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Govt to recast automobile investment policy

Kevin James in New Delhi

In a major recast of the investment policy in the automobile sector, the government proposes to stipulate a minimum initial investment of $100 million for foreign direct investment ventures.

According to the new guidelines, being finalised currently, a minimum indigenisation level of 50 per cent should be achieved in the first two years of their operation.

Besides ensuring only serious players with long-term plans would enter India, the new policy stipulates that automobile multinationals should strengthen the domestic auto component industry.

The recast of the policy has been spurred by the controversy over the memorandum of understanding system applicable to FDI ventures besides commitments under the WTO agreement which expect the government to clear all hurdles in the path of foreign investments. Two auto majors -- German's BMW and Japan's Toyota -- have delayed their entry into India because of the MoU system and a slow down in the demand.

The MoUs signed between such ventures and the Director General of Foreign Trade stipulate that the companies would be allowed to import CKD/SKD kits on annual basis, depending on their production in the first five or seven years. The companies, in turn, have to export a certain number of cars, the value of which will be linked to the foreign exchange outflow on account of their CKD/ SKD imports.

The current policy does not specify any threshold level for initial FDI investments. Nor does it stipulate such high levels of indegenisation in the initial years.

It is understood that the new policy would be made applicable to the proposed Proton car project of Malaysia. Proton, a joint venture between the Malaysian government and Mitsubishi of Japan, proposes to set up a project in Andhra Pradesh for manufacturing mini cars.

The high level of indigenisation proposed in the new policy will come as a fillip to the domestic auto component industry as it would not only expand their domestic business but will also bring them international status as they would become suppliers to the global auto giants operating in India.

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