QRs, MoUs and second-hand vehicles

Raghuvir Srinivasan

FOREIGN CAR manufacturers in India must be looking forward to the removal of quantitative restrictions (QRs), expected by the next year.

This would open up the domestic market to import of fully-built cars and CKDs. The MoU system, whereby foreign car manufacturers have to sign an agreement with the government committing to neutralise their imports through export obligations, would then come up for review.

Actually, once the QRs are removed, the MoU system would become redundant as foreign manufacturers might prefer to import and sell in the domestic market rather than go through the laborious process of signing the MoU and setting up a manufacturing/assembling facility in India.

Of course, while this appears simple, the hurdles could come in at two points. First, the Government may remove QRs, but nothing prevents it from setting the import duty at a high level. This will be the first hurdle for foreign manufacturers. The second would come in the form of the price itself. The cars could be outpriced by domestic market standards, especially if the duty element is added on to the basic price. So, it is not as if the removal of QRs would immediately open the floodgates for global majors to flood the Indian market with their models. The fickle Indian car buyer and his accent on value for money would put the skids on any such plans.

Second-hand vehicles import

The other common fear being voiced now is the import of second-hand vehicles following the removal of QRs. The domestic industry contends that this one single factor could killing them all. The argument is that given the prevailing prices of second-hand cars or motorcycles abroad, it would be impossible for Indian companies to match the import price. For instance, it would not be too difficult to secure a good second-hand car from abroad for as low as $3,000 which converts to Rs. 1-1.25 lakhs. What is the import duty one is talking of -- 100 per cent? It would be impossible for the government to peg it at such a high level but even assuming that it does so, one could still get a world-class marquee for around Rs. 3 lakhs accounting for shipment and other costs. A new Maruti 800 Deluxe would cost around the same!

But a few other factors need to be accounted for. Importing a second-hand car would be the easier part, the difficult one would be to get it serviced in the country. That might be a major stumbling block for aspiring second-hand car buyers going by the present service network in the country of most global majors. Of course, once volumes justify it, the foreign majors might set up facilities in India to recondition their vehicles and sell them with a warranty attached.

Second, the government could also impose other subtle restrictions such as preventing the import of vehicles beyond a certain age or mileage. It could also stipulate that vehicles with left-hand drive would not be allowed. This would immediately take away a major source market for second-hand cars -- the US. The import of second-hand vehicles is certainly a major issue before the industry today. To be sure, it is certainly not a desirable proposition for the government to allow such imports if it wants the domestic industry to thrive. There are examples of New Zealand and Sri Lanka which allowed the import of second-hand vehicles only to see their domestic industry wiped out.

But this should be balanced by the realisation that the Indian customer is not getting a good deal at all compared to his counterpart in the developed world. It has been estimated by the Society of Indian Automobile Manufacturers (SIAM) that the acquisition cost of an entry-level car is 42 times the median salary of an average Indian against just nine times in the US and 20 times in South Korea.

Reduce taxes, duties

Why is the acquisition cost so high? Of course, the average salary levels in the country are lower compared to the developed world. Equally responsible is the high taxation regime. The excise duty of 40 per cent on passenger cars is one of the highest among all consumer durables. Coupled with sales tax, road tax, insurance and so on, the average tariff on the purchase of a new car is almost 50 per cent.

The Government probably needs to become more pragmatic in the matter of duties and taxes on cars. Just as the reduction of income-tax rates increased collections, a reduction in the duties might lead to higher revenues because of more buys. That would also be an indirect way of countering the problem of second-hand car imports as manufacturers would be encouraged to produce and sell more new cars as volumes build up in the market.