Higher Import Duties Puts Pressure on Luxury Carmakers in India

India is encouraging local production of automobiles.

In its budget, the government has redefined the meaning of completely knocked down (CKD) auto components. Pre-assembled engines and gearboxes now also attract higher import duties.

There is a 30 percent import duty on CKD vehicles compared to 10 per cent earlier, in a bid to boost their domestic manufacture.

The increase has dampened the hopes of many luxury carmakers such as BMW, Audi and Mercedes to introduce new products.

Prafu Patel, the Minister of Heavy Industries, said: "Because of the sudden change in policy, some of the manufacturers are facing difficulties to indigenise in the timeframe that has been given.

"However, there are requests from the companies for at least about two years or so before they can build the facilities and bring more indigenisation into the product."

Luxury car makers, who have seen remarkable sales in the last two years, are contemplating whether to pass on the enhanced import burden to consumers or start production locally.

Japanese companies are even more confused as they are trying to cut costs following the March earthquake.

All automakers are worried that jacking up prices could affect their growth in the extremely competitive Indian car market. On the other hand, committing more investments seems unlikely, as many are still recovering from the impact of the economic slowdown.

So far only France's Renault has announced plans to increase investment in manufacturing.

Marc Nassif, Managing Director of Renault India, said: "We are committed to invest at Rs 4,500 cr (about US$1 billion) in the Chennai facility. That would include a huge car assembly line, power train facility, with a commitment to have an installed capacity of 400,000 per year. I can confirm today that we have just completed the investment on the second line so its two plus two. We should have, by mid 2012, our two production lines operating."

None of the carmakers have hiked the prices of their vehicles. If they decide to pass on the burden to consumers, prices of luxury cars could go up by at least US$11,000.

Luxury car makers are disappointed that the government did not consult the industry before raising the duty. They have urged the government to either reduce the duty or give them more time to localise production.