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The upcoming auto policy is an attempt by this government to put its eggs in not just one, not just two but in many different baskets. Too many baskets even, which in many instances, are counterintuitive to its larger goals.

For example, one goal is to promote Electric Vehicle (EV) technology in the country to cut carbon emissions and reduce the burden of oil imports. To do that, incentives are structured to promote local assembly of EVs through custom duty reduction on EV parts to 1 percent and a similar treatment for the import of charging infrastructure. The sales tax on both imported Completely Built Unit (CBU) and locally assembled vehicles is also slashed to 5 percent.

But before EV manufacturing could even begin, the government is doling out incentives for hybrids and plug-in hybrids in the form of reduction in customs duty for parts imports and waiving off regulatory duty (RD) on the import of hybrid vehicles for engines below 1800cc (in conjunction with reduced RD of 15% on hybrid import of engines above 1800cc).

Hybrids have much smaller batteries and cannot be run entirely on them either. In fact, the electric motor on a hybrid car can run out of charge at higher speeds and heavy acceleration thereby making them only suitable for shorter trips. Their carbon footprint is lower than fuel engines and while they don’t need an external charger to power up the batteries, the engine within the vehicle remains the main power source. Enter plug-in hybrids. These have larger batteries and can drive for longer distance, compared to hybrids, on electric power alone. But research suggests that their carbon footprint depends highly on driver behaviour (read more: “Hybrid thoughts”).

Though hybrids around the world are considered to bridge the transition from internal combustion engines (ICE) to Electric Vehicles, until such a time when charging infrastructure is accessible and reliable enough to alleviate drivers’ charging anxieties. Because these vehicles are cheaper than an all-electric car and they allow switching between two power sources, the leap of fate required for an all-electric car becomes even more daunting.

There are pros and cons of incentivizing both EVs and hybrid technology at the same time, but one could adopt a “see where it goes” approach to this policy, if it were not for the incentivization of IC engines. Aside from removing FED and reducing sales tax on engines under 1000cc while eliminating additional customs duty on the import of vehicle parts, some benefits under the policy appear to be confounding. No additional customs duty will be collected on the import of fully built units of vehicles under 1000cc and a 2 percent duty will be collected on engines above 1000cc.

Similarly, there are reductions in regulatory duties as well. For engines above 1800cc, this RD comes down from 90 percent to 30 percent (no RD for engines below 1800cc). There is no conceivable reason for an automotive “development” policy that wants to promote localization and import-substitution whilst suppressing imports to then go and incentivize imported cars in this way. All the while, the exchequer loses much-needed money, and importer of vehicles—many in the high-income segments—end up saving on taxes.

The policy is self-contradictory. In fact, if imports really are welcome, the government should then open up the commercial imports of used cars. That would at least give automakers some healthy competition—given they are presently at par with three-year old used Japanese cars in terms of quality and customer experience.

Meanwhile, the government is also mulling over a subsidy for car financing to make cars more affordable—again, across the board. This is believed to bring down car prices that had risen over the past two years due to rupee depreciation. But the vulnerability to the exchange rate is a function of dependence on high-value imported content. More than anything, the policy is covering up for the inefficiencies (and lack of investment) of the domestic automobile industry.

One could contend the scheme will target low-income households who need an affordable mode of transportation, but there are too many problems with that assertion. Plus, the scheme will not really make cars “affordable”.

A quick calculation suggests that a consumer buying the cheapest car right now—the locally assembled Alto—will have to pay ~Rs5,000 less per month on an auto loan after the FED/GST reduction and accounting for the subsidy that will expectedly bring down the interest rate to 5-6 percent. The total amount this consumer will pay is ~Rs21,000 for the month granted that they put 20 percent of the cost of the car (about Rs200,000) as down-payment.

Using a popular global metric, a car is affordable if a consumer pays less than 10 percent of their monthly income toward the car payment. By that measure, an Alto will only be affordable for a consumer that earns Rs210,000 every month!

As such, the government should call it like it is. For the most part, the policy is meant to increase volumes in the automobile industry and increase market size all the while making the automobile companies its primary beneficiary. Greater volumes could have long-term benefits in terms of localization but only if the automakers are motivated enough.

It certainly won’t make a transition from ICE to EVs possible and it won’t put too much on a dent on car prices either. With all the carrots, where is the stick? There are no quality and safety standard requirements for new models, and there are no localization targets. Will the new incentives pour in investments in the auto parts industry, no body knows! Perhaps the only stick here is that if one automaker localizes a particular component, that part would automatically incur a higher import duty for other players. That could potentially induce localization, but not definitely.

Meanwhile, expect an influx of expensive imported vehicles into the country further burdening the import-side of the current account equation. In its current form, the auto policy is flummoxing.


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