The global economy has done a veritable volte-face in the last one and half decade, owing to the emergence of the two Asian giants – India and China. These two nations have made inroads to every possible industry including the auto-industry. Huge potential demand coupled with a cost advantage has lured global auto-makers towards these countries, thereby leading to phenomenal increases in their production and quality of auto-products. This is evident from the rising share of these two countries in the world production of motor vehicles from 4 percent in 1998 to 12.5 percent in 2006. Most of this increase is visible in China alone, where the sector is recording a vertical growth since 2001, this is in stark contrast to the low comparative growth figures for India over the same period.

In 2000 there was only a marginal gap between the Chinese and Indian production of passenger cars, but after that this gap has increased approximately three fold by 2006. Even more intriguing, is the reason behind this trend- remarkable difference in growth rates(considering that these two neighboring countries had started off on similar pedestals). This in turn raises some issues: What accounts for the difference in the growth rates of the automobile sectors in these two countries? Can this difference be attributed to their trade policies? In the light of the ongoing debate on the high tariff protection for certain auto sub-segments in India, this latter question becomes even more relevant.

         
In India, the prevailing high tariff rates for passenger cars and two wheelers have been justified by the government and industry players on the following grounds; (i) low scale of production i.e. the infant industry argument (ii) lack of purchasing power or low per capita income and (iii) Infrastructure deficit. However, a comparative analysis of Chinese and Indian auto industries suggests that the infant industry argument is far from reality. The passenger car segment has already achieved the required scale of production which at present is approximately three times higher than what China had in 2001 when it introduced the tariff reforms in its automobile sector.

Secondly, the argument of low level of per capita income is also losing ground. In 2001, the Chinese per capita income was US$ 1038, which according to the IMF estimates, will be surpassed by India by the year 2008. Therefore, the current level of tariff protection for certain auto sub-segments can only be justified on the basis of infrastructure deficit. Hence, if the Indian government puts the required infrastructure in place and manages its exchange rate policy appropriately, the tariff reforms will only benefit the Indian automobile industry like it has benefited the Chinese, through improved competition and efficient resource allocation.

Pankaj Vashisht