OPINION
Ammar H. Khan
The lopsided market structure of the automobile industry
cases. In-effect, an automobile buyer will have to pay a certain percentage of the price in advance for booking, following with full payment. Furthermore, any price increases during this period are also borne by the customer. Such an erratic pricing and payment regime as well as waiting times extended to twelve months or more, automobiles have essentially become financial assets. Many individuals even use automobiles as an asset class, given its strong correlation with value of PKR against major currencies. A depreciating PKR eventually results in an increase in price of automobiles. More importantly due to a long wait time, there exists a substantial premium for delivery of vehicles on spot. A premium of 10 to 15 percent is fairly common on various models, if someone wants the automobile on spot, or with a much shorter waiting. Such market distortions have resulted in emergence of a class of investors who act as market makers, and pocket a n automobile is supposed to be a depreciating asset. An sweet low-risk financial spread on automobiles bought and sold. asset which is used and over time its value depreciates Creation of a shadow financial market has also been made possible as wear and tear takes hold, and new technology results due to increasing prevalence of cash in the economy, with most in better, and safer cars. In Pakistan, it is the complete transactions being done outside the financial system, devoid of any opposite. A protectionist regime which has protected potential capital gains taxes, or even income taxes. A market disthe incumbents for almost three decades now contintortion eventually having a ripple effect across the economy, from ues to manufacture cars which are not just expensive relative to other welfare loss to consumers, to creation of a shadow market. regional markets in US$ terms, but also of substandard quality, often There must be some kind of way out of here, said the joker skimping on technological advances available in similar models in other to the thief. Jimi Hendrix uttered these words in his seminal regional, and global markets. work, all along the watchtower. The way out of a protectionism In presence of a protectionist regime, competition from importregime is creation of a vibrant, and more open market. Reducing ed automobiles is discouraged through an excessive duties regime. In duties on imports is one way to enable more competition, but an absence of competition from imported automobiles, local manufacturers unintended consequence of increased automobile imports can be do not have the incentive to improve their product offering resulting in a deteriorating current account deficit situation given precarious a welfare loss for consumers, as they continue to pay a higher price for state of our foreign exchange reserves. However, any such incresubstandard automobiles, relative to the choice set available in other mental imports must be compared with imports of Completely markets. Knocked Down (CKD) units, and other components. Through an extended protectionist regime, and absence of any exIt is estimated that roughly 60 to 70 percent of components ternal competition, local manufacturers increase prices every few weeks, of an automobile sold in Pakistan are imported. In essence, we often pegging the prices with parity of PKR against major currencies. are importing a significant quantum of components regardless. Any depreciation in PKR results in increase of prices locally by a proRestricting imports further disincentivizes local automobile manportionate, or higher increase in prices. Furthermore, as demand often ufacturers to increase local production of components and reduce outstrips local supply, there is an extended wait time for delivery of the import component. Increasing competition through reduction automobiles, often stretching from six months to even one year in many in duties and sticking with the policy rather than succumbing to pressure of the automobile lobby may actually benefit consumers in the long-run. A tiered taxation structure where a lower tax is applied on automobiles with higher proportion of local components, thereby making the automobiles relativeThe writer is an ly more affordable can also be a policy action to steer the industry towards a more competitive market regime. independent Policy actions need to focus on enhancing consumer welfare, rather than safeguarding producer surplus. macroeconomist and A protectionist regime rarely enhances consumer welfare and often results in creation of a market structure energy analyst. which even stunts growth of an industry when a global marketplace is considered. Automobile industry is a classic example of the same where adverse incentives has created more problems than it has solved. A gradual opening up of competition in the industry and ensuring policy continuity for the same would enable availability of better and affordable products for the local consumer. In essence protection of infant industries shouldn’t be till perpetuity, the infant has got to grow someday. n
Cars are supposed to go down in value. Here they are a fixed asset
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