The phrase “violent change” isn’t new to car makers. Legendary Chrysler CEO Lee Iacocca famously used this to describe the shock that Detroit received in the 1970s, once the oil shock persuaded Americans to switch to smaller cars. Car makers—including those in India—are again making it seem that, with global warming, it’s time for another drastic change, now towards green cars.
If this change makes sense, it’s odd that manufacturers are seeking incentives. Yet, that’s what General Motors India asked for at New Delhi’s 10th Auto Expo this week. Such a suggestion also taps into the spirit of the expo, as India compares its auto prowess against China, whose electric car sales are inviting envy. So, just as Iacocca had to approach Washington to survive in the face of Japanese competition, GM India wants a subsidy from New Delhi. Auto makers argue that electric or ethanol-fuelled cars cost more than consumers are willing to pay. So the government must help reduce the sticker price.
Illustration: Jayachandran / Mint
However, first, it’s unclear what kind of protectionism a subsidized auto industry —which every country considers dear—will unleash. Second, it’s unclear if the present generation of electric cars is appealing. GM’s Chevy Volt in the US has to be charged for six hours a day, and only travels 40 miles on this charge—after which an internal combustion engine kicks in. Will GM’s electric Spark, due to roll out in India in October, be any different?
Third, a government struggling with a fiscal deficit is in no shape to offer more subsidies. Fourth, such subsidies skew other incentives. In 2008, the US discovered that more corn for ethanol meant less corn for food. This week India reportedly discovered that it has to blacklist ethanol makers—who are more interested in making molasses —to force them to supply to oil companies.
Fifth, by suppressing a natural price point, the government assumes it knows better. But India should realize by now that it can’t pick industry winners, let alone make technological choices for consumers.
Considering how green activism has hijacked the environment agenda, these issues are of global import. In India, at least, there’s a twist. Auto makers are demanding a green subsidy from a government that ironically already subsidizes regular fuels.
Economists have long argued that a clean way to combat climate change is to make traditional fuels more expensive, perhaps imposing a Pigovian tax —named after English economist Arthur Pigou—across the board for consumers to internalize these climate change externalities. This may later become necessary in India. For now, the government can start by allowing petrol and diesel to reach their market price. That’s the kind of drastic change that India’s auto market needs.
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