India-EU FTA spooks Indian auto sector: Here's why

Excerpts from India Business Hour on CNBC-TV18 Watch the full show »

Dubbed as the mother of all free trade deals, the India-EU FTA (free trade agreement) has spooked the Indian auto industry. The auto sector concerns arise even as FTA is unlikely to be signed at the India- EU summit scheduled on February 10. The concerns arise from the fact that the trade block has demanded that India cut its auto sector duties in the FTA.
 
In 2011, India exported 2,30,000 care to EU while EU exported 6000 cars to India. This is extremely unbalanced. We have to see movement in this sector, EU's ambassador to India, Joao Carvinho, summing up why the trading bloc wants India to lower its auto-sector tariffs.

While commerce ministry officials remain tight lipped, auto lobby group SIAM believes that EU wants India to halve its duty on imported vehicles.

SIAM maintains that the EU demand is unreasonable, the trade bloc is open to lowering duties for Indian car imports.

"This is a sector where India can gain immensely, especially in the small and mid sized cars. If negotiations go well, EU will lower tariffs and they will have an advantage over producers of cars form other parts of the world," Carvinho told CNBC-TV18.

According to trade experts, the EU's logic has some weight, but the Indian auto sector will have to ramp up capacity.

"Some of these countries are producing at scales higher than what we are producing. This is a factor and is causing some amount of unease here," says Biswajit Dhar, DG, Research & Information System

So, what would happen if India halves auto sector duties? Trade experts believe, the factor that will determine the impact is duty on European second hand cars, which currently attracts 100% duty.

Biswajit Dhar says if we are negotiating for a decrease in most-favoured-nation (MFN) tariffs, and you are going to give preference margin to EU, that also has an impact on second had cars. Then the scenario is going to be quite different, he believes.

While the FTA talks are unlikely to be over soon, the Indian auto sector is keeping its fingers crossed.