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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 |