AUTO INDUSTRY DEVELOPMENT PROGRAM - DIVORCED FROM THE REALITY

SHAMSUL GHANI (shams_ghani@hotmail.com)
Oct 20 - 26, 2008

The auto sector boom that continued till mid 2007 prompted the Ministry of Industries and Production to prepare and print a policy paper highlighting the five-year auto industry goals. Under the then prevailing circumstances, the program could have been best described as ambitious but the swiftly changed economic scenario has landed the program in fantasy zone. The summarized goals of AIDP are being mentioned below:

 

ACTUAL

PROJECTED FOR 2011-12

Cars (Nos)

161,000

500,000

Motor Cycles & Others (Nos)

750,000

1,700,000

Investment (Rs. Billion)

98

225

Contribution to GDP (%)

2.8

5.6

Contribution to Mnfg. Sector (%)

16

25

Contribution to indirect taxes (%)

63

190

Gross sales turnover (Rs. Billion)

214

600

Direct employment (Nos)

192,000

250,000

Exports (US $ Million)

35

650 (CBU 300 : components 350)

The AIDP consultation process started in March 2006 and the program was finalized and approved by the government in November 2007. While March 2006 period presented nothing ominous, the November 2007 time was showing visible signs of an impending economic downturn. A period of less than one year has clearly demonstrated that the auto industry boom was not on an even keel. The consumer-credit-based growth relying mainly on jacked up production of cars and free flowing bank credit, has now come to a grinding halt. In a given scenario, we can't expect to produce 500,000 units of cars three years from now particularly when the demand for cars has been cut down to half. Export prospects, in absence of any headway towards attainment of competitive advantages over more technologically sound world producers, remain quite bleak. Lack of skilled labor denies us any chance of winning outsourcing contracts. The shell shocked economy offers little hope for materialization of AIDP goals and objective as investment has been the first casualty of recent economic upheaval.

FAULTY PRODUCTION MIX AND UNREALISTIC TARIFF

The production mix of auto industry has remained biased in favor of luxury. Till now, we have been successful in producing and selling a higher number of cars thereby trying to create a false sense of economic progress. While roads jam-packed with new cars also convey an impression of economic well being, the real economic progress depends on increasing production and sales of commercial, transport and agro-support vehicles. According to the figures released by PAMA, we, in 2007-08, sold 82,510 commercial, transport and agro-support vehicles as against 164,650 units of cars. Such type of production and sales mix does not reflect favorably on an agro based developing economy. A big drop of 51 per cent in car sales during the first quarter of FY09 befittingly explains this point.

The tariff structure for auto industry has long been rich-supportive. You can't deny luxury to anyone but a high-price tag can certainly be attached to it. There is a huge difference in the resources of 800-1300 cc car users and those riding 1800 cc and above imported luxury vehicles. Giving relief to the later is something devoid of economic and social logic. During 2002-03, a duty of 200 per cent on 1800 plus cc luxury vehicles was quite justified. Then a gradual cut brought the duty down to an astonishing low of 75 per cent only 25 per cent more than the bottom line low cost car users. Was it the usual feudal pressure or some other indecent compromise?

CARS & JEEPS

2002-03

2003-04

2004-05

2005-06

2006-07

Up to 1500 cc

75-100%

75-100%

50-70%

50%

50%

1500 cc - 1800 cc

125%

125%

80%

65%

65%

Above 1800 cc

200%

150%

100%

75%

75%

Likewise, the AIDP too has vividly depicted this awful lean towards luxury seekers in its five-year advance tariff plan for CBUs of various capacities, briefly detailed below:

CARS & JEEPS

2007-08

2008-09

2009-10

2010-11

2011-12

CBU up to 800 cc

50%

50%

50%

50%

50%

CBU 800 cc - 1000 cc

55%

55%

55%

55%

55%

CBU 1000 cc - 1500 cc

60%

60%

55%

55%

55%

CBU 1500 cc - 1800 cc

75%

75%

70%

70%

70%

CBU above 1800 cc

90%

90%

85%

85%

85%

After having switched from deletion programs to Tariff Based System (TBS) in 2006, Pakistan auto industry positioned itself for a major thrust both on domestic and international fronts. AIDP, based on this sentiment, provided a launching ground to the upbeat auto industry. What we failed to take into account was the fragility of the development base. The migrating-birds like psyche of our investors, lack of state-of-the-art technology, over dependence on imported raw material, shortage of skilled labor and a shock prone economy were all there to suggest use of restraint and logic in the preparation of AIDP.

India has expanded its auto industry not on the basis of some hurriedly made future estimates but on the strength of its steel giants and the well targeted domestic and international markets. We are a very small market; our contribution to the one trillion dollar global auto trade was just 0.37 per cent in 2006-07. Our auto industry has no export potential. The high production cost and manufacturers' greed for higher profits render the indigenous production saleable only in the domestic market. We will have to do much more to revive the troubled industry than the mere preparation of AIDPs.