Demystifying new auto policy

EDITORIAL: The new auto policy is in the making. The government is attempting to develop a core base in small cars and new models in tractors and 2/3 wheelers. To understand the government’s perspective, let’s take stock of the situation. The automobile sector attracted Japanese investment in the 1980s. The protection given to them was supposed to end, with local producers gaining scale and skills to compete.

But that never happened. Deletion programme (from 1987-2004) was changed into a tariff-based system (TBS) in 2006. But one way or the other, localization did not grow to the levels desired by policymakers. Three Japanese players never came out of infancy and scale could never be achieved. CKD kits and parts are being imported from Thailand and other countries. Local parts’ value chains were developed to serve OEMs only.

The aftermarket largely relied on imports where duties on parts are usually being imposed by weight while the local part manufacturers pay per piece. The informality and skewed parts’ import policy never allowed parts maker to truly grow, scale up and become competitive. In 2016-21 policy, new players were incentivised. This was resisted by Japanese players. But the government at the time took the pressure and let the new policy come and play.

Today, there are a dozen OEMs producing over three dozen of models and variants. The competition is slowly expanding, and consumers have choice. But the core engineering development in automotive is still a dream.

With around 200,000 cars production a year for 40 odd models and variants, there is less likelihood for any model to gain scale and become competitive. Something must change. The proposed new policy is aimed to have incentives for the production of smaller cars — up to 1000cc — while there is no incentive for new entrants. The whole objective is to gain scale and divert the investment in smaller cars. That is a right approach.

Today, around 25-30 percent of car parts by value are localized. Older the model, higher is the localization; smaller the car, higher the localization. But still not enough to venture into export markets or even compete with similar duties on CBUs. The idea is to expand the pie and take the production up to 500,000 per year and with a model or two producing over 100,000 cars per year. However, by doing so, import bill will shoot up. And right now, with ballooning imports, automobiles is the first “luxury” sector that gets the cut.

The argument of banning CBUs or luxury cars is based more on sentiment than on actual statistics. Policymakers see friends and acquaintances buying expensive imported cars and start arguing that hundreds of millions of dollars’ worth of cars are being imported every month. The actual number is not even 10 percent.

The conflicting point with the auto policy and import control measures is that the policy wants to reduce FED (Federal Excise Duty) on 1000cc plus cars to encourage penetration while there are rumours that the government is all set to increase FED on these cars to discourage consumption. The left- and right-hand coordination is absent.

The situation will become clearer in a week or two with the arrival of mini-budget. On the policy, apart from cars, the focus is to bring change in tractors and 2/3 wheelers. Here the argument is flipped. In both segments, there are limited models and are being produced in large numbers. Localization is high while prices are low. But the consumer has a dearth in choices and variety. Even in this segment, there are few exports to take home.

The policy has introduced incentives for new bike models — over 125cc — rickshaws over 200cc and new tractor models. The focus is on developing the core engineering expertise in the auto parts. In 2006, when deletion programme was changed to TBS, the SRO 693 (appendix-I and appendix-II) was supposed to update every six months. The idea was to increase the duty on parts which are localized by even one model.

But that upgradation never happened. There was no incentive for part makers to invest in R&D as they had to compete with imports. Now the plan is to upgrade this SRO every six months. The story of aftermarket is explained above. The government should change the importing parts by weight system and should have documentation in the aftermarket where most importers, producers and dealers operate informally and are at an advantage.

There are indicative targets on exports with incentives to those who export. There are incentives for hybrid and EVs. The policy on paper is good. None of the past policies were bad on paper. But lack of implementation retrospectively failed them. Let’s see how much of the upcoming policy will be implemented in letter and spirit.

Copyright Business Recorder, 2021