Opinion Not yet on auto-pilot

In India,at least as consumers,we will likely continue to obsess about small cars for a while yet,given the affordability factor,but global carmakers with a long-term vision know that some time in the not too distant future there will be a very large market in India for bigger cars too. India will without much doubt be a major consumption hub for all cars,big and small,over the next decade or two.

But here’s where one needs to pause. Because while we can be pretty certain that India will become a major consumption hub for cars sooner than later,the same optimism and certainty do not apply to India’s future as a manufacturing hub,for small or big cars.

From a consumer’s point of view,the location of a car’s manufacture makes little difference as long as the quality and price are satisfactory. But viewed from the larger perspective of industrialisation,exports,growth and employment,we must care about where the car is manufactured.

In the old days,governments (and not just in India) used policy instruments to force carmakers to indigenise their product — either through compulsory local content requirement or through tariffs on imports (both of components and finished cars). That often worked — and it certainly did in India especially with the hugely successful Maruti Suzuki joint venture — but the effectiveness of such policy intervention is usually limited to short periods and involves a considerable cost. Over the medium term,protective restrictions reduce potential competition,increase costs and inhibit the necessary upgrade of technology. Also,many carmakers simply don’t enter markets which have restrictions. It took until the late ’90s for some of the biggest global players to enter India.

In any case that era of protectionism is over in India. After 2001,WTO rules prohibited the use of compulsory local content/ indigenisation requirements on carmakers. So carmakers can freely source all car components from abroad. They may still choose to indigenise if tariffs on component imports are high. But here’s where the second policy change — a move to free trade agreements,particularly with Asean,a major auto components manufacturing hub — has ensured that tariffs will not be a barrier either.

In the absence of policy restrictions,the only reason cars will be manufactured in India,and exported from India,whether by local or foreign companies,is if there are cost advantages to manufacturing in India. At the moment,the plain fact of the matter is that many countries,especially in Southeast Asia (and indeed China),beat India comfortably in terms of cost competitiveness and efficiency,not just in auto but across manufacturing sectors.

Consider any manufacturers’ two most basic input requirements: labour and land. In theory,a large,labour-abundant country like India should have a natural cost advantage. But stringent labour laws which make hiring and firing virtually impossible,dissuade manufacturers (and not just in automobiles) from hiring labour. That leads to carmakers adopting more machine-intensive rather than people-intensive technologies and that doesn’t yield a cost advantage over other locations.

The saga over land-for-industry is all too well known,especially after the Tata Singur fiasco. If the venerable Tatas ran into so much trouble acquiring land to manufacture the “people’s car”,what might the chances for other manufacturers be? At any rate,for a CEO,acquiring land on a large scale will never seem worth the risk unless the government sorts out policy issues in this domain.

What also matters for cost competitiveness,particularly for exports,is the transportation infrastructure. The less-than-satisfactory state of our roads,at least when compared with what have been built in our competitor nations,is well known. Major ports continue to be bottlenecks that no serious manufacturer will overlook when choosing a production base.

Yet,despite all the drawbacks,ironically enough,we still make cars in India — and we also make high quality,globally competitive auto components in India. Remember though,that’s because policy kept our market relatively insulated for a long time and at least some carmakers wanted to tap a profitable domestic market,largely in small cars. Note,for that reason,how limited the prospects are for India even being considered as a hub for making large cars. But even in small cars,it is easy to get complacent — now that there is free trade with Asean,the Tatas too can choose to make the Nano elsewhere.

And this isn’t just about the automobile sector’s direct contribution to growth,employment and exports; auto manufacturing is of larger symbolic importance to the Indian economy. Much of our celebrated economic success over the last two decades has been defined either by high-end services — IT,telecom — or by “soft” manufacturing like pharma,neither of which needed the kind of blue-collared labour,land or transport infrastructure that hard manufacturing like automobiles does.

Most countries — in the West,in Southeast Asia and then China — went through a phase of massive growth in labour intensive manufacturing in their process of industrialisation. That’s what pulled scores of unproductive people out of agriculture and into industry. India has,remarkably,achieved much success without going down that path. But unfortunately there is little likelihood of gainful employment for hundreds of millions of poor Indians unless manufacturing takes root.

And that is why it is important to perpetuate,and not squander,the success that auto has been so far — perhaps our only real success in “hard” manufacturing. Because it’s only if we keep making cars — with the necessary policy changes —

will we one day make toys,DVD players,cellphones and refrigerators in the same numbers,and hopefully with more profit,than our much richer neighbours in China currently do.

The writer is a senior editor at ‘The Financial Express’

dhiraj.nayyar@expressindia.com