PM may decide on EU car duty today

Written by Ronojoy Banerjee | Ronojoy Banerjee | New Delhi | Updated: Feb 6 2012, 07:24am hrs
The contentious issue of cutting import duty on cars from the 27-member European bloc as part of the proposed free trade pact is likely to be taken up in a high-powered committee meeting this week to be chaired by Prime Minister Manmohan Singh. Sources said while the commerce ministry has already prepared the blue print on the proposal to cut import duty by half to 30% on cars from Europe while getting a hindrance-free entry into those markets in return the final nod would have to come from the Prime Ministers Office. The meeting which is likely to take place on Monday could also see attendance of finance minister Pranab Mukherjee and home minister P Chidambaram. The final announcement on the FTA is likely to be made this month when the India-EU summit gets underway.

The proposal to cut import duty, as first reported by FE on December 30, has deeply divided the automobile sector. While companies like Mercedes-Benz, BMW and Volkswagen are likely to gain from any cut in import duty, homegrown automobile makers could get impacted. Apart from that, several Japanese companies such as Honda Motors, Suzuki Motors and Nissan could also demand a similar preferential treatment for their vehicles by making requisite changes in the existing FTA with Japan.

What we understand is that the government would cut duties on larger luxury vehicles. It is only natural that other non-European original equipment manufacturers would also demand the same, a senior executive in a passenger car company told FE. However, the situation is far more complex than what meets the eye. Chairman of Maruti Suzuki RC Bhargava had sought to downplay the fears on import duty saying that the sector would not be hit by any cut in duties. 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 had told FE in December.

Bhargava had also said that if New Delhi managed to extract a promise from the EU that India-made cars would not attract the 6.5% import duty in the 27-member block bloc then it would be an advantage for Maruti. If the EU cuts their import duty, then we have a clear price advantage of 6.5%, he said. Market analysts also said that South Korea (with whom India enjoys an FTA) is unlikely to object to the India-EU FTA since its own company Hyundai Motor, which is Indias largest car exporter, is going to gain the most if EU lifts the import duty.

However,the Society of Indian Automobile Manufacturers (Saim), is unconvinced. Large cars are only among a few commodities like tobacco which has been discouraged by higher excise duty by the government. When manufacturers in India have always been discouraged to invest in large-car segment, we fail to understand how the policy can suddenly make a U-turn to favour imports of such large and luxury vehicles and continue to oppose their manufacturing in India, a senior official of Siam said.

In fact, early last year, heavy industries minister Praful Patel had also written to the Prime Minister that any leeway to EU carmakers by cutting duties would go against the Automotive Mission Plan drawn up in 2006 which sought to keep the existing duty structure intact for 10 years. He had also warned that investment flow into the country could also get hit because foreign OEMs would not want to invest in India but merely import.