Mercedes-Benz Pushes for FTAs and Lower Trade Barriers to Boost Luxury Car Sales in India

Mercedes-Benz, a leading German automaker, is urging India's new government to expand free trade agreements (FTAs) and reduce trade barriers to facilitate the growth of luxury car sales in the country. Santosh Iyer, the company's India managing director and CEO, emphasized the importance of these measures, stating, "In the mid to long term, we want the Indian luxury car market to grow."

The call for more FTAs and reduced trade barriers comes in the wake of Mercedes-Benz achieving record sales in India in 2023, maintaining its position being the top luxury car brand in the country. The demand for luxury cars has been driven by a growing affluent class with more disposable income for high-end products.

Why this matters: The expansion of free trade agreements and reduction of trade barriers in India could have significant implications for the country's economic growth and its ability to attract foreign investment. If successful, it could lead to increased economic activity, job creation, and a boost to the country's manufacturing sector.

However, the expansion of the luxury car market in India faces significant challenges stemming from the absence of extensive FTAs and high import taxes on cars and automotive parts. India imposes a 100% import tax on fully built cars valued over $40,000, which discourages manufacturers from increasing local production.

Analysts suggest that more favorable tax conditions, as seen in FTAs, could significantly benefit the automotive sector. Mercedes-Benz has a longstanding presence in India, with 30 years of operations and an assembly facility in Pune, western India. In 2022, the company sold 17,408 vehicles in India, marking a 10% increase from the previous year.

Prime Minister Narendra Modi, who has been promoting a business-friendly reputation over the past decade, is seeking a historic third term. His administration has successfully negotiated FTAs with countries like Australia and the UAE, in addition to a European bloc. However, some negotiations, such as those with the UK, have faced delays, and talks with the EU only resumed in 2022 after a nine-year hiatus.

Modi's business-friendly measures, if re-elected, include regulations making it easier to hire and fire workers, subsidies for domestic production, and a reduction of import taxes on key inputs for locally made goods. These measures aim to transform India into a global manufacturing hub, making it an attractive alternative for global firms diversifying their supply chains from China.

India aims to increase its share of global manufacturing from less than 3% to 5% by 2030 and 10% by 2047. To achieve this, the government plans to create industrial zones, modeled after China's special economic zones, including the Dholera Special Investment Region (DSIR). Despite these ambitions, India faces several obstacles, including restrictive labor laws, challenges in acquiring land, and an inefficient tariff regime.

Modi hopes to push through labor reforms, including raising the threshold for official approval to hire and fire workers from 100 to 300 employees. This would allow companies to adjust their operations to meet demand more easily. "What can be done now to provide employment, good jobs for these people is manufacturing," said Josh Felman, former head of the International Monetary Fund's office in India.

Mercedes-Benz's push for FTAs and reduced trade barriers reflects the broader challenges and opportunities in India's luxury car market. The country's ambition to become a global manufacturing hub hinges on the automotive sector's growth, which will depend heavily on favorable trade policies and economic reforms.

Key Takeaways

• Mercedes-Benz urges India's government to expand FTAs and reduce trade barriers to boost luxury car sales.
• India imposes 100% import tax on fully built cars valued over $40,000, discouraging local production.
• Favorable tax conditions in FTAs could benefit India's automotive sector and attract foreign investment.
• India aims to increase its global manufacturing share from 3% to 10% by 2047 with business-friendly reforms.
• Reducing trade barriers and labor reforms are crucial for India to become a global manufacturing hub.