Indo-EU free trade pact gives auto sector the jitters

There is a sense of paranoia in the auto industry about India's proposed free trade agreement with the EU.

“The biggest fear is that import duty on completely-built units, now at 60 per cent, will end up being at par with the 10 per cent peak import duty on auto components,” sources said.

If this does happen, it will be music to the ears of luxury carmakers such as Daimler, BMW and Audi which can, overnight, build a larger customer base in India.

At least Rs 10 lakh will be shaved off on the price sticker of a car which would otherwise cost Rs 30 lakh. In India, the overall levy on imported cars works out to a little over 100 per cent because of additional taxation beyond the 60 per cent import duty.

Blow for local manufacturers

For companies that have invested substantially in their plants and building a robust ancillary structure, this will be a big blow because locally made top-end cars will become unattractive overnight. These manufacturers would naturally oppose any such move since this will not lead to a level playing field.

The same analogy would apply to trucks, buses and two-wheelers imported from Europe. Sources say local manufacturers would be ‘severely disadvantaged' as a result.

“None of them can hope to survive in a regime of cheap vehicle imports especially when they already have their backs to the wall with high commodity prices,” an auto sector official said.

Importing companies, of course, will have reason to rejoice. There is already a degree of heartburn within Indian industry that some of them are getting away with ‘cheap imports' in their CKD (completely knocked down) assembly operations.

“It is blatantly unfair when there are so many other companies that have put in money to build a strong local base. Any move to lower CBU import duties will be the last straw,” the official added.

European cos to benefit

The move will benefit companies based in Europe because it will assure them the cheapest route to building a base in India. It will also be the best way to alleviate their woes of coping with a shrinking market back home.

It remains to be seen if any of these moves will be initiated in the FTA with the EU. The concern is that this will later pave the way for similar agreements with China where local auto companies such as SAIC Motor Corp and FAW Auto Works are keen on going global.

This explains why local industry was not too gung-ho about the Asean FTA as it would have led to a surge of cheap Chinese goods coming into India what with the ‘country of origin' posing the biggest hurdle.

“There is no way we can compete with their costing structure. Just imagine if cars, bikes and trucks from China land up here at half the prices of locally made products. Some Indian companies may even fold up as a result,” sources said.

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