INDIAN AUTO POLICY AN EXAMPLE TO FOLLOW

Fuelling industrial growth through auto sector

By AQAMUDDIN KHAN
May 29 - June 06, 2004

Globally, the automobile industry is considered to be the mother of all industries and an engine of growth for the economy. It is an indisputable fact that countries that have achieved major industrial growth in the last century have focused on the auto industry, e.g. USA, Japan and, in more recent times, India, Korea, Thailand, Taiwan, Malaysia, etc.

Let us study the example of our neighboring country. The Indian Auto policy is a clear manifestation of the importance the Indian government accords to the Auto Industry in the context of its contribution to overall growth. The policy provides measurable goals and its stated Vision for the industry is "to establish a globally competitive automotive industry in India and to double its contribution to the economy by 2010."

INDIAN AUTO INDUSTRY BACKGROUND

The facts and figures relating to the Indian Auto Industry speak volumes about the importance of its role in the Indian economy.

* The size of the market has increased dramatically, from approximately 600,000 vehicles in 2002 to more than a million vehicles in 2004.

* It numbers more than 20 manufacturers among its ranks, including such names as Toyota, General Motors, Hyundai, Mahindra, Suzuki, Daewoo Motors, Maruti Udyog, Swaraj Mazda, Volvo, Ford, Hindustan Motors, Indian Auto and Eicher Motors.

* Number of automotive parts vendors total more than 500 major companies.

* Investment of over US $ 5000 million.

* Turnover amounting to over US $ 10 billion.

* Provide direct employment to approximately 450,000 people, and indirect employment to millions.

Source: Automotive Component Manufacturers Association of India (ACMA)

All the above has been made possible due to the policy of facilitation and support adopted by the Indian government.

MAIN POINTS OF THE INDIAN AUTO POLICY:

Some excerpts of the Indian Auto policy might be of interest in this analysis.

INDIAN POLICY OBJECTIVES

i. Exalt the sector as a lever of industrial growth and employment and to achieve a high degree of value addition in the country.

ii. Ensure a balanced transition to open trade at a minimal risk to the Indian economy and local industry.

The instruments to achieve the Policy objectives will be the initiatives relating to investment, tariffs, duties and imports.

INDIAN IMPORT TARIFF

i. The government will review the automotive tariff structure periodically to encourage demand, promote the growth of the industry and prevent India from becoming a dumping ground for international rejects.

ii. In respect of items with bound rates, viz. buses, trucks, tractors, CBUs and auto components, the government will give adequate accommodation to the indigenous industry to attain global standards.

iii. In consonance with Auto Policy objectives, in respect of unbound items, i.e., motorcars, MUVs, motorcycles, mopeds, scooters and auto rickshaws, the import tariff shall be so designed as to give maximum fillip to manufacturing in the country without extending undue protection to the domestic industry.

iv. Used vehicles imported into the country would have to meet CMVR, environmental requirements as per Public Notice issued by DGFT laying down specific standards and other criteria for such imports.

INCENTIVE FOR RESEARCH AND DEVELOPMENT IN INDIA

i. The current policy allows Weighted Tax Deduction under I.T. Act, 1961 for sponsored research and in-house R&D expenditure. This will be improved further for research and development activities of vehicle and component manufacturers from the current level of 125%.

ii. Vehicle manufacturers will also be considered for a rebate on the applicable excise duty for every 1% of the gross turnover of the company expended during the year on Research and Development carried either in-house under a distinct dedicated entity, faculty or division within the company assessed as competent and qualified for the purpose or in any other R&D institution in the country

Source: Ministry of Heavy Industries and Public Enterprises, Government of India

Moreover, the Indian government is undertaking the above measures in consultation with all stakeholders, i.e. manufacturers, vendors, financial institutions, trade bodies etc.

Let us now compare the above with the situation in Pakistan:

COMPARISON WITH PAKISTAN

* The size of the market has increased from approximately 60,000 vehicles in 2002 to more than 100,000 vehicles in 2004, indicating a strong upward trend, but still a very small market compared with India.

* The total number of manufacturers is only 8 companies, comparatively much smaller than India.

* The number of vendor companies around 200.

* Investment in the industry is over Rs. 20 billion.

* Employment to around 120,000 people.

Sadly, despite the huge potential, a clear strategy for the auto sector in Pakistan is still a dream; in fact, we have yet to develop a comprehensive Auto policy. Every now and then there are vested interests and lobbies that try to settle government's long term plans (e.g. second hand car lobby, car importers etc.)

So far, the focus is only on deletion levels, which happen to be amongst the highest in the world, in a country that has a limited engineering and vendor industry. There are high tariffs on CKD and raw materials, which when combined with minimum incentives for investment in a high risk and geo-politically unstable regional environment, tend to restrict the growth of the Auto sector in Pakistan.

The government also puts unnecessary pressure on Pakistani automakers to reduce prices when the government is itself the biggest gainer. On an average, the total government duties and taxes levied on a car with a base price of about Rs 900,000 come to around Rs.250, 000. Obviously, unlike the car manufacturers, the government has zero equity, zero risk and zero management problems.

And, to top it all, the government has recently taken certain decisions that totally negate a long-term approach. In fact these decisions are harming the gains and growth made by the auto sector. For example, on Feb 11, 2004, the cabinet decided in principle to allow the import of used cars and towards this end it set up a task force to present recommendations. Fortunately, sanity prevailed and the decision was deferred till November 2004, though the very idea itself should have been dropped altogether.

This is how the market reacted to this decision in the subsequent days:

KSE Review: Cabinet decision on used car imports puts the brakes on KSE Daily Times, "International reaction to the nuclear proliferation issue and the cabinet decision to allow the import of reconditioned cars restricted the movement of the Karachi stock market and the index failed to breach the 5,000 points level during the week, analysts said. The market further went down on Thursday, on the news of cabinet decision to allow the import of reconditioned cars and strong remarks of President Bush about Dr Abdul Qadeer Khan. The KSE-100 index dropped 69.63 points to close at 4,874.22 points."

While the Engineering Development Board has developed an Engineering Vision for the industry in general, it has yet to develop a focused long-term Auto policy. Also, there is an acute need to put in place specific measures to implement the Engineering Vision that was developed a year ago.

In view of the exemplary growth of the Indian auto industry, we need to take a lead from that country's auto policy to provide "adequate accommodation to indigenous industry to attain global standards".

Policy Initiatives that Government of Pakistan can consider:

* Government should take into account the need to encourage investment for capacity expansion in order to meet rising demand. Policy should also make the auto sector WTO compatible instead of just seeking extensions.

* The policy should make Pakistan a global supplier of auto components and should also include incentives to facilitate R & D and setting up of engineering educational institutions to provide trained manpower

* Import tariffs should also be fixed in a manner so as to promote manufacturing of cars and auto parts in Pakistan, as opposed to mere assembly, providing a gradual reduction of protection to domestic industry. While ensuring a balanced transition towards open trade, the automotive tariff structure should be reviewed periodically to prevent Pakistan from becoming a 'dumping ground' for second hand cars, used parts and international rejects.