Auto policy: How to put it on track
The need for an auto policy arose from two considerations. One was to put in place a subtle but protective wall around the domestic industry that was being threatened by the onslaught of new entrants from the US, Europe, Japan and Korea — most of which had long staying power. The other was the dire need felt by the industry to have a consolidated road map of the standards and norms on safety, environment, technology, certification, measures to promote growth and a regulatory framework to monitor massive outflows of precious foreign exchange. Instead of focussing on the invaluable strategic inputs consolidated by the governmental policy-making team, the policy document was misused to build barriers to an open market philosophy.
But when the auto policy was approved by Parliament, it was found to be an apology of a document, with hardly any significant content.
The basic requisite for an auto policy is simplicity. Three-four key or strategic areas must be identified and the controversial issues discarded. A consensus must be built around the basic principles, with a road map for five-ten years.
Policy principles
The policy should be founded on the principles of consistency, transparency and stability and provide the stimulus for accelerating growth. India's specific advantages must be leveraged where possible and the plan should be structured to co-exist with international norms. Areas of strength need to be clearly defined after taking account a long-term perspective of the R&D capability and the global economies of scale. The automotive industry potential must be leveraged to accelerate GDP growth and create employment opportunities.
Critical imperatives and current actions
Viable sections of the auto industry should be conserved and nurtured through permissible incentives (not protection) to face global competition. Non-viable companies should be guided to improve, consolidate or exit.
It is essential to monitor `used car imports' as they might make India a dumping ground and destroy the creation of additional employment. Used car imports should fully comply with Indian testing and certification rules. Duty barriers are only temporary and cannot be recommended.
The cost of acquisition of a new vehicle can be reduced by rationalising taxes and duties. Such measures will create consumer demand.
Create employment opportunities
This is vital for the development of the country. Growth of additional jobs is directly proportional to a healthy and vibrant industry. The auto industry is recognised the world over as the biggest employer. Ensuring that India builds global economies of scale, process capability and customer orientation can create a viable and healthy industry.
The government can draw a road map for an appropriate import tariff and duty structure. It is encouraging that the Finance Minister, Mr Yashwant Sinha, and his team have already laid the foundation. He has reiterated again, in this year's Budget, that he would bring down the peak import tariff levels to 20 per cent and one slab excise duty in the next few years.
A timetable should be framed for statutory compliance. Enforcement of inspection and maintenance will ensure that only `fit' vehicles ply on the roads.
Importance should be given to promote R&D programmes. Focus should be on those products and services where the Industry is capable of creating global economies of scale — for instance, two-wheelers and auto components
Future actions
The import tariff structure should be made to fall in line with the global harmonised code. Artificially-created nomenclature of completely knocked down units (CKDs) and semi-knocked down units (SKDs) should be eliminated and two basic tariff levels adopted — completely built units (CBUs) and raw materials/components. The latter should be codified item-wise with suitable differential in the rates to support the local component industry.
A basic import tariff differential of 10-15 per cent should be recommended between the peak rates of the CBU and raw materials /components. This difference will offer sufficient safeguard to the component industry to manufacture in the country and beat the imports.
The SME sector must be revitalised through consolidation, upgradation, R&D and other support needed. Our growth is heavily dependent on the viability of this sector. Mr Sinha is moving towards one rate of excise duty (16 per cent) and will gradually withdraw the special excise duties.
Improving road infrastructure is a key requirement to the growth of the automotive industry. It is necessary to put the economy firmly on `wheels'. It is encouraging that the government is allowing private investment in this area.
The global industry is suffering from over-capacity. The process of consolidation is on and mega mergers and acquisitions are on the way. Any global player to be viable will have to operate on economies of scale of not less than 4 million units per year.
Those that fulfil this criterion would, probably, include GM and its alliances, Ford, Daimler-Chrysler, Toyota, Volkswagen (Skoda) and the Renault group. What may happen to Honda, BMW, Fiat and Hyundai is a matter of conjecture.
A similar consolidation is taking place in the component industry. The annual global vehicle manufacturing capacity is around 55 million units compared to India's 700,00 units (including commercial vehicles).
Also, the sales revenues of the third or fourth largest component supplier in the world exceeds all local suppliers put together. This factor cannot be ignored.
The prescription is clear. Transform or perish. One must be geared to match the global onslaught or plan a graceful exit. The two-wheeler and component manufacturers can meet this challenge.
This is the story of the automobile industry. The honeymoon period is getting over. Testing times are ahead.
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