Passenger car manufacturers in the country are worried over the government's stand on import duties under the proposed free trade agreement (FTA) with the European Union (EU).

While it is not clear yet if the agreement will be sealed at the upcoming summit with the EU in New Delhi on February10, reports of Prime Minister Manmohan Singh calling for a meeting with two of his Cabinet colleagues on February 6 to discuss the issue have caused concern among car manufacturers.

The EU is pushing for a big reduction in duty on import of fully-built passenger cars into India. The present rate of duty on completely built units (CBU) of new cars is 60 per cent and the EU is understood to be demanding that it be reduced to 30 per cent.

Tariff Rate Quota

Also under consideration is the introduction of Tariff Rate Quota or TRQ under which a fixed number of vehicles can be exported to India at duties even lower than that finalised under the proposed FTA. “Technically, this can even be at zero rate of duty,” says Vishnu Mathur, Director General of Society of Indian Automobile Manufacturers, the industry association.

The domestic car manufacturers are up in arms as they see their interests under threat. Toyota, Maruti Suzuki, Honda, Hyundai Motor, Tata Motors and General Motors, otherwise fierce competitors in the Indian market, are aligned on the same side as they fight what they see as a move by European manufacturers, primarily German, to drive in their cars from Europe without setting up a factory in India.

Though the concessional duty will be applicable for all cars exported from the EU, the primary threat seems to be in the luxury car segment where price elasticity is minimal. Even a concessional duty will not make imported small cars competitive in the Indian market.

The predominant beneficiaries of the free trade agreement will, therefore, be luxury car manufacturers such as BMW, Mercedes Benz and Volkswagen. Renault and Fiat already have manufacturing units in India while Peugeot recently announced plans to set up one in Gujarat.

What irks the domestic car manufacturers is that the government has not taken them fully into confidence on its plans. “The negotiations are not public though we have told the government what we prefer and what we don't,” say Mr. Mathur, adding that they learnt from German media reports about EUs demand to cut duty to 30 per cent.

An agency report on Friday quoted P. M. Telang, Managing Director (India Operations) of Tata Motors as saying that a duty cut will hinder industry growth and also create an ‘unlevel playing field' between those who have invested in factories in India and those just importing cars from abroad for selling in the country.