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201318 Mar

The Unrecognised Risks to the Indian Auto Industry



The Mahindra Bolero and its ilk will be more expensive henceforth. Why? Read on...


When the last Union budget was tabled, the Finance Minister and his advisors, in all their wisdom, decided to increase excise duties on SUVs by 3 % to 30 %, the logic being that they contribute to greater congestion on Indian roads, and also consume more fuel. Also, the bulk of SUVs on sale in Indian use diesel fuel, which is heavily subsidised by the government, hence justifying the increase in excise duty.


Is this valid logic?


Passenger car sales have declined over 25 % in the last 12 months, but overall the industry sales figures have remained constant (about 2.5 million units PA) due to an increase in demand for SUVs. Having caught on to this trend, the Finance Ministry P Chidambaram saw it as an opportunity to milk the UV segment for greater revenues. He also increased import duties on completely built vehicles by a whopping 25 %, from 75 % to 100 %, arguing that for those who really aspire to own a high-end car or motorcycle, would be willing to pay the premium.


The counter-argument, quite seriously, has to be that as of today, the automotive industry contributes 22 %, or about one-fourth of India’s manufacturing GDP and is a major ‘engine of growth’ to quote jargon. This statistic was highlighted by Heavy Industries Minister Praful Patel in a letter to Chidambaram. Patel also pointed out that the higher excise duty on SUVs included vehicles like the Mahindra Bolero and Tata Sumo, which form the backbone of personal and unorganised public transport in semi-urban and rural India. Such SUVs are a necessity, Patel argued, given the poor road infrastructure, and should therefore be exempt from the increase in excise duty.


Whatever be the allegations of corruption against Patel otherwise, he does indeed make a valid point in this particular case.


Higher excise and import duties aside, another serious limiting factor for the growth of India’s automotive industry is the poor road infrastructure, both within cities and cross-country. A study by the Economic Times reveals that 4 of India’s metro cities will be completely gridlocked within the next 5 years, given the rate of increase of vehicles vis-à-vis the rate of increase of road infrastructure. This simple statistic, plus the unavailability of parking spots, is already de-incentivising some people from making a new car purchase. Where would you park, they ask; again a valid question.


On a recent road trip, most of which was along India’s fabled ‘Golden Quadrilateral’, we were frequently blighted by numerous unnecessary delays, which included diversions for a religious gathering, bottle-necks at toll plazas where half of the toll gates were non-functional, detours for road repairs, accidents etc. Not to forget that uniquely in India we have traffic coming the wrong way, especially in the fast lane.


Since driving is fast becoming a life-risk and a hassle, not to mention prohibitively expensive, why would I want to drive? And if someone like me, who bleeds petrol, is beginning to feel this way, isn’t this a point of consideration for the storied intellectuals within India’s cabinet, who seek to mop up funds to prop up an unsustainable revenue model, blighted by archaic subsidies, subject to short-lived political considerations and short-sighted interest groups? Obviously no, but for the automotive sector to survive and thrive, it will need to look beyond India.


Seven million units a year by 2020? You’ve got to be kidding.