The proposed European Union Free Trade Agreement could prove detrimental to the Indian automobile industry

As Prime Minister Manmohan Singh embarks today on a bilateral visit to Germany, there is at least one section of industry that is nervous: automobiles. For, at the top of Dr. Singh’s agenda in talks with German Chancellor Angela Merkel is finalising the contours of the India-European Union (EU) Free Trade Agreement (FTA). This FTA has been under negotiation for a few years now and several intractable issues have ensured that progress is slow until now.

Industry, trade and agriculture groups in India have voiced their opposition to the FTA at different points in time simply because the proposals, or whatever is available of them in the public domain, do not appear to be favourable for domestic interests. Though the EU FTA will impact segments of industry, agriculture, dairy farming and even services, very little public debate has taken place on the subject. But that is another story.

European car companies such as BMW, Mercedes-Benz, Audi and Porsche want the road to India smoothed out so that they can drive in their uber-luxury cars with minimal hurdles. And Dr. Singh appears keen to please them.

The EU is said to be pushing for a concessional rate of import duty on fully built cars, known in industry jargon as completely built units or CBU. The present tariff rate for CBUs is 60 per cent and the EU would like it halved. This will mean that European car companies need not invest in a manufacturing facility in India but can export from their European plants paying just 30 per cent duty. The pressure appears to be mainly from Germany where most of these luxury car companies are based.

Mercedes, BMW and Audi have a limited assembly operation in India where they assemble CKD (completely knocked down) and SKD (semi-knocked down) car kits for sale in the domestic market. Of the three, Mercedes has been here relatively longer and also has a more established domestic sourcing network but still doesn’t score high on indigenisation.

Used cars

The import duty on CKD and SKD kits range between 10 and 30 per cent and if the EU proposal is accepted, CBU rates will fall to that of CKD thus disincentivising even limited assembly operations in the country. But what is more worrying is the other proposal that is also on the table regarding a similar low duty on used cars.

The EU would like that “non-new goods” be treated on a par with new goods. This dangerous proposal can lead to the country being flooded with used cars junked by European customers.

European recession

The EU’s desperation is understandable given that its own auto market is in recession and is unlikely to recover anytime soon. On the other hand, the Indian market, minus the blip in 2012-13, is promising in the long term and offers juicy growth rates unlikely to be ever seen in Europe for a long time to come. For instance, even in a bad year for cars as the one that just went by, sales growth was flat in the luxury segment where BMW, Audi, Mercedes and Porsche operate.

In the April-February 2013 period, a total of 20,947 units of luxury cars were sold in the country compared to 21,079 units in the same period in 2011-12. In comparison, sales in the immediately lower segment with models such as the Honda Accord, Toyota Camry and Volkswagen Passat fell by a third to 3,859 units in the 11 months to February 2013, as per data from the industry body, Society of Indian Automobile Manufacturers (SIAM).

These numbers also show that the absolute size of the luxury car market is about five times larger than the semi-luxury segment. And it is growing the fastest among all segments thanks to rising affluence and the availability of these models in the country. In a recent interview to Business Line, Audi’s India head, Michael Perschke, said that by the end of this decade, his company would sell more cars in India than in Japan, France, Spain or Italy. Is it any wonder then that the Germans and the EU are desperate to get the rules of the game changed?

But the problem is that India does not gain anything from changing the rules; if anything, it has a lot to lose. For one, it will hit companies that have already invested in manufacturing facilities here such as Maruti Suzuki, Tata Motors, Hyundai, Honda, Toyota and Ford to name a few. These companies have created millions of jobs directly and indirectly in the country, which will stand imperilled.

Second, exports to Europe by these players have also reduced with the stimulus-related scrappage measures being phased out there. So, Indian companies will not gain from the FTA.

Third, once the barrier is lowered, it can be guaranteed that imports into India will swell. Even at the present imposing 60 per cent duty rate, which after adding other imposts would go past 100 per cent effectively, CBU imports have been rising. Between 2009-10 and 2010-11, CBU imports from Europe more than doubled to 11,000 units adding up to a total value of $3.4 billion, which is also an outflow of precious foreign exchange.

Diesel debate

Finally, the cars in this category — 3,000-5,000 cc capacity, diesel engine — are not really the ones that the country might want to incentivise at a time when there is a raging debate on SUVs and the subsidised diesel that they guzzle.

So whichever way one looks, it seems as if Dr. Singh can oblige his German hosts only at the cost of the domestic auto industry and millions of jobs.

raghuvir.s@thehindu.co.in

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