Free trade pact with EU likely to include auto

CHENNAI: India's proposed free trade agreement (FTA) with the European Union could include tariff reduction on import of vehicles as well as automotive components. If it does, it will be a first since India's FTAs with other auto hubs like Japan, Korea and Thailand have so far left out completely-built vehicles from the areas covered by the FTA. The possibility of fully-built vehicles being included in the FTA with the EU – home to auto majors like Volkswagen, BMW, Mercedes Benz, Fiat and Renault – is causing considerable heartburn in the auto industry.

The industry apex body SIAM (Society of Indian Automobile Manufacturers) had protested against the inclusion of fully-built vehicles under the EU FTA earlier this year. The commerce ministry had, back then, asked for their recommendation on the subject. SIAM had said it's against any exception to the rule that has so far applied to other FTAs including the Asean, Korea and Japan. All of them lead to some tariff reduction on components but did not touch fullybuilt up vehicles. SIAM wanted status quo to be maintained in the case of the EU FTA as well.

Since then, though, the industry has not been kept in the loop about the details of the negotiations or the areas that are likely to be covered. The ministry and SIAM had a public face-off before that – the government felt the auto industry enjoyed undue tariff protection unlike other sectors while SIAM felt the EU FTA would seriously impact both employment and investment in the sector.

The EU FTA has now entered the final phase of negotiations and the draft will likely be announced shortly. Once both the Indian commerce minister and EU trade commissioner announce their intent to sign, the FTA will be formally implemented next year.

"Apart from offering the EU undue tariff advantage in automobiles over Japan, Asean and Korea, it will also mean cheap import of big cars which will run on subsidised diesel at a time when big cars in India are being taxed higher and there is also talk of a diesel tax on big SUVs and luxury vehicles," said a Delhi-based auto CEO.

Currently import of fully-built up cars attracts 110% duty though the actual import duty is 60%. The rest of the taxes are also applicable on locally assembled vehicles. European car majors such as Volkswagen, Mercedes Benz, BMW, Renault and Fiat have made substantial investments in India. VW, for instance, has pumped in Rs 3,800 crore in its new plant in Chakan, Maharashtra; Mercedes Benz and Daimler India are together pumping in around Rs 5,000 crore into the Indian market in creating a car assembly line and a truck manufacturing plant.