The Government of Pakistan is expected to launch a comprehensive Automotive Industry Development and Exports Policy(AIDEP) 2021-26 next month, as the previous five-year policy has gone out of commission as of 30th June 2021.
In his recent press conference, the Minister for Industries and Production Kusro Bukhtiar laid down several salient features of the upcoming policy. Regarding the enforcement, he said that the auto policy will be furnished before the cabinet next month for approval. It will especially focus on localization and making the auto sector export-oriented.
The minister also added that extra focus for the first time in the country’s history would be on the availability of quality vehicles at an affordable price.
This is done by the incumbent government by being the first one to be implementing the UN’s WP29 regulations, and under the new policy, it would be mandatory for the auto manufacturers to follows the 17 regulations under the law.
This is in line with the government’s overall export-led growth policy brought under the recent budget for 2021-22.
Talking first about the supply side of the policy, Mr. Bukhtiar said that the government is focused on increasing the production of the industry from 417,000 vehicles to 650,000 in five years.
On the demand side, he mentioned that the government is working to make car finance easier, especially for “first-time buyers”.
In a recent interview, Parliamentary Secretary for commerce, industries & production Aliya Hamza Malik said that PTI has introduced “Meri Gari” after the much welcomed “Mera Ghar” initiatives.
She said, “the government is working with the State Bank of Pakistan to work on such a financing mechanism where the markup rate on loans would be lesser than already very feasible rates offered by the banks”.
Another important aim of the new policy is to increase localization in parts assembly and pave way for exporting auto parts, 2/3 wheelers, and tractors. Thus, under this, the production capacity for 2/3 wheelers is projected to increase to 7 million units, 100,000 units for tractors, and 20,000 units for heavy vehicles.
Similarly, local production of electric and hybrid vehicles would also be encouraged, which would also accrue benefits for the economy.
Duties are being slashed in the less than 1000cc car section for both local and imported cars. For the local vehicle, the additional customs duty (ACD)is now 0 percent. The Federal Excise Duty(FED) is now 0 percent as well.
However, these goals are easier stated than realized. The demand side needs to catch up with the increased capacity to reach their increased capacity and give a level playing field to all the companies in Pakistan.
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So, historically, some policy suggestions have been made by the auto sector of Pakistan and the experts on how to improve the sector, and here they are.
Policy Suggestions
Everyone is hoping that the government is not flying blind as the auto policy is going to have a long-term impact on Pakistan’s auto industry. This is especially important as the international auto manufacturing companies are eyeing the expansion to the Pakistani markets over the last couple of years.
It is worth mentioning that over the last decade, the Government of Pakistan has had three studies done on the tariff and trade policies in the auto sector, and on the question as to what can be done to make the automotive industry more competitive.
Some major recommendations made in the three reports by the World Bank (2004)46, Dr. A.R. Kamal (2004)47 and Garry Pursell et al (2011) include removal of the de facto deletion programs; reduction of the auto customs duties to a considerably lower uniform rate; unification of tariffs on CKD packs, original equipment components, and replacement parts at a single rate (for example at 25%); and a review of successful models of regional automotive agreements.
Some highlights include:
Rationalization of tax policies
One of the biggest demands of the auto sector of Pakistan is the rationalization of Pakistan’s taxation policy, in particular, the customs tariff and import of used cars.
The industry has claimed that as the majority of parts are to be imported, the non-uniform and arbitrary prices are deterrent to the growth of the industry.
The recommendations for this include that the additional customs duty (ACD) on auto parts, otherwise known as Completely Knocked Down (CKD) kits, should be brought down to 10 per cent. This would potentially decrease the production cost and remove the arbitrariness in tax regimes.
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The auto sector also recommends that government removes the CKD kits from the negative list for imports from India. This is important because India has become the hub of auto manufacturing in the region and the auto manufacturers must be facilitated in importing parts from the Eastern neighbor until steps are implemented for import substitution.
Auto Trade Agreements
Keeping in mind the low cost of production in India, and various plant setups in the country, the government must incentivize the auto sector to get involved in auto trade with Pakistan’s Eastern neighbor and other regional countries. This can cut import costs from Japan and other nations with comparatively expensive currencies.
Examples of successful regional agreements would include the Indo-ASEAN Free Trade Agreement (FTA), signed in 2013, that provides India with many benefits.
Focusing on Comparative advantages
The recommendation by the experts also includes prioritization of the sub-sectors of auto-manufacturing that have a comparative advantage. This can only be done as a result of a collaborative effort between the Government of Pakistan and the manufacturers.
While car parts are being imported, a large number of auto parts for international brand tractors and motorcycles are locally manufactured and it would be in Pakistan’s favor to capture the regional market by signing agreements and realizing the industry’s potential by exporting them.
The last recommendation is on quality. Although the government has signed the WP29 under the UN which guarantees safety measures, and by extension, the quality of the vehicles, assuring its implementation by the local industry is whole another matter.
Thus, an ad hoc body including EDB officials and private experts is recommended to oversee the compliance of international standards, especially with respect to the products that are going to be exported from Pakistan.
An example of this is the Tractors industry, wherein Pakistani tractors do not meet Euro II emission controls. If Pakistan is able to meet international standards, maybe it can capture agricultural countries’ markets like India and Bangladesh.
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These are some of the major policy recommendations given that are hopefully addressed in the new Auto Policy 2021-26 to allow sustainable growth for the auto sector of Pakistan.