An industry at the crossroads

Policy stability is the most important ingredient for the Indian automobile industry's continued growth

Any evaluation of this government’s economic agenda will indicate that while there is earnestness of intent and hard work, the same cannot be said of the outcomes. A case in point is the below-par performance of the manufacturing sector. This is despite the fact that the government has focused sharply on this sector, in view of its importance as an engine of economic growth and job creation.
 
The government has taken up several high-profile initiatives and programmes such as Make in India, Skill India, liberalisation of FDI, defence procurement policy, and infrastructure development, and efforts have been made to improve ease of doing business, all aimed at giving impetus to the manufacturing sector. However, the contribution of manufacturing to Gross Value Added at current prices remains at 16.6 per cent, similar to what it was in 1979-80 (as per government data), and is among the lowest for large global economies. At the current pace, the target for the manufacturing sector of contributing 25 per cent to the national GDP remains a distant reality.
 
The continued slow growth can be attributed to a host of macro-economic issues, ranging from the ongoing NPA problem that the government inherited to the related issue of the private sector’s lower appetite for debt leading to low private capital formation. However, these issues along with the many initiatives of the government constitute only “hygiene factors”, the resolution of which is necessary but not sufficient for ensuring high manufacturing growth.
 
The important missing ingredients are the softer issues that help create a positive market sentiment, facilitate lower investment risk and enhance confidence in the economy. These include a holistic, synergised approach to the complex web of government policies that transcend various domains and the importance of stability and continuity of government policy. This aspect is best illustrated by the automotive sector and the manner in which key policies pertaining to taxation of cars, the shift to electric mobility, promotion of alternate fuels and framing of automotive regulation have been dealt by the government recently.
 

Car bodies on an assembly line: Only a well-thought-out road map will ensure progress

The two to six per cent decrease in effective taxation on large cars and SUVs post-GST was an attempt to rationalise tax rates for cars, which are among the most highly taxed products in India. This was a progressive step undertaken after much deliberation and was in line with the government’s efforts to boost investments. However, an upward revision just two months after GST implementation conveyed an impression of policy volatility. It is not the tax hike per se but the manner in which the decision was taken that is worrisome for the manufacturing sector.
 
The transport sector is one of the largest consumers of fossil fuels. Hence policies for shifting this sector towards higher energy-efficiency and use of greener energy sources are important. While there can be no dispute about the government’s focus on electric vehicles, the aggressive technology pathway that is being adopted is surprising. The bold announcement that only electric vehicles will be allowed by 2030 does not reflect the ground reality nor does it consider the impact of such a sudden shift on India’s large auto component industry.
 
At present, India lacks the charging infrastructure, manufacturing ecosystem and market acceptance for electric mobility. At this stage it would have been prudent to adopt a technology-agnostic approach of supporting all technologies, such as hybrids and plug in hybrids. This would have addressed the existing limitations, reaffirmed India’s commitment to the national road map as outlined in NEEMP 2020 and, more importantly, helped the Indian auto parts industry to migrate to these new technologies while avoiding dependence on China for battery and other electric vehicle parts. It will take time to fully assess the impact of this disruptive approach on a sector as complex as the automotive industry; however, it will not contribute to higher growth, as the potential losses simply outweigh the likely gains.
 
A key reason for the policy disconnect is that while auto sector policy matters are complex issues involving multiple departments, in most cases inter-departmental deliberations seem ineffective; the dominant departments tend to push for options evaluated from their own isolated perspective. There is a lack of holistic assessment of issues from a broader perspective and no clear long-term road map for the industry emerges.
 
Often long-term road maps that do exist, like the NEMMP 2020, are easily lost sight of. This is evident from the fact that for lowering petrol/diesel consumption, while Road Transport Minister Nitin Gadkari advocates bio-fuels, Petroleum Minister Dharmanand Pradhan is predisposed towards CNG/LNG, former Power Minister Piyush Goyal supports electric vehicles and NITI Aayog Member V K Saraswat believes methanol blending is the answer. This only creates confusion, as adopting multiple options is not possible. Such uncertainty also plagues the introduction of a number of automotive regulations.
 
In such a scenario industry faces increased investment risk due to the high degree of ambiguity in policy direction. A holistic approach to policy-making and policy stability is essential if India is to compete with other countries for investment. For the auto sector, policy stability is the single most important ingredient for continued growth. Without it no amount of other interventions can really make a big difference.
 
Consistent long-term supportive government policies and implementation of measures outlined in the Automotive Mission Plan (AMP) 2006-16 were key to the growth of the Indian auto sector. Any ad hoc measures or a disruptive “transformational” approach will only cause irreparable harm to this sector. Therefore, the growth trajectory of the Indian auto sector, including the manufacture of automobiles, will depend largely upon the government’s ability to build effective institutional frameworks and capacity creation that can bring about a holistic approach to policy making.
 
The National Automotive Board conceived by the government in 2013 was to play such a role but has not taken off. It would be appropriate for the government to create this body at the earliest, possibly under the NITI Aayog, on a priority basis. In addition, a well-thought-out long-term road map for the auto sector, such as an AMP (II) 2017-27, needs to be finalised to ensure long-term policy stability and consistency. For growth to recover in the near future, the government should immediately undertake a course correction and desist from ad hoc policy measures such as flip-flops in taxation, unrealistic targets for electric mobility and apparent vacillation in the selection of alternate fuels. 

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The writer, a former Secretary to the government, formulated India’s “Automotive Mission Plan 2006-16”