Wednesday, February 23, 2011

Imported Cars May Get Cheaper After Indo-European Trade Agreement


India EU Pre-Post FTA Car Prices

On one end of the spectrum, we have Mercedes Benz, BMW and Audi who want duties on imported cars reduced through the India-European Union Free Trade Agreement. On the other, we have the Society of Indian Automobile Manufacturers(SIAM), who are pressing for the continuation of the duties imposed on CBUs(completely built units). While high end luxury car manufacturers assert that the steep duty is actually making their cars uncompetitive and sales duds due to the high prices, Indian manufacturers as well as some Japanese car makers who have set up manufacturing units in India contend that the lowering of  duties will actually affect the Indian manufacturing sector adversely as the incentive for setting up new manufacturing plants will vanish.

Also, Indian and Japanese  manufacturers averse to this latest move which the government intends to make claim that any lowering of import duty will adversely affect the Indian automotive makers by cannibalization of Indian cars sales. Now, looking at the situation on the ground and with me talking like a car and motorcycle enthusiast. The all Indian luxury car, the Tata Aria Crossover sells for under INR 20 Lakhs. The soon-to-be launched Mahindra W201 World SUV also will sell for under INR 20 Lakh. Coming to motorcycles, the Royal Enfield Classic 500 is the costliest made-in-India “Indian” motorcycle at about INR 1.5 Lakhs. So what cannibalization are the Indian manufacturers talking about?

Picture this, if the FTA does go through and the foreign car and motorcycle manufacturers do manage to pass on the benefit to the car buyer, we could be looking at a Jaguar XF for INR 30 Lakhs or an Audi A8 for INR 55 Lakhs or even a Ducati Monster 796 for under INR 5 Lakhs. Won’t that make these cars and motorcycles so much more affordable with the manufacturers too making a lot of money as volumes will definitely see a massive boost? You bet, it will, but only it the car makers pass on the benefits to the customer. The Indian government, along with slashing down the duties should also ensure that the manufacturers pass on the accrued benefits to the end customers. Whether this is legally feasible is another question for another day.

Now, talking in a nationalistic and an egalitarian sense, this move would definitely hit the Indian manufacturers hard as a person buying a Tata Aria would definitely want to stretch that little bit extra if he gets a European built sedan. Also, we need to bear in mind that the Indian car industry’s development with the likes of the Tata Indicas and Mahindra Scorpios of this world has only been possible as the Indian government adopted a protectionist view in order to ensure that Indian manufacturing is able to withstand foreign onslaught through the means of high import duties. So, if the duties do continue, very soon we may have high end luxury cars and motorcycles from our very own homegrown automakers. And this means more manufacturing facilities and jobs for Indians too.

So there, these are the two opposing ends of the spectrum on the Indian government’s planned duty waiver of 38% for CBUs from Europe and 10% for CKD kits from Europe. All said, most end consumers however will not bother about how the imposition of duties will favor the Indian automobile manufacturers as well as help develop the Indian automotive industry for the better. Bang for buck is the only language the consumer, especially the Indian one, understands, and for this very reason, the Indian manufacturers might find themselves on the wrong foot come April. If the Indian government does go ahead a sign the FTA with the European Union, luxury cars might very well get a lot more affordable. The writing seems on the wall, however minor the duty cut may be.


Ranji said...

The prices mentioned in this article are absolutely false!
The decrease will be in the tax applied to the imported cars and not the total value. So, if the tax applicable is Y then it would be reduced by 38% so new tax would be:
Y-38/100Y = 0.62Y. If Y=112% it implies new tax is approximately 70%
So, if the cars original value before being imported is X then the new value would be X+0.7X = 1.7X

Therefore if Audi A8 is for 89 then its new value would be 1.7(89/2.12)= approximately 71.4 lakhs. It's cheaper but not as cheap as the article quotes here. If I am wrong kindly let me know where and how.

Thanks. Cheers people!

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