The import duties on fully built automobiles should be sharply reduced to the level of auto parts in order to encourage competition, make vehicles cheaper and increase exports, says a study commissioned to a think tank by the government’s National Manufacturing Competitiveness Council.
The effective rate of protection, which makes imports more expensive than indicated by the actual customs duties and is a barrier to excessive imports, is 10.1% for auto parts compared with 183.5% for passenger vehicles. This, the study argues, distorts the investment pattern in the industry and also helps improve the profitability of automobile assemblers.
“Profitability should have come down after liberalization because of competition,” said Pankaj Vashisht of the Indian Council For Research on International Economic Relations (Icrier), an economic think tank, who co-authored the report. “But the high levels of protection has enabled auto assemblers to actually increase their profits and also attracts more investment.”
The profitability of auto makers has nearly doubled to around 10% in the 15 years since economic liberalization, the report claimed.
Some Rs60,000 crore is being invested in building new factories for cars, trucks and bikes over the next four years by manufacturers such as Volkswagen AG and Nissan Motor Co. Ltd. By comparison, around Rs8,000-10,000 crore is the estimated investment in the auto parts sector, according to the industry grouping, Automotive Component Manufacturers Association.
However, the study also said that before lowering import tariffs for automobiles, it should be ensured that the rupee doesn’t get stronger, infrastructure be improved and anti-dumping measures be strengthened.
The study will be presented on Tuesday at a seminar organized by the council, which promotes manufacturing. The report, which studied the determinants of competitiveness of the Indian auto industry, surveyed 45 companies, including 14 automobile makers.
The auto parts sector should also be supported with lower excise duties and improved access to credit since it has the potential to employ more people and also export more, recommends the study. Auto parts makers employ about 250,000 whereas auto making employs about 200,000.
The study said that Indian auto parts makers can compete more effectively against those in other countries if they increase their scale of production, which in turn will cut costs and increase efficiency.
It cited lack of credit availability and skilled manpower as the two main reasons why smaller component suppliers were unable to expand production.
The study also notes that countries such as China and those in the Asean bloc, which are India’s main competition in the auto industry, have lower tariff on capital goods—those that are used to make other goods. It has asked for up to a 5% reduction in these taxes to increase the competitiveness of Indian firms. It has further called for policy intervention in the form of tax incentives for research and development to keep pace with new and emerging technologies. Indian auto-parts makers spent only up to 1.5% in R&D and most do not have a research facility nor do they intend to spend on R&D in the future, the study said.