India’s high contribution to the global production of automobile spare parts of diverse brands is in itself a standing testimony to its inherent advantages of low cost of production mainly due to cheaper workforce.
Automobile parts manufacturing is a very important industrial activity in the world today. The huge variety of automobile brands and models in the world where road transportation happens to be the leading mode of surface transportation for humans as also for human goods makes automobile components manufacturing a dynamic, growth oriented segment of industry with consistent scope for income generation and employment creation. The continuous refinements in technology in the automobiles sector have ensured that automobile components production maintains its tempo. India as an industrialised nation has done well in the automobile parts production. India’s high contribution to the global production of automobile spare parts of diverse brands is in itself a standing testimony to its inherent advantages of low cost of production mainly due to cheaper workforce. Today, we find automobile ancillary units in India catering to most of the major global brands. But the factors that have hindered the emergence of India as a prime manufacturing hub are the same, old, known factors. Let us recount and review them also taking a look at how they can be addressed.
During the period of seventies and eighties extending well into nineties, multiple benefits like sales tax and excise duty exemption, reservation of identified products for small scale industry, free availability of cheap labour etc. ensured that automobile components churned out by the small scale industry were price competitive in both domestic and export market. But later on, World Trade Organisation (WTO) regulations like General Agreement on Tariffs and Trade (GATT) and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) became binding on India and our small-scale industry also became subject to strict regulations like ban on child labour and phased import duty reductions on imported automobile parts. This has significantly stifled the growth of Indian small-scale industry in the automobile ancillaries sector. Availability of electricity at reasonable rates is an important factor for automobile components to be produced in a price competitive way because factories of these components use forging, milling, chipping or annealing processes that consume large amount of electrical power. Indian industry has always been hamstrung by power shortage and, therefore, factories all over had to install diesel generating sets which produced electricity that was three times costlier than that procured from the power utility agency.
It need not be overemphasised that ‘Inspector Raj’ has done incalculable harm to the growth of industry in India, particularly in the small-scale sector. Regular rounds of corrupt electrical inspector, labour inspector, factory inspector, sales tax inspector or excise inspector have ensured that the hapless factory owner had to do some compromise on quality or resort to power theft in part or employ cheap child labour to keep afloat in the fiercely price competitive market.
The way to mitigate the stifling effect of the aforesaid factors on the growth of automobile components manufacturing industry in India is pretty simple. Establish medium scale or large scale factories in Special Economic Zone (SEZs) with wide range of fiscal concessions as also cheap, uninterrupted power supply available from captive generating units. Changeover to a system of self-certification about compliance with electricity laws, labour laws, factory laws or excise laws. Inspections could be random instead of regular. The other important issue is marketing support, which the government needs to provide in a much bigger and better way.
The attractiveness of domestic and foreign investment in automobiles components industry in India is borne out by the following facts. The cost of making steel in India is significantly lower than in competitor countries. Steel is the prime material going into the making of auto components. The exports of auto components increased at a Compound Annual Growth Rate (CAGR) of 17 per cent during 2008 to 2013 reaching USD 9.7 billion in 2012-13. There is enhanced investment in R&D for conducting activities such as analysis, simulation and engineering animations. One observes a visible trend of global Original Equipment Manufacturer (OEM) sourcing from India. The government has announced R&D incentives for industry and private sponsored research. Incentives announced for promotion of manufacturing activity include reduction of excise duty and customs duty and lowering of income tax, besides specific state incentives, export incentives and area-based incentives.
Implementing the steps suggested above will provide the desired boost to investment in and growth of automobile components production in India and ultimately make it the global manufacturing hub for these items.
Atul Sehgal
(The writer is a senior columnist)
