India-UK free-trade agreement: Carmakers object to sharp import duty cut

India's auto industry push for a phased duty reduction to protect interests

With India and the United Kingdom (UK) entering the last lap of the negotiations over a free-trade agreement, passenger vehicle makers in India have raised concerns about any sharp reduction in Customs duty on imported vehicles under the pact.

During stakeholder consultations spearheaded by the government, carmakers have argued that allowing lower tariffs for passenger cars shall set a precedent for duty cuts. They argued that competing countries in the European Union shall also seek such a measure and this will ultimately hurt the domestic industry as India is negotiating an FTA with the trading bloc, too. 

Besides, duty concessions to companies from competing nations may go against the government’s Make in India initiative, three people aware of the matter told Business Standard.

This development is significant since duty concession on automobiles, including auto components and electric vehicles (EVs), is among the UK’s major demands. Both nations are keen to finalise the trade deal by the end of October.

India is clear that it is not eager to lower the tariff for EVs, considering that it is a sunrise industry. The government has not faced any opposition from companies in the commercial vehicles segment, as well component manufacturers, said one of the people cited above.

The department of commerce is learnt to have asked the industry to arrive at a consensus for a maximum-possible duty concession. Depending on the extent of duty cut the industry agrees upon, New Delhi will be able to negotiate for greater market access for labour-intensive sectors, such as textiles, in the UK.

An auto industry executive, who is privy to the ongoing negotiations, said instead of a massive duty cut, the industry is open to the idea of a phase-wise duty reduction. “We are open to the idea of giving increased market access but in a calibrated way,” said the executive.

As of now, Customs duty on fully-built imported vehicles ranges from 60 per cent to 100 per cent, depending on the category. It’s not clear how much duty concession industry lobby group Society for Indian Automobile Manufacturers (Siam) is willing to agree on.

When it comes to finished products, industries are more cautious, even as they are liberal with automobile components. This is a global trend, said the industry official cited above.

Rajesh Menon, director general at Siam, declined to comment.

“The Government of India is committed to building a strong and globally competitive automobile industry and the industry is aligned with Make in India as evinced by the unprecedented success of the PLI scheme for the auto sector. The government does extensive consultation with industry bodies and companies for trade pacts. With supportive inputs from the auto industry, we are working on win-win FTA negotiations to enable market access and technological upgrade,” said a spokesperson for the commerce and industry ministry, in response to e-mailed queries sent by Business Standard.

Government officials said that while there has been a broad agreement on 26 chapters of the trade agreement, a consensus is yet to be reached on the goods chapter, as duty concession on automobiles remains a thorny issue.

Still, officials in the commerce and industry ministry are confident of finalising the trade deal by Diwali. In an industry event last week, British High Commissioner to India Alex Ellis said there is “high ambition” to complete the deal by Diwali -- a deadline set earlier by Prime Minister Narendra Modi and former British PM Boris Johnson.

Rahul Mishra, partner at Kearney India, said the industry cannot expect to always remain in a protectionist environment. He said a very small segment of the market shall face increased competition due to greater market access.

Given that the industry has just come out of a tough phase, the expectation of opening up the market in a graded manner is a fair ask, Mishra said. “But it’s critical that the quantum of concession and the timelines are clearly defined in terms of tariff and non-tariff barriers. The government and industry should be able to give that kind of visibility and any ambiguity on these can deter investment,” he pointed out.

Over the years, European automakers have been pushing hard for a duty reduction but there has always been a constant pushback from the industry, he explained. For instance, Tesla put its India entry plans on hold after failing to secure a lower import tariff for its cars.

According to Vikram Pahwa, president BMW Group India, “Any free-trade agreement between two countries brings cost efficiencies and leads to higher demand. But a lot will depend on the final outcome of the deal.”

India-UK in the last of negotiations

• Passenger vehicle makers raise concerns over any sharp cut in customs duty
• Lower tariffs for UK could set precedent for India-EU trade FTA; would go against government’s Make in India push, they said
• They are open to FTAs, but want duty reduction in a calibrated manner
• Indian auto component makers, commerce vehicle makers on board for duty concessions
• India-UK aim to finalise the FTA by Diwali