let us plan for the next 25 years. I would strongly urge the sector to invest in public transport and develop electric bikes, electric cars.... I urge automobile companies to diversify in alternative fuel," Gadkari said here at the 57th Society of Indian Automobile Manufacturers (SIAM) Annual Convention.
He said the government is planning to bring second generation ethanol as an alternative fuel.
Discouraging automobile manufacturers to make any more diesel-run vehicles, he said it was adding to the huge import costs and pollution levels, which the government was committed to bring down.
Gadkari said the companies which would make use of new technology to innovate on alternative fuel will benefit in the longer run.
He said the government's policy was "crystal clear" on this.
"Pollution and high import of petrol, diesel are challenges. Second generation ethanol with the use of bamboo, compressed natural gas (CNG) can act as substitutes for these imports and bring down the import cost."
"Alternative fuel like Liquefied natural gas (LNG) is the future fuel. CNG is also good for reducing pollution. We have abundant coal reserves to make methanol," he said.
"I have seen engines running on methanol in foreign countries. The companies thus should spend a part of their profits on research on such fuels," he added.
Urging the industry to invest in public transport, he said the rural and agricultural sector would benefit with this.
In a lighter vein, the minister also said the sector, which has 22 per cent share in India's GDP, if continued to grow at the same rate for the next three years, the government would have to add another lane in national highway.
"I want growth rate of the sector be thus less."
He also said the automobile companies should view the sector with an integrated approach -- from fuel, parking, engineering to even driving training centres.
"The companies can contribute in skill development with driving training centres. Diversification and expansion is the key," he said.
Gadkari also acknowledged the sector's contribution in exports, job creation and growth of the country.
He said because of the abundant manpower, reasonable costs, plenty of raw material availability in the country, India can be developed as an export base for automobiles.