2011 Budget Proposal May Lead to Price Hike in Luxury Cars

India’s auto companies that import parts for their assembled car manufacturing may face a cost increase due to the country’s growing customs duty on pre-assembled parts and the expanded definition of semi-knocked down (SKD) kits.

The recent Indian 2011 budget proposal says that automakers that import pre-assembled components will need to pay a 60 percent customs duty, while the import duty for completely-knocked down (CKD) kits is only 10 percent. At the same time, the new proposal also set up a wider definition of SKD kits: not only is a pre-assembled engine, gearbox or transmission mechanism considered as an SKD kit, but now a body assembly coupled with an assembled engine, gearbox or transmission installed is also counted as an SKD kit. Since those two categories were previously classified as CKD kits, the definition alteration means auto companies that produce with those imported components will bear a higher customs duty.
Although the Indian Finance Minister Pranab Mukher later reduced the duty from 60 percent to 30 percent, reacting to auto manufacturers’ protests, India’s car prices, especially luxury cars that usually use imported pre-assembled auto parts, will still very likely see an increase to the extent of Rs. 400,000, analysts estimated.

Experts believe that with the customs duty lift on SKD kits, luxury cars like Mercedes Benz, BMW, and Audi will become costlier, while many cheaper foreign cars may also lose their current price advantage to local car makers. In general, Indian automakers such as Tata Motors, Maruti and Mahindra will be less influenced since only some models they produce use imported pre-assembled parts.

The policy shift aims to develop the local manufacturing of all components and increase manufacturing’s contribution to India’s total GDP to 25 percent instead of the current 16 percent. Such a policy will very likely change many auto companies’ investment strategies. If component imports becomes too expensive, companies will have to make additional investments to build up manufacturing plants to manufacture all these components locally and transfer foreign technologies to India as well.

It still remains to be a answered whether the new policy will attract more direct investment from auto companies, or drive them away, since the duty hike already led to some sharp reactions. Audi has threatened to “scale back” investments and Mercedes has asked for a one-year grace period so the company has enough time to adjust its strategies.

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