Move into top gear
To grow, the auto industry needs an enabling environment and futuristic infrastructure, writes Dilip Chenoy.india Updated: Feb 26, 2008 14:07 IST
Globally, the automotive industry is a key economic sector and drives the emergence of a strong employment-led manufacturing sector. India is no exception. We are the second largest two-wheeler, the 11th largest passenger car and the fifth largest commercial vehicle producer in the world. In fact, this sector can enable the government to fulfil its two promises: promoting manufacturing and generating employment. An additional car manufactured generates five jobs, a commercial vehicle 13. The current share of employment in the manufacturing sector is around 12 per cent as against 50 per cent in Malaysia, 62 per cent in Korea and 31 per cent in China. Growth in the automotive sector could significantly change this. The government’s Automotive Mission Plan 2006-2016 (AMP) aims to make India a global automotive hub, accounting for 10 per cent of the GDP and creating 25 million additional jobs by 2016.
The industry is investing over Rs 75,000 crore, nearly 50 per cent of the investments envisioned in the AMP. Much of this will be in regions that did not have any pre-existing manufacturing activity. The industry is also developing new products. While the unveiling of the Nano attracted global attention, many new two-wheelers, trucks, buses and other products were also on display at the Auto Expo in Delhi. Some products like the ‘i10’ are manufactured here for the world. The industry is committed to making the vision of the AMP a reality. Increasing commodity prices, depreciating dollar, hardening interest rates and high taxes have posed new challenges for the growth of the industry. Considering all these, will we be able to meet the AMP targets? Yes, but there is a need for multiple actions like reduction of taxes, specifically excise duty and the creation of an enabling environment so that the mobility aspirations of Indians are met. A inter-ministerial task force to implement and monitor the AMP is needed.
India has the second-largest road network in the world after the US. The US’s network is twice as large as India’s and it carries over 11 times the number of cars. Japan has seven times the number of vehicles but one-third the road length; Brazil twice and China thrice the number of vehicles but with just half the road length. The issue in India is connectivity. A well-connected and efficient road network would be the bedrock of a competitive India. Otherwise, it would not be possible in the future to transport goods including agricultural products from the rural hinterland to the national or international markets. A nine-state survey indicated that the construction of rural roads would lead to change in the cropping pattern, increase farm employment, improve access to health facilities, enhance the number of school-going children, and increase the availability of public transportation among others.
Of late, much has been said about cars out-pacing the growth in road development and the need to control private ownership of vehicles in our cities. This comparison is incorrect and misleading. The actual fact is that even in Delhi, one of our better cities, road availability has declined from 2.21 kms per 1,000 people in 1995-96 to 1.94 kms in 2005-06. With increasing urbanisation and influx of people, matters will get worse. The transportation sector contributes over Rs 120,000 crore as taxes and duties on vehicles and fuels. A proportion of this can be used to finance road and infrastructure development.
Improved public transportation is part of the solution. To do this, the first step could be to reduce duties on buses and rationalising of road tax. The former can be done in Budget 2008 but states should extend similar facilities for VAT. The second needs an empowered committee of transport ministers and would take time. Transport corporations and city bus systems have and can make profits. But, the sector needs reforms. Cross-subsidisation of passenger vehicles is not the answer. The problem is the multiplicity of departments and bodies that govern urban transport. A unified transport authority is required for coherence in planning and functioning. For example, in the Delhi metro, ring railway, taxis, autos and the city and inter-state buses need to be integrated. A strengthened, focused and extended urban renewal mission can enable this.
The increase in fuel prices was long due, but more needs to be done. The debate on petroleum prices is similar to the earlier one on electricity tariff. There is no reason why electricity and petroleum products need to be treated differently. To reduce fuel consumption, only efficiency standards would not have the desired impact in isolation of prices. The oil industry needs revenues to modernise and produce clean fuels. For emissions beyond 2010, an expert panel needs to be formed to announce a roadmap, a national norm rather than state or city-specific norms.
Research and development projects on alternative fuels and hybrids are required. Seventy-nine per cent of vehicles produced in India are two-wheelers, 71 per cent of the domestic car market is small cars, and a framework to encourage domestic production of such hybrids is required. Research on second-generation bio-fuels, synthetic fuels and fuel cell/hydrogen vehicles must be initiated. Many governments are investing huge sums in R&D projects and support out-sourced R&D — all these could be a model for India. Almost all of what needs to be done is known. Leadership and allocation of funds with long-term tax incentives that include outsourced R&D are required. Fostering innovation would enable more low-cost products like the Nano to be developed. To address the shortage of skilled personnel, an industry-institute partnership is a must. This has to be complemented by change in curriculum and teaching methodology. Many of the small auto component firms don’t have any access to capital. A modernisation fund could be created.
While the above measures would promote and sustain domestic demand and competitiveness, to become a global hub, exports have to increase. Exports have been growing at a compound annual rate of 40 per cent during the last five years. More vehicles are exported than the number produced in 1980. We need to promote ‘Made in India’ products. The depreciation of the dollar and non-reimbursable embedded domestic taxes has reduced profitability of exports. This needs to be addressed along with improved rail connectivity between the auto-manufacturing plants and ports.
While the industry invests to improve productivity, quality, create new capacities and products, parallel action to create an enabling environment and futuristic infrastructure is needed to realise the vision of the AMP and is imperative to sustain growth.
Dilip Chenoy is Director General, Society of Indian Automobile Manufacturers.