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The New Tyranny of the Auto Industry

Arvind Panagariya

               It was with much apprehension and fear that India lifted import controls on 714 consumer goods on March 31, 2000, following a WTO ruling.  The messiahs of doom had predicted that imports would flood the markets and destroy the local consumer goods industry.

But as the Commerce and Industry Minister Murasoli Maran explained in a recent interview published in the Economic Times (October 14), the Apprehensions about surge in imports are misplaced.”  Non-oil imports grew a paltry 2.78 per cent during April-August 2000.  “This is definitely not a surge,” noted the minister boldly.

This experience is a part of the now familiar pattern around the world to which India is no exception: greater openness benefits not just the consumer but industry as well.  With liberalization, India has not only accelerated its growth rate but also accumulated foreign exchange reserves at an unprecedented rate.

Nevertheless, we persist in ignoring the lessons of our own experience and stand ready to punish the consumer in favour of narrow, short-term industry interests.  Thus, our WTO obligations require us to lift import controls on all remaining goods by March 31, 2001.  A key item among these goods is used cars.  By all accounts, the government is poised to replace import licensing on used cars by prohibitive tariff duties and technical barriers.

A massive lobbying campaign by the Indian auto industry appears to have convinced Maran that liberalization of used-car imports will lead to huge unemployment.  In turn, the minister has vowed not to “allow our auto industry to be destroyed by second-hand imports.”  It now appears likely that the poor consumer will be subject to further penance before being blessed with the right to purchase the car of his choice, new or old.

Until mid-eighties, the Ambassador and Fiat car companies had robbed the consumer of his right to drive a decent car, at any price.  Today, foreign companies such as Ford and Daewoo are leading the charge against used-car imports at a reasonable tariff duty.  Having established local production facilities, the foreign companies now have as much interest in keeping cheaper imports out as domestic ones.

One argument given against used-car imports is that they will undermine technological progress in the auto industry.  Last November, while launching the prized model Ikon, the Ford Motor Company CEO, Jacques Nasser, declared, “India must decide whether it wants to be the recipient of the rest of the world’s junk or desires to develop latest technology automobiles.”

The suggestion that you can have either latest technology automobiles or used car imports but not both is, of course, ludicrous.  There are many countries in the world that have both. But even if we accept Nasser’s statement for the sake of argument, new technologies and products should be adopted only if they can compete against the old ones.  If the consumer chooses an imported used car over Ikon, it is Ford’s funeral, not the consumer.

The argument that used-car imports will turn India into “the recipient of the rest of the world’s junk” is even more spurious.  To begin with, we already drive Ambassadors and Fiats that are up to thirty years old and Marutis that are up to fifteen years old.  Soon, we will also have plenty of used Ikons.  So why are imported used cars especially bad?

Rather than increase the average age of automobiles in India, used-car imports will likely lower it.  In all likelihood, the average age of imported used cars will be lower than the current average age of domestic cars.  In addition, the imports will help retire a large stock of our very old cars. 

Indeed, used-car imports can be a powerful instrument of making the phase out of the existing unsafe and environmentally unsound cars politically acceptable.  While liberalizing used-car imports, the government could tighten further the safety and environmental standards applicable to automobiles.  Thus, the consumer welfare, sound environment and trade liberalization can all go hand-in-hand.

The government should also heavily discount the prophecies by the auto industry captains that used-car imports will destroy the local industry.  If Ford and Daewoo can compete against used cars in the United States and Europe, they can surely do so in India.  Ford’s Nasser himself states, “We are planning to make India the export hub for a range of our products like manufactured components, systems and even completely-knocked down kits.”  One wonders what plans he has for the Ford India Limited to compete against used cars in foreign markets if it is afraid to compete against them in its own market?

Thus, the problem is not that Ford and other auto companies are uncompetitive against used-car imports but that they want higher profits at the expense of the consumer in the domestic market.  This is the same instinct that led the Ambassador and Fiat to block entry of other firms and imports of even new cars three decades ago and held back the progress of the industry.

Even if it were true that some auto manufacturers will fail to compete against used-car imports, why should they be protected?  Why should auto industry operate under rules different from those applicable to other industries?  After all, we do allow the imports of used machinery at relatively low duty.  If the Indian auto industry is not competitive in the long run, its inefficiency should not be subsidised at the expense of the rest of the economy.

The appropriate policy for used-car imports is to allow them at a modest duty, not exceeding the current top tariff rate of 35 percent.  If there is then a surge in imports that causes injury to the domestic industry, the usual safeguards, permitted by the WTO, can be invoked.  These safeguards provide temporary protection for four years.  If the industry fails to adjust during that period, there is no reason to subsidise it in perpetuity.

 Economic Times October 25 2000