India Should Not Cut Auto Sector’s Customs Duty In Any FTA: GTRI

The GTRI mentioned in the report that India has not given tariff or duty reductions for cars in its free trade agreements with ASEAN (Association of Southeast Asian Nations), Japan, and Korea

India should not reduce import duties for the automobile sector through free trade agreements (FTAs) with nations such as the UK, as it could have detrimental effects on the industry and potentially lead to the closure of companies in the country, according to a report by Global Trade Research Initiative (GTRI) released on Wednesday.

The GTRI mentioned in the report that India has not given tariff or duty reductions for cars in its free trade agreements with ASEAN (Association of Southeast Asian Nations), Japan, and Korea. "Do not cut auto (including electric vehicles) tariffs through FTAs. This will adversely impact auto majors who have invested billions of dollars in India and force them to wind up," it said.

Furthermore, it emphasised that there is no reason for extending these concessions to the UK, given that the UK predominantly assembles cars using components imported from the European Union (EU) and China. It said if India offers duty concessions to the UK, it might face pressure to do the same for other free trade agreement partners like Japan and Korea.

"This could lead some companies to reduce or even stop making cars in India and instead export them from their home countries. This will be rewarding imports over competing local production and lead to closure of many key units," GTRI Co-Founder Ajay Srivastava said.

India is currently negotiating a trade agreement with the UK, and these talks have reached an advanced stage. The UK is specifically pursuing duty concessions on electric vehicles (EVs).

The report suggested that the government should support the industry by continuing the present tariff regime and providing additional PLI (production-linked incentive) support. It also suggested directing investments towards research and development for the next generation of battery technology instead of offering subsidies for EVs on the road.

"The import intensity of EVs exceeds 70-90 per cent, and most imports, including batteries, are from China. With over 70 per cent of power being generated from coal, EVs will not be green enough in India," it said.

Using an example, the report highlighted that in 1987, Australia manufactured 89 per cent of the cars it used. The country safeguarded its automotive industry with a substantial 45 per cent import duty. However, the proportion of domestically produced vehicles declined as Australia progressively reduced import duties.

"Today, Australia imports nearly all cars as tariffs came further down to a 5 per cent level. Most manufacturers in Australia shut shop. In contrast, India could attract significant investments in the car sector on account of high import duties. This resulted in the development of an indigenous car and auto component industry," the report said.

Talking about the significant challenges the auto sector faces, the report said that the industry is facing global supply chain issues that are driving up the costs of materials such as steel, aluminium, and rubber, coupled with a significant shortage of semiconductor chips.

"The sector is under pressure from increasingly strict regulatory compliances. These include stringent emission standards and heightened safety regulations," Srivastava said.

He further emphasised that the industry heavily depends on imported components, particularly for advanced technologies and specialised features. This reliance exposes the sector to risks associated with fluctuations in global supply chains and foreign exchange rates.

"In FY2022, the estimated value of imported automotive components and other inputs was USD 20 billion, with original equipment manufacturers (OEMs) and auto part suppliers contributing 60 per cent and 40 per cent, respectively," the report said.

Almost 70 per cent of these imports are in four categories, including engines, drivetrains, electrical systems, and electronics.

As the significance and value of electronics in new vehicles rise, the dependence on imports is anticipated to expand. The report highlighted that China is the largest contributor to India's imported auto components, constituting almost 25 per cent of the total imports. Other major import sources are Japan, Germany, South Korea, and Thailand.

The report also revealed that almost 70 per cent of India's passenger cars are made by companies controlled by foreign firms.

India is the world's fourth-largest car producer, following China, Japan, and the USA, with a production of 4.6 million cars in 2023. Regarding exports, India secured the tenth position, contributing to 2.4 per cent of the share.

The automobile sector plays a significant role in India's economy, contributing 7.1 per cent to the GDP, a substantial increase from 2.8 per cent in 1992-93. Additionally, it constitutes over 50 per cent of the country's manufacturing GDP, offering direct and indirect employment to more than 19 million individuals. In 2022-23, the auto and auto component industry's turnover crossed $ 150 billion.

The report said that exports were robust in automobiles at $ 8.7 billion, two-wheelers at $ 2.8 billion, and auto components at $ 7.3 billion.

"Steps such as high import tariffs, including not cutting tariffs under the FTAs and allowing up to 100 per cent FDI through the automatic route, have led to the rapid growth of the Indian automobile industry starting late 1980s," it said.

The fundamental import duty for large cars stands at 100 per cent of the import value, while medium or small cars face a duty of 70 per cent. Old cars incur a duty of 125 per cent.

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