Automobile Industry: Urgent Need to Revamp Policy Measures

Economic Review, July 1997 | Go to article overview

Automobile Industry: Urgent Need to Revamp Policy Measures


A major, even basic factor that has impeded the development progress of the automobile industry in Pakistan has been the lack of a well structured and long-term policy for the industry. From the decade of the 1950s to the decade of the 1990s, what the automobile industry has witnessed in terms of government policy has been reliance on adhocism, vacillating approach and ill-considered measures that might have benefited interest groups but not to automobile industry as a whole.

At one time, nationalisation closed the door against initiative and investment. It resulted in a lack of mutual understanding among the three most relevant parties - the local entrepreneur, the foreign investor and the government. Even when the benefits of the market economy were acknowledged, the official apathy towards the automobile industry continued, which is substantiated by the unhelpful and regulatory measures adopted from time to time. It is indeed a sorry state of affairs. We have witnessed the collapse of well established plants. The industry as a whole is faced with several anomalies and imbalances which retard its progress. Now that a new government headed by Prime Minister Nawaz Sharif is at the helm of affairs, the automobile industry naturally expects that the situation in the industry will come under close review and rational policy evolved to help the automobile industry progress and make its due contribution to the growth of the transport sector.

The automobile industry has reason to expect this as Mr. Nawaz Sharif has himself been the guiding spirit in the development of a large industrial enterprise in the country and is fully conversant with the needs and demands of growth in a major industry. The unprecedented electoral support given to him strengthens his position to introduce revolutionary changes for the development of industries. Now, about the state of affairs in the automobile industry, it is like a retarded child who, with time, has come to the age of adulthood but remains in a state of immaturity, with its growth retarded by stifling regulatory measures.

To reverse the process of retardation and help healthy growth, fresh approach is needed in respect of regulatory and fiscal measures. The industry understands that some regulatory measures are required but they have to be reasonable and well defined. In order to generate maximum revenue, government policy makers are inclined to repeatedly tax motor vehicles. To illustrate this we can take the example of a car where its price to a customer is Rs.700,000. Out of this, Rs.210,000, that is 30 per cent, goes to the government. The balance of Rs. 490,000 includes the cost of CKD kit, local (deleted) parts, manufacturing cost, royalty, dealer's commission, etc.

In this process, the assembler is left only with 5 per cent as his profit. It has to be said to the credit of most automobile firms that, along with their partners, after making huge investments to set up plants to offer indigenous products to Pakistani customers, they are operating with this marginal profit, obviously with the hope that better returns will come in the future.

The position which has emerged after the 1996-97 federal budget remains grim - import duty at 40 per cent, income tax at 4 per cent, PSI charges at 2 per cent, sales tax at 18 per cent, octroi at 2 per cent, withholding tax at 3.5 per cent and capital value tax up to 6 per cent would take the total to 75.5 per cent. The heavy load of levies makes the car very expensive and acts as a deterrent for prospective customers. It also raises a vital question. Such levies are resorted to restrain imports of some unwanted items. So does the government want to discourage Pakistanis from buying locally assembled cars? …

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