It was bad enough that, after being badly briefed, US President Donald Trump talked of how certain countries – the hint was, clearly, India – were levying a 100% import duty on Harley Davidson motorcycles and that he was going to change that. And now, the legendary Elon Musk has been considerably more direct in accusing India of protectionist policies. In response to a tweet on whether Tesla would release its car in India this year or the next, Musk tweeted back, “Maybe I’m misinformed, but I was told 30% of parts must be locally sourced and the supply doesn’t yet exist in India to support that”. Both President Trump and Musk are wrong. In the case of Harley, as the ministry of commerce pointed out, it is imports of second-hand bikes that are taxed at 100%, new ones under 800cc pay a 60% import duty, bikes imported in SKD form paid 30% while those in CKD form paid a mere 10%. As for Musk’s assertion, there is, in fact, no 30% local-sourcing norm in the automobile sector – depending upon whether the imports are in SKD or CKD form, the import duty is 30% and 10%. Musk could argue that, with India’s eco-system for electric cars as yet poorly developed – with the battery, among others, fully imported, around 40-50% of the car is imported even when it is made by Indian manufacturers right now – a 30% import duty is too high, but that is a different matter.
Where Musk got the 30% local-sourcing number from is anyone’s guess, but chances are he got it from Apple which was trying to negotiate with the government on whittling down the 30% clause. Though the clause is a bad idea, it applies to single-brand retail – so, if Apple is to retail its phones through company-owned stores, it needs to ensure 30% local-sourcing. The same norm applies to Ikea and, as FE has argued before, it is excessive – once India develops a supplier base, companies like Ikea and Apple will anyway source locally on their own since imports are both time-consuming as well as expensive since India, like many other countries, has high import duties on certain products in order to encourage more local value addition. If it did not, as in the case of mobile phones that are being ‘manufactured’ in India – assembly is the correct term – more than 95% of components are being imported, with little value addition here.
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There are two lessons here for the government. For one, when bad policies like the local-sourcing one, or price caps/royalties on items from stents to GM seeds, or aggressive tax practices are put in place, even well-informed CEOs are likely to believe the worst about a country. Two, given the fact of India’s under-developed eco-system when it comes to electric/hybrid cars, and the need for imports, as in the case of mobile phones, the government would do well to work on a phased-manufacturing-programme (PMP) with realistic timelines on how soon these products can be made in India – this year’s PMP for mobiles, for instance, is looking at a 5% value addition locally – and, in the interim, import duties must be kept at low levels. Developing a reliable component base takes decades, but when it happens, as in the case of Suzuki’s Maruti, there will automatically be a lot more indigenization and, possibly, even export. But for that eventuality, firms first have to be allowed to come in with as few restrictions as possible.