AFP/Getty ImagesIndia’s auto production has doubled from 7 million units in fiscal year 2004 to over 14 million units in fiscal year 2010.
Sales in the most recent year were dominated by 9 million two-wheelers followed by close to 2 million passenger cars. This year, starting April 1, has been even more stellar with domestic sales from April to September exceeding 8.5 million, a healthy 30% increase over the previous year. Little wonder that when sales clocked a new record of 1.3 million units in September, stock markets cheered and stocks of auto companies hit new highs. All the global auto majors are clamoring to join the party.
But the question which begs an answer is: Can India really afford so many cars?
For starters, we are an oil-starved economy and our growing oil addiction can only have disastrous consequences. We consume around 1 billion barrels of oil annually of which we produce barely 25% domestically. What is more worrying is that while our production of oil has been steady over the last decade at around 750,000 barrels a day, our consumption has shot up from 2.2 million to around 3 million barrels a day.
As a result, our petroleum imports (including crude processed for exports), which amounted to about $80 billion in the year ended March 31, now constitute a third of our imports. We are extremely vulnerable to any upward movement in oil prices which aggravate our current account deficit, put pressure on the rupee and adversely affect the economy.
Second, most of our cities are bulging at the seams with inadequate roads and minimal parking. Our current obsession with widening roads and building flyovers as a panacea to our traffic woes is short-sighted and akin to using a band-aid when surgery is required. Flyovers, apart from largely benefiting the middle and upper classes, tend to be self-defeating as the shorter commute time encourages more people to travel by car thereby increasing traffic to its former level.
Delhi, for instance, has more than 20% of its land dedicated to roads but with over 5.5 million registered vehicles and over 1,000 new cars entering the city daily, the city continues to be gridlocked. As more cities across India fall prey to such poorly thought-out policies, traffic congestion is inevitable.
Third, there are huge environmental implications of a surging vehicle population and future generations will pay the price. Vehicular emissions continue to be the principal source of air pollution across Indian cities despite a series of measures to improve emission standards and phase out older cars. The level of nitrogen oxide in many cities is far above Indian and global standards, posing a serious health hazard to citizens, particularly children who prone to contract asthma and other respiratory disorders.
Despite all of the above, government policy seems to turn a blind eye to the problem and, in many instances, actually encourages a greater automobile density.
More than a decade after the policy was announced to remove controls on fuel, the government continues to subsidize it. Apart from the economic loss to the Exchequer and the public sector oil companies, this sends the wrong signal to the consuming masses who are encouraged to keep buying cars and using them in preference to public transport.
Further, the higher subsidy on diesel (ostensibly to reduce the burden on the kerosene-consuming poorer section of the population) has encouraged the middle and upper classes to shift to diesel cars over petrol cars, aided by car manufacturers who routinely introduce diesel variants in luxury models.
Apart from the supreme irony of the richer classes tanking up on subsidized diesel for their fuel-guzzling SUVs, diesel cars release a greater number of pollutants and further compound the environmental problem.
All the while, the auto industry gets lots of sops with states and politicians wooing the companies aggressively with free land, one-stop approvals, subsidies and a whole range of fiscal incentives. Such political patronage is not surprising given the large investment involved in setting up an auto plant and the ability of the sector to generate employment and additional investment in auto components and other ancillary industries.
It is high time that we pause and reflect on the long-term impact of our auto policy and choose between what a friend of mine refers to loosely as the European model versus the U.S. model.
Europe followed a very different policy. Most European countries (even Germany, which has a significant auto sector) have preferred to make large investments in building extensive and efficient public transport networks and have imposed high taxes on fuel to nudge consumers onto buses and trains. A gallon of petrol costs around $2.50 in the U.S. today while it ranges between $5.50-6.50 across Europe. No prizes for guessing that the per capital fuel consumption in the U.S. is twice that of most European nations.
India has the benefit of history and can analyze different models to arrive at an appropriate transportation solution. Lets use it to decide whether we brake or accelerate the auto party.
Source : The Wall Street Journal (Samita Sawardekar is an investment banker based in Mumbai.)
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