Once again the Automobile industry in Pakistan is faced with a difficult situation as the local manufacturing has been rendered uneconomical due to a number of factors. These factors include: increase in depreciation allowance of used cars, increase in duties of auto parts and appreciation in value of yen and the US dollar against the Rupee and reduction in duties of imported cars by the GDP.

In the 04-05 budget, the GOP substantially reduced duties on imported cars. In the small cars segment up to 1000CC import duties have come down to 50 per cent only. The most affected is the medium car segment of 1001-1300 CC category where duties have been slashed from 100 per cent to 50 per cent. A 30 per cent reduction in duties has been done in the 1301-1600 CC category and 45 per cent reduction in the 1601-1800 CC category.

In the luxury car segment, duty has been reduced by 50 per cent from 150 per cent to 100 per cent. In addition to the above, the NTN certificate is not required for purchasing imported cars. Thus importers and buyers of imported cars are still outside documentation and tax net.

Even though only three months have passed since the announcement of duty reduction in the new budget and it takes at least 3-4 months for imported cars to reach Karachi after opening of LC, the flood of imported cars has already started. As is evident from the table below compared to only 306 units for the Apr - Jun 04 qtr, there has been a 300 per cent increase in import of new cars to 1063 units in Jul-Sep 04 qtr.

Appreciation Yen and dollar: Both the Japanese yen and the US dollar have appreciated considerably against the rupee, making local production costlier.

Import policy: Used cars depreciation allowance has been increased in the new CGO NO 10/2004 dated 31st August 2004. Accordingly, deprecation at the rate of 1 per cent would be allowed for used vehicles up to 1800 cc per month calculated from the date of first registration abroad up to the date of entry in Pakistan subject to a maximum of 50 per cent. Similarly, for vehicles above 1800 cc, depreciation is now at the rate of 2 per cent per month up to a maximum 50 per cent.

This too has resulted in an escalation in imports of used cars since the new policy has come into effect.

Indian policy: Indian car manufacturers are protected through tariff as well as non-tariff barriers.

*Imported vehicles need to get tested by testing agencies set up in India to ensure that poor quality, fuel inefficient old vehicles do not enter the country.

*Registration charges for imported vehicles are higher compared to locally manufactured vehicles.

*Only right hand drive vehicles with speedometer in Km/hr reading and signalling system for Keep Left traffic system are permitted in India.

*Other non tariff barriers include conditions such as, cars shall not be more than three years old from the date of manufacture, importer has to submit a pre-shipment certificate to the effect that vehicle conforms to regulations specified in the Motor Vehicles Act 1988 of India.

* The importer also has to submit a pre-shipment certificate to the effect that the vehicle conforms to the Original Homologation certificate issued at the time of registration.

Duty increased: The GOP has also increased duty on auto parts. This will have a direct effect on cost of local parts manufactured by local vendors, which are already appreciating due to increased prices of sheet metal and higher raw material costs due to rupee depreciation with respect to the Yen and US dollar. This makes localization uneconomical.

Negative effects: GOP's recent reduction in duties of imported cars is bound to have an adverse effect on the local auto manufacturing.

*Industry experts fear that reduction in duties could result in a situation similar to the one created by the Taxi Scheme of the early nineties that allowed zero rated import of taxis resulting in massive decline in sales of locally manufactured vehicles and complete cessation of investment. Before the announcement of the Taxi scheme, the industry had reached production figures of 65,000 units/year. After the taxi scheme, production reduced to 45,000 units/year and remained at around that level for more than seven years.

It was only due to consistent policies of last 3 years that the local car industry has recovered to achieve growth and touched 130,000 units/year in 04. Now, once again the industry is faced with a difficult situation, as the GOP is again playing with duties. The recent budgetary measures will stop the investment by OEM's and vendors. There is no long term auto policy for the auto sector.

This will have a direct negative effect on employment, revenue to GOP and transfer of technology.

Almost all auto manufacturers in Pakistan are joint venture projects with foreign affiliates. Not only do the foreign partners provide foreign exchange equity, but are also responsible for transfer of technology. Many of them are responsible for the Technical Assistance Agreements (TAA) with foreign component manufacturers. All of the above has been jeopardized by recent measures in the budget 04-05. These measures render Pakistan a less lucrative investment opportunity compared to other countries in the region that have stable long term, investment friendly policies.

The government should adhere to its strategy of long-term policy making. Also consumers should be patient as production increases, and not go for imported cars of low quality used cars as all OEM's have charted out crash programme for production increase.