Govt's boon for automobile joint ventures

Kevin James in New Delhi

In a major concession to automobile multinationals operating in India, the government has decided to relax export stipulations under the existing memorandum of understanding (MoU) system.

Under a new package being readied, joint ventures in the sector will be allowed to backload their export commitments. In other words, companies will be allowed to postpone their annual export commitments from the initial to the later years of the MoU period which ranges from five to seven years. More importantly, these ventures will be allowed to export components instead of passenger cars.

The MoUs signed between such ventures and the Director General of Foreign Trade (DGFT) stipulate that the companies would be allowed to import CKD/SKD kits on annual basis, depending on their production in the first five or seven years. The companies, in turn, have to export a certain number of cars, the value of which will be linked to the foreign exchange outflow on account of their CKD/SKD imports.

Renewed annually, the MoUs monitor the progress on the indigenisation plans of these companies as also their export commitments. The issue of fresh licences for importing CKD/SKD kits was linked to the progress made on these fronts.

The stated objective behind the MoU system was to force the joint ventures to go in for speedy indigenisation and to balance forex outflow on account of kit imports.

However, most of the ventures which signed MoUs have so far reportedly defaulted on their export targets. Besides, they have been lobbying hard with both the commerce and industry ministries, the two ministries concerned with automobile industry and exports-imports, to wriggle out of their commitments under the system.

Currently, due to the high level of imported components which increase the production cost, these companies are not being able to perform well either in India or abroad. In fact, there was negative growth in the luxury car segment last year, forcing most of these companies to cut their productions.

Besides, the government has also realised that Indian auto components have made deeper inroads in the international market than passenger cars. The move is also intended to attract more foreign investments in this sector. Some of the automobile MNCs are reportedly holding back their plans of investing in India because of the dismal performance of the existing players and the stringent export conditions.

Meanwhile, it is learnt that the commerce ministry has decided to ask Volvo to sign the MoU, although the conditions are expected to better due to the proposed amendment. The Swedish auto major is setting up shop in the commercial vehicle segment.