Go steady, Mr Gadkari

Frequent policy changes will harm the auto industry

Car buyers were greeted with a mixed bag of news as the Goods and Services Tax Council ended its second meeting since the roll-out of the new indirect tax regime on Saturday. There was relief for small car buyers but people hoping to buy SUVs or other mid-sized cars will now have to pay more since the Council decided to levy additional cess. The hike is expected to impact the demand for such cars ahead of the festive season when car sales are usually at their peak. Car manufacturers are naturally unhappy because they are concerned about the frequent changes in taxation, which often lead to abrupt changes in consumer choices and upset their calculations. This is a valid grouse because the auto industry in India has been at the receiving end of frequent policy shifts.

This was more than evident from Transport Minister Nitin Gadkari’s stern message the other day about bulldozing the industry if it failed to shift from producing petrol and diesel vehicles to electric vehicles by 2030. Mr Gadkari wants all vehicles — buses, three- and two-wheelers, included — to make the shift. There can be no question about the need to phase out polluting technology, but such warnings can be hugely counter-productive if they are not backed by a consistent policy. The auto industry has complained about other policy flip-flops also. For instance, the government had been incentivising hybrid cars so far, but now it has increased the tax on such cars. The auto industry has long timescales and cannot make sudden shifts in production. In the last financial year, India produced 25 million vehicles of all types and over 99 per cent of them run on regular conventional fuel. A shift to an all-electric framework in the next 13 years is an impractical demand. That’s because such a transformation would require phasing out the existing capacities and putting in place investment plans for new types of vehicles. Moreover, there needs to be adequate infrastructure in the country to ensure that such a transition to electric vehicles is smooth.

In the past, auto makers have resented the sudden policy demand to shift from BS-IV to BS-VI vehicular emission norms. Moreover, from a business perspective, manufacturers also claim that they have to deal with policy uncertainty because often the government fails to defend its own policy in court. For instance, even when SUVs followed emission norms, they were banned in Delhi for a period by court. Clearly, India’s booming automobile market needs a more stable and well-thought-out policy regime.

In July this year, for example, the government told Parliament that there was no plan under consideration to make a switch to 100 per cent electric vehicles by 2030. Such sudden change in goalposts can only harm investors. The government is right in pushing for higher emission standards but a proper road map with a coherent package of economic incentives is required to nudge the industry towards electric vehicles. It’s true, there are substantial tax incentives for electric vehicles — 12 per cent GST — but the questions are many. For example, lithium batteries attract 28 per cent GST if they are sold separately. Lithium batteries usually need to be sold separately from electric two-wheelers to give a choice of the batteries at the point of sale. And then there is the question about whether the government will be able to create the humungous charging infrastructure. Mere threats will only be counter-productive.