The Indian motor industry suffered years of stifling controls until 1991. A sign of the times then was that motor vehicles and cars in particular, were considered to be a luxury and hence subject to strict government control and crippling taxes. During the 80’s there were only three vehicle manufacturers in the country, manufacturing around 1.20 lakh vehicles annually. However, the reforms process transformed the industry. Today, there are more than 15 car manufacturers with a planned capacity of well over 1.2 million units per year.

Following the reforms process, India became one of the most open markets for auto investors in the world. And, although car imports were still effectively banned, there were no local-content requirements, nor any export obligations or production quotas for the new investors. Thus, it was the vast potential in the Indian market that initially allured many a foreign car-maker. However, with a growing trade imbalance and problems facing the economy in 1997, the government was forced to announce new regulations for the auto sector in late 1997.

It took the government roughly six-and-a-half years of trial and error to evolve a clear-cut set of guidelines for attracting FDI into the automotive sector. Thus, came into being the auto policy with the foreign car-makers signing a Memorandum of Understanding (MoU) with the Director General Foreign Trade (DGFT) in December 1997. The policy reflected a fundamental shift in thinking and included steps like: minimum investment, export obligations, localisation schedules, etc. Incidentally, opening up of the auto sector came after the cabinet committee on economic affairs (CCEA) had rejected a proposal by the industry ministry on framing a comprehensive auto policy in 1988! It was mainly rejected by the CCEA on account of the heavy foreign exchange requirements.

Another reason was the likely demand for passenger cars by the mid-1990s and the imperative need to avoid fragmentation of unviable units. No new entrants were therefore permitted into the sector. CCEA’s views also found support in the recommendations of the sub-group on transport in the seventh plan which was also against no new units being setting up in the passenger car sector.

The policy has attracted investment from almost all the world class auto giants. Under the current industrial policy, manufacture of all automobiles, barring passenger cars, have been delicensed. The foreign collaborator takes care of the foreign exchange outgo through export of components.

According to the earlier policy too the intending foreign auto companies were to sign an MoU with the DGFT. But there were no definite commitments towards investments, indigenisation and exports, all of which were left entirely to the discretion of the companies. The DGFT was,of course, issuing licences for import of kits for two years to begin with. However, it was unable to take a firm decision on renewing the period as there were no specified norms for the purpose. The issue was therefore kept before the CCEA. The CCEA mooted that detailed guidelines be formulated regarding this and that the other issues could be part of a new auto policy by continuing with the MoU. Without the MoU, import of kits/components were disallowed as per DGFT regulations. Thus, the existing units as well as the new entrants into the auto sector have been covered by the MoU.

Interestingly, the MoU parameters apply “uniformly” to all these car-makers who are now aware of what is expected of them. The companies have to bring in a minimum foreign equity investment of $50 million within three years of floating a JV, indigenise 50 per cent of their production in three years and 70 per cent in five years, besides making a commitment to export cars/components. However, initially the DGFT had a tough time explaining the policy to the foreign companies and how they would facilitate matters. Further, serious doubts were raised regarding the successful implementation of the policy.

Says DGFT’s NL Lakhanpal, “I called them one by one and cleared their doubts by furnishing written clarifications and we were able to finally persuade them to sign the MoU.” According to India’s commitment to the WTO, India is to phase out import restrictions in the auto sector by March 31, 2002. However, the foreign companies would still be required to fulfil their MoU commitments, Lakhanpal clarified.