By Sushil Rajput
Over the last nine years, the government led by Prime Minister Modi has been working tirelessly to implement various initiatives to propel India’s economic growth forward. One of the most notable campaigns is “Make in India,” which seeks to transform the country into a prominent global manufacturing and investment hub. The ultimate goal of this initiative is to create many new job opportunities while also significantly increasing the manufacturing sector’s contribution to the country’s GDP. By attracting foreign investments and promoting domestic industry, “Make in India” is poised to have a far-reaching impact on India’s economy and society as a whole.
The Indian Auto Components Industry was pleased to be included as a top priority sector in the first phase of a Make in India campaign. Previously, it had been considered unimportant and frequently overlooked in comparison to the vehicle industry.
As the Make in India campaign approaches its ninth year in September 2023, the auto components industry has experienced tremendous growth both domestically and internationally, even in developed markets. In recent years, the industry, primarily consisting of MSMEs, has grown significantly from USD 35 billion in FY 2014 to USD 70 billion in FY 2023 despite challenges such as Covid, geopolitical issues, slowdown in the industry, etc. This is the first time ever when the Indian auto components industry reached a turnover of USD 70 billion, while exports reached USD 20 billion.
The Make in India initiative has a dual focus of creating a manufacturing hub in India and expanding globally (Go Global). The auto components industry is a crucial part of this effort and is contributing significantly to engineering exports. It has been observed that the Government of India has taken an assertive stance when negotiating and signing trade agreements. Notable examples include recent agreements with UAE and Australia, as well as ongoing trade negotiations with EU, UK, Canada, and others. This reflects India’s aggressive foreign policy.
As the Indian industry matures, the Government of India is now in a comfortable position to take an aggressive approach while dealing with developed markets. In 2013, India had a trade deficit of USD 4 billion with the EU, but by 2022 it had turned into a USD 19 billion surplus, indicating a significant growth in India’s exports to the EU. It is worth noting that the EU imports goods worth USD 562 billion from China, which contributes 40%, while India’s contribution is relatively small at 6%. Currently, China and India do not have any treaties with the EU. As a result, there is no need for India to proceed slowly in concluding a trade agreement with the EU, especially since the Indian Government has the support of all sectors except for two or three.
With the growing stature, Indian Auto Components Industry has shifted from a defensive to an aggressive position in the last four to five years. The industry is now focused on market access and inquiring about what partner countries can offer to India. Recent examples include trade agreements with the UAE and Australia. The industry seems eager to increase its market share in new markets, despite starting from a low base. Kudos the industry for its extra efforts in expanding its reach globally.
The industry is confident that with these trade agreements, as well as upcoming ones such as with the EU, will certainly increase its share in the global trade, which is currently at around 2 percent.
The European Union is the most significant market for India’s auto component industry in comparison to the vehicle industry. Increase in trade, people’s movement, technology transfer and, investments, etc are the crucial factors that enhance the relationship between the countries. The EU has all these factors in place, making it essential to have broad-based trade and investment agreement. Based on the government’s recent efforts, it appears that India will soon sign an agreement with the EU, which was initially started in 2008-2009.
It is estimated that the EU imports close to USD 130 billion worth of auto components from word. It is clear that Asia is the largest exporter to the EU, contributing 73% to EU imports. Countries like China, Japan, Turkey, Taiwan, and South Korea have a major share in EU imports from the Asian region.
Several Asian countries have already formed trade agreements with significant nations in the region, including Japan, South Korea, Turkey, Singapore, Vietnam, and more, excluding China and India.
At present, the EU is hesitant to pursue a trade agreement with China due to geopolitical reasons. However, with China out of the picture in current scenario, India, with its large market, cannot be overlooked for too long. Likewise, India cannot disregard the importance of the EU.
Having a trade agreement with EU is crucial and would help Indian Industries and the auto component industry to maintain competitiveness with China. One of the best ways to achieve this as it would benefit Indian businesses by providing better market access and growth in the global market. Overall, it would be a major step forward for the Indian industry, ensuring their continued success in the highly competitive global marketplace.
While the EU’s demands are well known, the Indian auto components industry needs to develop strategies before entering the final negotiations. The industry needs to define high-value electronics and non-electronics products that must be safeguarded while opening tariff lines for the EU. The Product Linked Incentive Scheme covers electric mobility and electronics components, where foreign and domestic companies have announced significant investments in the next five to seven years. Therefore, the Government of India and the industry need to work together and prioritize critical components that can be included in the negative/sensitive list from the Indian side. It needs protection if the industry truly wants quality investments in high-tech/value-added products.
Currently, the Indian Auto Components Industry exports close to 60% of its components to developed markets. Among these markets, it is clear that after North America, the EU is the most promising. Despite the gradual withdrawal of the Generalized System of Preference (GSP), India has been able to manage its growth trajectory. The average MFN rate in the EU is currently between 3-4%, and a trade agreement with the EU will eliminate tariff barriers and help India to double its share from 6% in EU’s Imports. The auto components industry contributes 8% of the overall goods trade between India and the EU, which is a significant share.
To tackle the overall goods trade deficit of USD 19 billion with the European Union, it is imperative for India to lay emphasis on value-added products. This approach will allow India to showcase its strengths and capabilities in producing high-quality goods that are in demand in the global market. By adopting this strategy, India can address the current imbalance in trade and boost its exports to the EU, while also promoting economic growth and creating employment opportunities for its citizens.
Further, the EU’s Carbon Border Adjustment Mechanism (CBAM) is a hot topic in the world trade community. This policy has garnered significant attention due to its potential to impact international trade and the environment. The Carbon Border Adjustment Mechanism of the EU will be implemented in a phased manner over a period of nine years, beginning in 2026, and will only be applicable to a select group of industries, namely iron, steel, cement, aluminium, fertilizers, electricity, and hydrogen.
Today, India seems to be quite confident in its negotiating position and may potentially request some relaxation on CBAM adoption. This is due to the potential challenges that may be faced by its large MSME export base. Given the current situation, it is important to carefully consider all possible options and outcomes before making any decisions.
European Union and India to focus their attention on finalizing a trade agreement. Such a deal would undoubtedly bring numerous advantages, including significant improvements to their respective economies, the facilitation of movement for individuals, technology & knowledge transfer, standard & regulations alignment, increased trade opportunities, and mutual respect for each other’s cultural values. Therefore, it is imperative that both parties prioritize the successful conclusion of this trade agreement.
The author is Principal Officer (Public Affairs) at Bharat Forge Ltd.
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