Driving growth: The auto sector could create new jobs

IIf Henry Ford were alive today, where do you think he'd be making his cars? Besides a few other countries, definitely in India. If you've already read our cover story and the special on manufacturing's winning industries this issue, you'll know why. One reason is, of course, the boom in domestic auto sales. The industry has grown at a compounded annual rate of 27 per cent over the last five years, and now accounts for 5 per cent of the country's GDP. Over the next nine years (that is, until 2015), it is expected to grow at 10 per cent a year. By then, the industry could be worth $40-45 billion (Rs 1,84,000 crore-Rs 2,07,000 crore), with auto parts suppliers-Indian and foreign-roping in outsourced manufacturing worth $20-25 billion.

Given India's current auto components exports of $1.9 billion (vehicle exports are higher at $3.5 billion), a 10-fold increase in less than 10 years seems very ambitious. Yet, there are compelling reasons why the centre of the global auto industry is shifting to low-cost countries like India and China. A recent PricewaterhouseCoopers study, called the "Global Financial Review", reckons that, while developed automotive markets will continue to grow over the next four years, "the biggest breakthrough growth will come from BRIC (Brazil, Russia, India, China) countries. They will account for more than 40 per cent of forecast global light vehicle assembly increases, and represent 52 per cent of the industry's forecast global capacity expansion".

The numbers should not surprise anyone. The global auto industry is going through its toughest phase yet. General Motors, the biggest vehicle manufacturer in the world, is teetering on the brink and needs either a strong strategic partner or a sweeping restructuring to survive. Ford and DaimlerChrysler, the other two big players, apart from Toyota, which is now at #2, are in the red and losing market share. With costs climbing and smarter competitors like Toyota and Honda eating their breakfast, lunch and dinner, the GMS of the world have been turning the screws on their suppliers. For instance, Visteon, a former Ford subsidiary, was driven to losses because Ford's own problems translated into tighter sourcing rates. Last year too, Delphi, despite being spun out of General Motors in 1999, filed for bankruptcy.

All these companies, including the vehicle manufacturers, are stepping up investments in India, and even some luxury car makers such as BMW are making a belated entry into the country. With the government of India reducing excise duties on small cars, everyone wants to make them, and at least two (Hyundai and Suzuki) have plans of making them here for global markets. What the industry needs today is help from the government in fixing some key problems related to infrastructure and taxation. If India wants to make the shift in manufacturing to stay with it, then it should address the industry's problems at the earliest.

No, Minister

Civil aviation minister Praful Patel's plan to curb new airline entrants on lucrative traffic routes is a retrograde move. His fears are justified-that mindless competition could result in casualties, given the extent of losses recorded by the carriers, both the low-cost and the full-service variety. His proposed action is regressive, since free market forces should prevail. Any intervention would be anti-competition and restrictive in nature, undermining the very policy which gave birth to the slew of private players in the domestic market.

The US, which deregulated its skies in 1978, witnessed a bloodbath thereafter-32 of the 34 low-cost carriers perished in a short period. Many were ideal candidates for seeking redressal under the anti-trust laws-they were bludgeoned to death by the big players who cross-subsidised their businesses. So, memories of mid-90s, when several domestic carriers like Modiluft, EastWest, and Damania went belly-up, should not become a consideration for the government. Importantly, the case of full-service carriers like Jet and Kingfisher is quite different-their plea for invoking the competition laws is unjustified. The low-cost carriers offer competitive rates by cutting costs, and keeping services to a minimum. If anything, bloodletting by the full-service carriers is reflective of consumer choice, no more.

Rather than interfere with the market, the government ought to hasten the pace of modernisation of airports across the country, create an enabling environment for private sector to pour funds in creating infrastructure. It should ensure that rationing of parking slots for aircraft in clogged airports like Delhi and Chennai is done on commercial terms. And, the faster it creates the Airport Economic Regulatory Authority and entrusts this job to it, the better.

The ill-effects of creating entry barriers have already been seen in the petroleum sector, where a ticket to the retailing business requires an upfront investment commitment of Rs 2,000 crore. This has ensured that since 2002, only a handful of players have ventured into the business. But price controls have also ensured that the PSUs have been run down. Free market phenomena like efficiency and innovation were never allowed to take off. In the airline sector, the power of innovation by the private sector to stay afloat should not be underestimated. That would require minimum government intervention.

SEZs Could Be Our New Cities

SEZs: A fresh chance to build modern cities?

Some of the suspicions and doubts about offering tax and other benefits to the private sector to build special economic zones (SEZs) may be valid. Congress president Sonia Gandhi (as well as politicians of other hues) feels arable farmland should not be given away for establishing SEZs. The Ministry of Finance has very publicly voiced its concern about revenue losses that may be incurred if industry diverts investments to SEZs from other areas by taking advantage of the various tax breaks offered. Others see it as a form of land-grabbing, fearing that private enterprises would be cheaply given large tracts of land, off which they could potentially, after developing them, earn huge profits. There are other concerns too-about displacement of marginal farmers and farm labourers and, more darkly, the machinations of corrupt politicians and greedy realty developers.

All of these are legitimate concerns. But let us (okay, maybe naively) assume that SEZs come up fairly and transparently with everything above board and nobody's interests harmed. Besides emulating China, where it is a fact that SEZs, set up there more than two decades ago, have been one of the driving forces of that country's remarkable economic growth, SEZs may have a big benefit for India's urban development. Take a look around at our cities and you will find most of them in a terrible mess. The larger, older metros like Mumbai, Kolkata and Delhi face problems of infrastructure that are fast reaching alarming proportions. Smaller wannabe metros like Bangalore, which was once a sleepy town, suddenly have to cope with economic boom for which they are not prepared. A third kind of urban crisis is exemplified by Gurgaon, where, as a village metamorphoses into a jungle of malls, condominiums and office complexes, the infrastructure is woefully inadequate as it struggles to keep pace.

That's where SEZs could make a difference. Begun on a clean slate, the SEZs could be our second chance at creating urban agglomerations that are planned and fully equipped with infrastructure. Indeed, some of these proposals, like Reliance's proposed SEZ near Mumbai, would actually create bustling metropolises that could be bigger than India's existing cities. True, we do need well-thought through (and funded) plans to revitalise our existing cities and towns, but SEZs may provide a way of creating new cities whose planners don't repeat the mistakes of the past.