Home >Opinion >Views >A tax fix for our stalled automobile industry

Ford Motor’s exit from India—joining the ranks of General Motors, Harley Davidson, Volkswagen Group’s Man trucks—has cast a spotlight on our beleaguered auto industry. The travails of this $70 billion industry are emblematic of the flagging India growth story. Faced with declining demand for vehicles and often also rising inventory levels, most auto production facilities in the country have been running below their capacities. The covid pandemic and its associated lockdowns have only worsened the industry’s woes. As the outlook remains uncertain despite signs of recovery in the market for passenger vehicles, most players are reluctant to make fresh investments.

This is what bedevils a demand-constrained economy as well. Private consumption demand—the most important engine of growth, accounting for over half our gross domestic product (GDP)—has not been firing on all cylinders. After adjusting for inflation, per capita private final consumption expenditure in 2020-21 was lower than the levels recorded in 2017-18. Although there has been some recovery in the first quarter of 2021-22, it is still down by 12% over the same quarter of 2019-20. Investments, too, are down by 17% over first-quarter 2019-20. Falling consumption and the absence of animal spirits among entrepreneurs to invest have been responsible for our steady decline in overall growth since 2016-17.

The auto industry reflects these trends, as it contributes 7.5% to GDP. It accounts for 49% of the manufacturing sector’s output and employs around 35 million people directly and indirectly. Globally, India is the fifth-largest passenger-car manufacturer with 2.9 million vehicles produced in 2020, according to the International Organization for Motor Vehicle Manufacturers. It is also the world’s largest market for two-wheelers and the largest maker of tractors. The industry thus has critical mass to be a driver of overall growth. It is a bright spot now that vehicle-manufacturing in most advanced countries has reached maturity.

For such reasons, a prolonged slump in vehicle registrations (a reliable indicator of retail sales)—as seen this September over the same month of 2019—has economy-wide implications. Of course, recent trends within the industry present a picture of variation: Motor cars registrations have smartly recovered, showing robust growth over their covid depths, while two-wheeler volumes remain down, according to the Vahan Dashboard of the ministry of road transport and highways. If motor car and two-wheeler sales are considered proxies for consumption by upper and lower-income households, respectively, their divergent trends suggest a K-shaped recovery, according to Sajjid Chinoy of J.P. Morgan.

This festive season may perk up these numbers, but the outlook on demand is still worrisome. Urban consumers are postponing purchases as new mobility solutions emerge that are disrupting the global auto industry. The value of car ownership itself is being called into question, with ride-hailing options provided by apps like Uber and Ola.

Electric mobility is also in the ascendant. India has a stretch target of all new vehicles rolling onto streets being electric by 2030. Although digitally-connected cars and autonomously-driven vehicles are still some distance away, the emerging possibilities for mobility are bound to result in a pause exercised by car buyers who increasingly see vehicles that run on internal combustion engines as things of the past.

In this milieu, Ford Motor opting to close shop is bad news for green-field investments that are needed to kick-start growth not just in the auto industry, but also the overall economy. Ford invested $2.5 billion in its India foray, which began with its facility in Chennai. In 2011, it set up another one in Gujarat. Green-field investments are a long-term bet by investors. Like other global corporations that were attracted by India’s vast market opening up in the early 1990s, Ford introduced products that found ready acceptance internationally, like its Escort model. However, it soon realized that the market at the upper-end was narrow; that it had to develop affordable products. The Ikon and Figo were rolled out. But the wager didn’t pay off. Despite some success with its EcoSport, Ford made huge losses as demand for its vehicles was not strong enough to run its two factories.

As an engine of growth, the auto industry needs policy attention. The industry is dismayed that vehicles are still considered a luxury that only the rich can afford. Even two-wheelers attract a Goods and Services Tax of 28%. Lowering the cost of ownership will help generate demand. However, instead of helping legacy manufacturers of fossil-fuel-run vehicles, the government is pushing electric mobility; it has announced a package to incentivize electric and hydrogen fuel cell vehicles. This strategy will not take off with policy flip-flops. Tesla’s chief Elon Musk, for instance, has referred to “challenging government regulation" on Twitter in the context of setting up shop in India. Car-charging infrastructure isn’t yet in place. If electric vehicles fail to turn affordable, they too will face the demand constraints faced by other carmakers. Perhaps India could learn from the example of Norway, which facilitated electric mobility through truly generous tax subsidies.

N. Chandra Mohan is an economics and business commentator based in New Delhi. These are the author’s personal views.

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