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Impact of India-EU Free Trade Agreement on Auto Sector and India!

The European economy is going through a slowdown and the Indian economy is still one of those economies which have a great scope for growth. So in order to strike a balance between the two, the 27 nation European Union is looking to touch down on Indian shores via a FTA ( Free Trade Agreement) which has several points of indifference between the two authorities.

Let us explain to you how it will impact our automotive sector and then we’ll talk about the rest of the economy.

Proposal: EU has proposed that the duty on 50,000 European cars being brought into India should be reduced from 100 percent to 10 percent.

INDIA-EU-Free-trade-agreement-001

Impact:

This would bring the duty on CBU (Completely Built Unit) cars down by a considerable amount and a slew of European manufacturers would like to enter India. What it would do is that the buyer will get a lot of choices at competitive price points but at the same time, the sales of the automotive companies which are present in India will take a hit.

This shall also prove to be a bit unfair to the Japanese, American, Korean and Indian companies who have already invested quite a lot in India.

Also, with the trade opening up, who knows this limit of 50,000 units might get revised in future.The import of 50,000 units at such a low duty shall also decrease the government’s revenue to quite a large extent.

The European cars are technically way ahead of the ones which are being sold in India and seeing the fact that they’ll come with a price tag similar to the ones currently on sale in India, they’ll get an instant following with the Indian car manufacturers going back to the drawing board to bring in better cars at further lower points.

However, in all this the biggest winner will be the consumer.

Point of indifference:

The Indian manufacturers are of the opinion that this would curb the growth of the automotive companies present in India and the European companies would get an undue advantage. The sole purpose of imposing duties was to help the Indian automotive sector grow which will take a dent.

The second most important group of people involved is the spare part suppliers. When the demand for the cars produced in India would be reduced, their sales would reduce and in turn, this would impact the livelihoods of many.

It could swing in the favour of the Indian companies as well. This is because order for an emerging economy to flourish such restrictions should be lifted so as to allow the it( in this case the Indian industry) to compete head on with the international giants, thus helping the Indian industry grow.

Dairy Sector and its impact:

EU currently has enough of dairy surplus and it is looking to dump its surplus in developing countries. The Indian dairy sector currently employs over 90 million people and the all the protection rights that were given to the Indian dairy sector would take an exit.

And the EU is not even removing the subsidies it provides to its agricultural sector thus making its products cheaper and making it difficult for the Indian counterparts to compete.

Impact on Insurance Industry

The EU bloc does not stop at the automotive sector and the issue which has gained a lot of importance off late has been the allowance of investment in the Insurance sector.

The EU states that the cap on Foreign Direct Investment (FDI) in insurance sector which currently stands at 26 percent should be raised to 49 percent. The insurance sector in India is already undergoing a consolidation phase and it will further deteriorate the state of the Indian companies.

Conclusion

Its not just these 3 sectors but a slew of sectors that the EU wants to infiltrate in the name of free trade. The EU is approaching developing nations individually who did not accept the proposals of the developing nations at the WTO.

EU is looking to enter the finance sector through liberalization and the Biotech sector by strengthening its claims on intellectual property rights to get a slew of royalties from Indians.

It all may look good on the outside that it will put the Indian industries at par with the International units but is Indian industry ready for that?

We still need a consolidation in a lot of sectors and the FTA is just a way for the developed nations to dump their surplus and ride through the economic turmoil they have been going.

The other side of the coin reads that India might undergo a drastic structural change giving it the edge in every department to compete in the global arena. But that is what an optimistic would tell you.

We are just practical and in real terms, the India-EU FTA is not something India needs right now. It has been getting delayed since 2007, there must be a reason for it.

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About Ritij Khurana

An Automobile and Technology blogger who always has a dream of being a F1 driver. A gadget freak when not driving cars and riding bikes and a singer as well.

5 comments

  1. A great topic @ Ritij, I would like to comment as follows : 1) Auto sector : The duty on foreign cars is not only to protect struggling indian car makers. Certainly it generates some income to the state. But think of the figures given. When the duty is at 100%, indians still import 50K cars. Even considering a price tag of 10 lakhs per car which is 20,000 USD, the import bill itself is 1 billion which is contributing to trade imbalance. Imagine if the duty is brought down to 10%, the price of the cars goes down drastically and imports grow and increase trade dificit. At a time when importing gold is considered in ethical in view of our trade balance, how does it look to import luxury cars? On the other hand India should ask EU to give priority to Bio Diesel it is importing from India. It should reduce their duties on Bio Diesel from India or give subsidies to indian exporters. It will reduce pollution in EU and increase the boi diesel sector of india generating more rural employment, more industry, more exports to India. Also EU should buy more auto parts from India. 2) Dairy sector or even agricultural sector as a whole : We all know that Europe cut down all their forests hundreds of years back and converted them to farm lands. All the country sides in Europe today which looks beautiful today were once forests. Now the whole world should ask EU to adopt the policy of reverting back. Convert farm land to forests. It will serve many purposes. a) It remedies the mistakes of their fore fathers of cutting down forests. b) Reduces the agri surplus which is forcing the govts to dump it on the world. c) Reduce the subsidies it is providing to the farmers. If the above idea looks radical, think of this, a rather ttoned down idea. As EU, North America consider themselves ‘Developed Nations’ they should give their surplus unmamagable portion of agri products to poor African nations free of cost. We all have seen TV clips of ship loads of grain sent to hungry Africa. Still there are millions of hungry Africans. Still there is unmanagable agri surplus in Developed nations. Why dont these two problems adress each other? It will take out the equation of EU to hard bargain India into importing their products. 3) Insurance sector : I have no knowledge of this sector but I dont see why India should not allow them. 4) Other topics to be included in EU-India talks : India should put more pressure on EU to adopt same emigration rules like US. They should allow more Indians into EU. We all are aware that EU is more concerned about their cultural identity and their worry about cultural dilution once outsiders come into their lands. They all want to stay in thei rcountries, they want to maintain their standard of living by forcing outsiders to import more from them. Once we argue that they should let in more Indians, they will know their bargaining power. Just my two paisa :)

    • Ritij Khurana

      That is exactly what India has been trying. India has been pressing for relaxed norms for Indians as work professionals into EU. As you said they want to maintain their cultural identity but they want to invade the Indian identity. There should be a balance between the relaxations given to them and received by the Indians.

  2. I don’t understand why the government doesn’t have 100% tariffs and duties on everything that is imported. Why only cars? We have other industries that need protecting too. These other industries need to save jobs too.

    • Arun Prabhudesai

      @Mohan – Far too many things will become too costly. India still has a long way to go before becoming self-reliant. It depends on imports in lot of sectors. And our Industries will itself suffer due to high prices…Consumers will shun lot of products if that is done..

      • @Mohan, Consider this : 100% duty on Crude oil and taking out all subsidy on Petrol which you are getting. You will end up paying 300 rupees per every liter you use. 100% duty on Luxury cars and having no duty on crude are two extremes of the argument. In between there are many products, many indian requirements, many factors to consider. The job of our Fin Minister is to consider all such factors and decide on the duties or subsidies for each item. The topic of the subject here is every country is trying to convince other countries into relaxing their import policies without relaxing their own policies. How we counter without compromising our goals is the game played by masters of the game. I think Chidambaram is an able player. Just my two paisa :)

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