Cranking up the engine

TRADE ZONE/ BILATERAL AGREEMENTS

Recent bilateral agreement may not provide auto components sector enough margin to maneuver.

The Indian automotive component industry has witnessed a compounded annual growth rate of 20 per cent from 2000 to 2005, according to a McKinsey-ACMA report. The industry is expected to nearly double every four years, to $18.7 billion in 2009 and reach $40 billion by 2014.

The auto component players have made a sustained shift to the global Tier-1 market for their products and have, therefore, displayed a growing capability to cater to the engineering and production needs of the some of the world's biggest auto companies.

According to a study authored by Dun & Bradstreet, India has emerged as an outsourcing hub for auto parts for international companies such as Ford, General Motors, Daimler Chrysler, Fiat, Volkswagen and Toyota. India enjoys a cost advantage with regard to castings and forgings. The manufacturing costs in India are 25-30 per cent lower than its Western counterpart. India's competitive advantage does not come from costs alone, but from its full-service, supply capability.

In spite of such strides, when it comes to signing a comprehensive economic cooperation agreement with Thailand and with the ASEAN region, various quarters of the Indian auto-component sector express apprehension.

The most important worry that has been expressed is that such FTAs will result in flight of capital and, therefore, ruin the future of Indian aut component sector. The study carried out by ICRA for the Auto-Component Manufacturer's Associa-tion (ACMA) also stamps this observation.

The other argument is that the vehicular structure of the ASEAN markets (including that of Thailand) would never facilitate the exports of India into these markets. For example, the Thai market is dominated by one-tonne, pick up trucks.

Given that the market for such trucks is negligible in India, the Indian auto-component manufacturers have never really created a production line for such products.

On the other hand, given that ASEAN countries "� especially Thailand "� have a small car market, their auto-component manufacturers are in a position to manufacture parts that can be also consumed by auto-manufacturers in India.

To add to the anxiety of the auto-components industry, during the bilateral meeting between India and ASEAN negotiators in third week of January 2007, an agreement has been reached that the negative lists to be tabled by both countries would not account for more than 5 per cent of their bilateral trade. It is being argued that due to such a move, 'negative lists' would not hold negotiation on an agreement to ransom.

Be that as it may, the auto-component sector is going to find it increasingly difficult to carve out a space for its products in the negative list given that the government will always want to hold out a chunk of this 5 per cent space for protecting the interest of the agriculture sector. Time to crank up the engine! Isn't it? n

The author is chief economist at Economic Laws Practice, Advocates & Solicitors