Save the auto industry

After much ado, the cabinet has finally endorsed the ECCs decision to relax the age limit of imported cars from three years to five years.
Earlier there was an impression that the Prime Minister, who has no authority to change the ECC decision, has withdrawn this decision. However, persuaded by none other than President Zardari himself, the cabinet has opted to sidestep PM Gilanis pressure and approved the ECCs proposals in question.
Before addressing the impact and the rationale of this decision, it is pertinent to highlight that the signal being given by parliamentarians and the establishment to foreign and local investors is not good for much-needed investment in the country.
Pakistans worsening fiscal position and poor law & order is already chasing away foreign investors, and such instances, where personality-based politics drives key economic decisions, are detrimental for any economy. Not to mention, it comes at a time when foreign investors are reluctant to accept sovereign guarantee for their investment in the country.
Such processes should be institutionalised and based on economic rationale, rather than on the whims of the leaders and the influence of their so-called personal advisors and lobbies. Also, the media should have sufficient understanding of how an institution works, and should have pointed out earlier that the Prime Minister does not have the authority to revert ECCs decision.
Now, towards the main discussion. There is a clear need for consistency of policies over the long run. In 2006-07 the age limit of used cars increased from 3 years to 5, and the very next year it reverted to 3 years until mid-FY11. Now after see-saw deliberations, it has been increased back to 5 years.
The real issue at hand is the lack of economic rationale behind this decision; the relaxation of the age-limit of imported cars is not beneficial to existing and potential auto assemblers as well as for consumers in the medium to long run.
The arguments for the relaxation primarily revolve around the fact that local assemblers are still selling costly cars. But it is important to understand the reason behind the price hike as well as the impact of the relaxed age-limit on future auto prices.
According to auto assemblers, the hike in locally-made auto prices was to pass on the impact of the falling rupee against the yen. It was also because cost-plus-profit component within the total price of cars started falling as the assemblers began increasing the level of their indigenization. Mind you, approximately one-third of the price already goes to the government in the form of taxes.
The import of cars after age-relaxation usually takes place in high-powered cars and different variants of sports and other luxury cars, which are not assembled in Pakistan, and would not benefit the average consumer.
Plus, the import of luxury cars may incur relatively minor yet unnecessary pressure on balance-of-payment directly through auto imports - which is not good for a country for which the only silver lining is the current account balance.
Besides, the experience of consumers was not good when luxury cars were last imported under the relaxed age-limit scheme of 2006-07. The consumers bought the cars in exuberance, but were later troubled with the shortage of readily available auto parts.
It also helps the grey market of spare parts to grow, whereas the under invoicing of prices is also possible where interest groups make money through tax evasion.
Knowing from the past experience and falling demand of imported cars over the past five years, cars might not be imported anywhere close to level of 23,603 passenger cars imported in 2006-07, as only 5,366 cars were imported last year.
The government can have it both ways and must decide between local and imported cars. If they want to keep the local auto industry up and running, stable long term policies are a must, along with effective strategies for the development of local auto industries.