At present, finished cars (called completely built units or CBUs) attract an import duty of 60% in India while in Europe it stands at 6.5%.
While we are willing to bring the import duty on large European vehicles down by half to 30%, small Indian cars should in return get preferential access to the European market. The import duty will be abolished in all probability, a government source told FE.
The agreement, if it goes through, will help several domestic and foreign carmakers. While duty cuts on CBUs will directly benefit brands like Volkswagen, Mercedes-Benz, Skoda, Peugeot and Audi, others like Honda, General Motors, Ford and Toyota also stand to gain by shipping larger vehicles to India from their European plants by paying a duty of just 30%.
The biggest advantage, however, would come to the country's largest car exporters like Hyundai Motor India and Maruti Suzuki from the preferential access they would enjoy in European markets. Preferential access refers to a specific quota on the number of Indian cars that would have access to the European markets at zero duty.
Though domestic automobile industry apex body Society of Indian Automobile Manufacturers was against any relaxation on the import duty front, what swung the decision in favour of the manufacturers largely based in EU nations was the support provided by the Trade and Economic Relations Committee headed by Prime Minister Manmohan Singh.
At present, India has a separate comprehensive economic partnership agreement with Japan and South Korea, but automobiles are not covered in the list of items.
Maruti Suzuki chairman RC Bhargava said: If the EU cuts their import duty, then we have a clear price advantage of 6.5%. Bhargava said that even if India cuts its import duty, it would only impact the luxury vehicle segment in which Maruti Suzuki does not operate. One cannot export 'B' segment cars to India since it is such a price-competitive market. The real effect would be felt in the high-end vehicles, Bhargava said.
Another industry official said that since import duty on completely knocked down (CKD) units is at 30%, companies based in the EU would rather import the cars than assemble it in India.
Most global manufacturers like Audi and BMW assemble cars in India. If import duty on CKD and CBU would be the same, why should they continue to assemble them in India They would rather export completely finished cars, the official said, requesting anonymity.
Earlier this year, Tata Group chairman Ratan Tata had spoken in favour of free trade. He had said in an interview to market research firm JD Power that existing import duties in India on cars and components were unrealistic, creating an artificial barrier.
EU's demand for a cut in import duties on CBUs stems from getting access to the world's second fastest growing automobile market. While sales in most parts of Europe including France, Germany, Italy and Spain have been declining on the back of fears of a prolonged recession, car sales in India have grown at 4-5% this fiscal year.
The free trade agreement could double trade volume between the two sides to close to $200 billion. India and EU will hold a summit in February 2012 when a formal announcement is expected to be made.