EDITORIAL: Sometimes market forces will stand a policy objective on its head only because the policy wasn’t properly thought through before implementation. The Auto Policy 2016-2021, for example, was principally geared towards encouraging competition in order to reduce prices of smaller cars, 800cc and less, to facilitate the large middle class. Instead it flooded the market with Sports Utility Vehicles (SUVs) and high engine power models which the country’s elite was only too happy to throw some of its money at. Now it’s a bit rich for policymakers to just throw their hands up in frustration because what they thought would happen didn’t happen. They should have thought about it when they allowed new entrants import of parts at concessionary customs duty of just 10 percent, while old manufacturers continue to import these parts at 30 percent customs duty. Surely, they could see that not only would this lead to more employment generation in other countries because of demand created in Pakistan, but also that foreign money would naturally be more inclined towards the more or less empty SUV space than face direct competition with Suzuki when it comes to cars of 800cc and below.
It might not be the worst possible thing from a strictly economic/financial point of view that the $1 billion or so investment that new entrants made in Pakistan through this policy now has bigger and better sedans in the entourages of the super-rich to show for it. Yet because even after all these years not even one international brand of repute has put a single entry level car of below 800cc on the market, the primary target market was missed lock, stock and barrel. The Pakistan Association of Automotive Parts and Accessories Manufacturers (Paapam) has given a few suggestions that have more than a touch of sanity and common sense to them. Concessions should be targeted towards entry level cars only to bring down their prices and stimulate demand in the working middle class, it says. And ‘instead of reducing Completely Knocked Down (CKD) and Completely Built-Up (CBU) duties, concessions in mark-up rates for financing smaller cars, abolishing federal excise duty and additional customs duty on raw materials and parts, a reduction in sales tax rates, etc., should be considered’.
These import duty concessions will continue till June 2026, but since the Auto Policy 2016-2021 expires on June 30, 2021, everybody will go back to the drawing board realising that even after all the effort they are still right where they started. And the only thing they have managed to do is rotate a billion dollars in the automobile sector over five years by making producers in other countries rich and giving the very rich in our own country more toys to buy with their money. Meanwhile, the working class that holds up the entire base of the economy is struggling, quite unnecessarily, with something as basic as adequate transport. Such misdirected policy is often also the result of not taking all relevant stakeholders on board at the right time. The tendency seems towards rushing decisions through when it’s time for due diligence and consulting everybody involved in the entire chain, then rushing to stakeholders for damage control when things don’t turn out as expected.
This policy commits the twin blunder of stoking production in other economies and subsidising expensive cars for the top most segment of our society. More than anything it shows the consequences of misguided incentivisation. So there is, at least, a very important lesson to be learnt from this auto policy. If authorities must sprinkle subsidies around, then let them at least benefit the real drivers of society and the economy. Segments of the auto sector might, and will, be able to justify the bulge in their profits as fitting reward for smart investment. But the government does not have the luxury of waving market forces in people’s faces as justification of the middle class missing out on the auto bonanza. It simply must cater to the masses. And if its policies will not make a difference, then there’s an increasing chance that their votes just might.
Copyright Business Recorder, 2021
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