The fuss in reaction to the finance minister’s announcement, in his Union Budget speech for 2006-07, of bringing down the excise duty on diesel and petrol-driven passenger cars of a length not exceeding 4 mtrs. and an engine cubic capacity not exceeding 1500 and 1200, respectively, appears to have had been lost in a cloud of unreality then and continues to be in the midst of debate as the Budget announcement for 2007-08 nears.
Have we forgotten about the reality of a country that is India, what the statistics say and the lessons of the past?
The one thing on which there is no debate or doubt is that this move has had a positive impact on vehicles that come in these categories. How has “small” been defined is debatable but going by the model of cars and their makers it is evident that companies such as Maruti Udyog, Hyundai Motors and Tata Motors would benefit. Maruti will obviously benefit the most owing to its range of cars within this classification and its existing market share.
In a country of roughly 1.2 billion people and for a nation, which said goodbye to the license raj over a decade ago, why is it that we manufacture two-wheelers to an extent of nearly five times than the passenger vehicles (cars, utility vehicles and multi-purpose vehicles) that are made? It will not take a survey on an all-India basis to know that, supply being based on what demand offers, there is first and foremost a huge mass of Indians who cannot readily afford to buy vehicles other than reasonably-priced two-wheelers to enable their mobility or transportation needs. The approximately 200 to 250 million in the middle-class segment who can easily afford a four-wheeler come later. Given a choice, within their means, would the former not prefer to possess a vehicle which was more comfortable, which would shield them from the elements of nature, provide greater safety and allow the driver to carry a bit more of his family?
From the social point of view, the government, by making cars in the category defined by it, has first and foremost announced to the world that it does not see passenger cars as a luxury item but a necessary means of transport. Second (and perhaps because it has been urged by its Left wing partner’s as well), why should a four-wheeler not be within the reach of the masses in India is what it may have asked. Third, I think the government has become very sensitive to the fact that our cities (despite the flyovers and re-routing of traffic) are choking and our conventional fuel-reserves will not last for long.
From the economy’s point of view, the highest volumes in vehicles, apart from two-wheelers, are in the small car segment. Still these volumes are not as high, economically speaking, to make India a manufacturing hub of small cars for global consumption or, as its manufacturers would like, to enhance the competitiveness of the Indian auto component industry. It needs greater volumes.
I remember how some vehicle makers in the early 1990s, after introduction of radical reforms then, had to realign their vehicle manufacturing strategies on (realising the Indian market’s price sensitivity and other factors in favour) the manufacture of small, affordable, cars as a lucrative option. As a result the market saw some small car models being introduced.
It is not uncommon for governments to favour specific high growth industrial sectors, and segments within these sectors, by encouraging their development and progress through special benefits or focus. Thailand gave special incentives for the manufacture of pick-up trucks and that has today translated in the country being the second-largest manufacturer of these kinds of vehicles in the world after the U.S.
India’s aspiration to be a small car manufacturing hub is not new. Automotive industry associations had been voicing this ambition for many years and in 2002 the government’s automotive policy document enshrined its commitment to this aspiration. The policy states, “Domestic demand mainly revolves around small cars not exceeding 3.80 meters in length. Small cars occupy less of road space and save on fuel. These capture more than 85% of the market. India can build export capability and become an Asian hub for export of small cars. The growth of this segment needs to be spurred.” It has been nearly four years since the policy was announced and that the government did something specifically for this segment. The government will be bound to continually explore several possibilities to make this achievable and it could tinker around either with internal taxes or other incentives.
Hence any move by the government to take this forward should not come as a surprise to manufacturers or anyone else. It has been widely acknowledged by several economies that the automotive industry is the engine for growth. The same holds true for India and one of the vehicular segments that will take it forward belongs to the small car.
Copyright:Taarun Dalaya
