FTAs between regions may overtake India's automobile plan

A key architect of the Automotive Mission Plan (AMP) says the government should examine the whole issue of free trade agreements (FTAs), like the one between South Korea and the European Union, that might make the manufacture and export of cars cheaper between them and more expensive if they are exported out of India.

“The government must calibrate its response to the whole issue of regional FTAs signed between different countries. In order to develop India as a small car hub, the government has to make it attractive for car manufacturers to come to the country and set up manufacturing units. This can happen only if the numerous measures spelt under the Automotive Mission Plan for car exporters are implemented,” he said.

The AMP has been crafted by both the government and industry bodies, laying out a road map for India, currently the eleventh largest car producer in the world, to become the seventh largest by 2016. The plan also envisages the contribution of the auto sector to GDP, now 5 per cent, to almost 10 per cent in the next seven years.

The AMP planner’s warning comes on the back of an FTA that will be enforced in the next three to five years between S Korea and the EU. Which means export of cars, for instance, from S Korea to the EU under the FTA will attract nil import duty.

Currently, a duty of 10 per cent is levied for cars entering Europe. Hyundai Motor India Ltd (HMIL) which manufactures cars like the i10 and the i20 in Chennai for export to European markets will find it uncompetitive to continue manufacturing cars in India for this market. Last year, Hyundai exported about 177,341 units of cars to the EU region alone, making Hyundai the largest car exporter after Maruti Suzuki.

Asked if in the coming years Hyundai will shift its entire production of cars meant for European destinations out of Chennai to S Korea, a company spokesperson said: “We surely hope not. The entire business plan is based on manufacturing small compacts in India for the domestic as well as the export market, and this is in line with the Indian government’s AMP.”

Hyundai last year celebrated its 10th year of operations in the country. Its research and development facility in Hyderabad and its manufacturing operations in Chennai, according to its managing director and chief executive officer, H S Lheem, is meant for the development and manufacture of small cars for all the export markets Hyundai operates in. This could get jeopardised if it is forced to relocate manufacturing locations.