Increase in age limit of used cars: government's decision may decimate automobile industry

Government's decision to increase the age limit of used cars from three to five years for import purposes and enhancing the depreciation limit on these vehicles by Economic Co-ordination Committee (ECC) to 60 percent from 50 percent may decimate the automobile industry of Pakistan.
Pakistan Automotive Manufacturers Association (PAMA) and Pakistan Association of Automotive Parts and Accessories Manufacturers (PAAPAM) and are both unhappy over this situation. This could "Kill" the industry which is not only a rarity in third world countries, but, according to Aamir Allawala, Chairman, PAAPAM is also the third largest contributor to national exchequer and offers tremendous future potential in terms of promoting industrialisation, technological know-how, defence production, foreign exchange savings and export promotion.
He said that auto vendors and their thousands of employees are unable to understand how the government of Pakistan Peoples Party, a true champion of labour rights in the country for over 40 years, could implement policies that will surely lead to massive layoffs of highly skilled manpower in the vending industry.
With high levels of unemployment and a booming population, 55 percent of which is below the age of 25 years, Pakistan desperately needs industry-friendly policies that lead to employment generation and alleviation of poverty, rather than appeasement of elite class having power to spend million of rupees on purchase of used vehicles, ranging from Vitz to Prados.
There is growing unrest in vendor factories. If the worse comes true, the resultant layoffs may lead to labour unrest, which might culminate in a serious law and order situation in the industrial areas. PAAPAM fears that the worse is not yet over. Still not content, these vested interests, representing traders of used cars into Pakistan, are now moving to the next step in destroying the auto parts manufacturing base in the country as the ECC is soon expected to approve increase in depreciation percentage on used cars thereby reducing the customs duty on these cars by half.
Analysts say that though prices of used cars will decrease as a result of increase in the depreciation limit on imported used cars to 60 percent, this is a rather short-sighted approach on the part of the government which will increase import of used cars and eventually lead to the demise of the local auto vendor industry.
It is not realised that the auto vendor industry is one of the few industries in Pakistan that is still doing well despite all the adverse economic challenges that the country faces. The question that the ECC needs to address is whether the country can really afford to import cars against the backdrop of increasing trade imbalance, spiralling inflation, rising unemployment and massive closures across the entire industrial sector.
On December 8 last year government allowed the import of used cars up to five years old (which was initially three years old) on the premise that this would result in reduction of car prices which local manufacturers increased during the past couple of years and would break their monopoly.
Analysis's, however, believe that all previous and recent records of used car imports are likely to be broken this year as investors from various sectors may put their investments of billions of rupees in the import of used vehicles as the import policy relaxation is luring them to earn millions of rupees un-taxed profit.
The decision was and is still being opposed by local auto manufacturers because it is hurting local auto industry. They insist that the reason for price increase is not due to their dominance in the local market but the inflation factors in other relevant industries have hiked the car prices in Pakistan.
The federal cabinet in its meeting on January 26 had allowed up to five years old cars to be imported under gift, transfer of residence and personal baggage schemes. The policy was severely criticised by local automakers on the pretext of comparing old cars with brand new cars made in the absence of level playing field.
In all probability no rules of the game prescribed for eligibility of used cars import are likely to be flouted, as personal baggage could be claimed by the shipper himself. The practice, however, is totally different and that makes the business attractive for the investors.
The decision allowed the import under various schemes to benefit the consumer, particularly low end consumers, but local Original Equipment Manufacturers (OEMs) confronted the decision as they dreaded that traders would trespass by importing luxurious cars in to the country, which would decline government's revenue and result in loss of foreign reserves. This fear proved correct as during a short period of 22 days, more than 5000 cars were imported making it obvious that the decision was traders' biased.
It is believed that the relaxation will not cause a normal business pattern but a huge shift of investment as many sectors currently are facing different kind of blockage due to geo-political scenario. The current turmoil in business sector in Pakistan has detracted investors from almost every sector; be it property, stocks or any other business category.
In 2005-2006, when import duty on used cars up to five years was relaxed, 46,278 cars were imported and this time when heavy investment is likely to assist the auto dealers, massive number of cars are expected to land in Pakistan, local auto industry believes.