INDIAN AUTO POLICY IS DOUBLE THE SIZE OF THE INDUSTRY BY 2010

By SABEEN IBRAHIM and TALHA BIN HASAAM
Nov 14 - 20, 2005

The Indian auto policy clearly demonstrates the importance placed by the Indian government with regards to its auto industry. The policy's vision is "to establish a globally competitive automotive industry in India and to double its contribution to the economy by 2010."

The figures of the Indian auto industry prove the important role it plays in the Indian economy. The market size has evidently increased from approximately 600,000 vehicles in 2002 to stand at over more than a million vehicles in 2005. India has over 20 manufacturers, including Toyota, General Motors, Hyundai, Mahindra, Suzuki, Daewoo Motors, Maruti Udyog, Swaraj Mazda, Volvo, Ford, Hindustan Motors, Indian Auto and Eicher Motors. The number of automotive parts vendors reaches an impressive figure totally more than 500 major companies, while investment stands at over US $5000 million. The Indian auto sector has a turnover of more than US $10 billion, providing direct employment to approximately 500,000 people and indirectly providing job opportunities to millions of locals.*1

All this has been made possible by the support and facilitation adopted by the Indian government. India's policy objective requires exalting the sector as a lever of industrial growth and employment. This will help achieve high value addition, while warranting an impartial changeover to open trade at minimal risk to the local industry and its economy. The instruments used to achieve the objectives of the policy are the initiatives relating to investment, tariffs, duties and imports.

India's import tariff allows the government to reassess the automotive tariff structure intermittently. This periodic assessment helps encourage demand; promoting growth and preventing the country from become a dumping ground for international cast-offs. In respect to items with bound rates buses, trucks, tractors, CBU's and auto components, the government will give passable alterations to the local industry helping to attain global standards.

Import tariffs are designed to give maximum impetus to manufacturing without extending unwarranted protection to the domestic industry. All used vehicles imported into the country have to meet Central Motor Vehicles Rules (CMVR) environmental requirements. These requirements detail standards and criterion for imports.

The policy allows Weighted Tax deduction under I.T. Act, 1961 for sponsored research and in-house Research &Development spending. Vehicle manufacturers will be considered for reimbursements on the applicable excise duty for every 1-% of the gross turnover of the company. *2All these undertakings by the government are in consultation with the manufacturers, vendors, financial institutions, trade bodies, etc.

However, if a comparison is made keeping in mind the Indian market with that of the Pakistani market, we see a notable increase in the sale of passenger cars and light commercial vehicles from 49,450 units in 2001-2002 to over 148,000 units in 2004-2005. This rising trend in the market in Pakistan is still relevantly small as compared to that with India. Pakistan boasts of only eight manufactures and 200 vendor companies and directly employs more than 200,000 people

Despite the huge potential, Pakistan still requires a clear strategy for its auto sector, while a clear, comprehensive auto policy is pending. Second hand car lobby and the car importers who have vested interests try to settle the government's long term plans.

The focus has only been emphasized on deletion levels, which are the highest in the world. Tariffs on CKD and raw materials are high 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.

Pakistani automakers are under pressure from the government to reduce prices. Government duties and taxes levied on a car with a base price of approximately Rs.90, 000 equals Rs. 250,000, thus making the government the biggest gainer as it has zero equity, zero risk and zero management problems. The government recently has allowed the import of used and reconditioned cars under the Personal Baggage, Transfer of Residence and Gift Schemes (import of vehicles) Rules 2004. Even at a conservative estimate, it is expected that 30,000 to 40,000 new and used vehicles will be imported during 05-06.

The Engineering Development Board (EDB) has yet to develop a focused long-term auto policy, implement and put into place the engineering vision for the industry which was developed more than a year ago.

The Pakistani government needs to encourage investment for capacity enhancements to meet the rising demand. Policies should be WTO compatible and Pakistan should be made a global supplier of auto components, including incentives to facilitate R&D.

Tariffs should promote local manufacturing of cars and auto parts as opposed to mere assembly. The automotive tariff structure needs to be reviewed to prevent Pakistan from becoming a cesspit for second hand cars, used parts and international rejects.

*1Source: Automotive Component Manufacturers Association of India (ACMA)
*2Source: Ministry of Heavy Industries and Public Enterprise, Government of India