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The 30% rule applies to Apple stores, not Tesla PDF Print E-mail
Wednesday, 24 May 2017 05:38
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India’s 30% local-sourcing rule is a bad idea, but it applies to single-brand retail, not car production

 

It was bad enough that, after being badly briefed, US president Donald Trump talked of how certain countries—the hint was, clearly, India—were levying a 100% import duty on Harley Davidson motorcycles, and that he was going to change that. And now, the legendary Elon Musk has been more direct in his criticism. In response to a tweet on whether Tesla would release its car in India this year or the next, Musk tweeted back, “Maybe I’m misinformed, but I was told 30% of parts must be locally sourced and the supply doesn’t yet exist in India to support that”. Both president Trump and Musk are wrong. In the case of Harley, it is imports of second-hand bikes that are taxed at 100%, new ones under 800 cc pay a 60% import duty, bikes imported in SKD form pay 30% while those in CKD form pay a mere 10%. As for Musk’s assertion, there is, in fact, no local-sourcing norm in the automobile sector—depending upon whether the imports are in SKD or CKD form, the duty is 30% and 10%. Musk could argue that, with India’s ecosystem for electric cars as yet poorly developed, a 30% import duty is too high, but that is a different matter—with the battery, among others, fully imported, around 40-50% of the car is imported even when it is made by Indian manufacturers today.

Chances are Musk got the 30% local-sourcing number from Apple which was trying to negotiate whittling this down with the government. Though the clause is a bad idea, it applies to single-brand retail—so, if Apple is to retail its phones through company-owned stores, it needs to ensure 30% local-sourcing. The same norm applies to Ikea and, as FE has argued before, it is excessive—once India develops a supplier base, companies like Ikea and Apple will anyway source locally on their own since imports are both time-consuming as well as expensive given India, like many other countries, has high import duties on certain products in order to encourage more local value addition. If it did not, as in the case of mobile phones that are being ‘manufactured’ in India—assembly is the correct term—more than 95% of components are being imported, with little value addition here. That is also why, the same Apple has no problem assembling phones in India—the 30% norm only applies to the retail sector.

There are two lessons here for the government. One, when bad policies like the local-sourcing rule, or price caps/royalties on items from stents to GM seeds, or aggressive tax practices are put in place, even well-informed CEOs are likely to believe the worst about a country. Two, given the fact of India’s under-developed ecosystem when it comes to electric/hybrid cars, and the need for imports, as in the case of mobile phones, the government would do well to work on a phased-manufacturing-programme (PMP) with realistic timelines on how soon these products can be made in India—this year’s PMP for mobiles is looking at a 5% value addition locally. Till then, import duties must be kept at low levels. Developing a reliable component base takes decades, but when it happens, as in the case of Suzuki’s Maruti, there will automatically be a lot more indigenisation and, possibly, even export. But for that eventuality, firms like Tesla first have to be allowed to come in with as few restrictions as possible.

 

 

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