Taxes and trade

India is losing export opportunities

One of the few successes within India in terms of competitiveness and exports has been its automobile industry. Yet, as the managing director of Volkswagen India, Gurpratap Boparai, pointed out this week, aspects of India’s internal duty structure on cars have restricted the growth of the export market. In particular, the multi-tier nature of goods and services tax (GST) has distorted the market and, thus, the production capacity within the industry. The political decision to try and have a different structure for “affordable” and other goods — where “affordable” is often arbitrarily defined — is never a good idea. In the case of automobiles, this political imperative has translated into two different sets of duties on cars with a length of over and under 4 metres. Petrol cars that are under 4 metres in length have GST and cess together at 29 per cent, while that goes up to 45-50 per cent for cars over 4 metres. The consequence is that companies producing in India for the domestic market have created capacity specifically for the under 4 metre segment. Yet, globally, that is only a small fraction of cars sold, as Mr Boparai pointed out. In India, over two-thirds of the cars sold are under 4 metres; globally, that fraction is under 7 per cent and declining.

The consequence of this divergence is that India cannot benefit from economies of scale when it comes to exporting cars. This is particularly problematic in this case as the margins and value added are much higher when it comes to higher end cars. Its duty structure is thus causing India to lose out on many export markets. In the natural order of things, a plant set up to service Indian demand, which would look much more like global demand in the absence of the skewed duties, would be able to expand into export production easily. But, clearly, that is not the case. At a time when India is seeking to break into global supply chains and expand its share of world trade, the government should take Mr Boparai’s remarks very seriously.
 

More broadly, this is a reminder that when domestic regulations are put into place, the effect on trade and exports should always be part of the consideration. There has been too much confidence expressed about the Indian domestic market being sufficient to power recovery and growth. This has never been the case for India or indeed any other country. Only the ability to access world markets will ensure that investment rises to a level high enough to restore India to a sustainable growth path. In this context, it is not just domestic regulations that have been a problem. 
 

Mr Boparai pointed out that India’s inability to sign free trade agreements with several major markets meant that his industry had been proved uncompetitive in those geographies. The free trade agreement with the European Union has been hanging fire for so long that cars that could have been made in this country and exported to the EU are now assembled in Eastern Europe, given that there is a 10 per cent import duty in Europe on Indian cars. This is a self-inflicted wound, and a product of India’s unwillingness to move forward on trade. The government should reconsider its position.