Ban on Import of Automobiles, Misguided Move

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Ban on Import of Automobiles, Misguided Move

The automobile industry is interconnected with all gamut of the Nepali economy. The decision of the government regarding restriction on the import of vehicles will have a long-term effect on the government and people alike in the future.

--BY NEWBIZ TEAM

A foreign currency crisis is not a new issue in Nepal. Since the balance of trade has always been unbalanced, this kind of situation comes now and then without a hiccup in the Nepali economy. There are very few exportable items that bring foreign currency to Nepal. The country continues to struggle to add new items to its export baskets. In the 90s, carpets and garments were prominent exportable items. However, people jokingly say that Nepal imports from noon(salt) to soon(gold) which indicates its dependency on imports.

A few months ago, the government announced a ban on imports of 10 "luxury" items by issuing a notice in the Nepal Gazette citing the low foreign currency reserve. The aim was to preserve the country's foreign currency reserve, which it believes, is being wasted on the import of luxury goods. The embargo on import applies to imports of cars, vans, and motorcycles with an engine capacity of more than 250 cc, liquor, mobile sets worth more than $600, colour television sets larger than 32 inches, diamonds, cigarettes and tobacco products, toys and playing cards and ready-to-eat snacks like potato chips.

Talking with New Business Age on the current situation, Dhruba Bahadur Thapa, President, NADA Nepal Automobile Association of Nepal (NADA) says, "After Covid-19, the automobile sector was on the track to recovery. There was a good recovery. However, various policies introduced by Nepal Rastra Bank and the government have affected us the most. While we were asking the central bank to withdraw its provision requiring a 100 percent cash margin on the import of vehicles, it announced to stop opening letters of credit altogether. What could be more extreme than prohibiting automobile dealers to import vehicles and sell them in the Nepali market? We are in a situation to shut our business and hand over the keys to the government. It's only the automobile sector that has been affected by one after another event. Other businesses are gradually on the way to revival."

 Understandably, the depleting foreign reserve prompted the government's decision of imposing a ban on the imports of 'luxury' goods. However, there are a plethora of reasons that could be blamed for the current crisis. Liquidity crisis, high trade deficit, lack of export drive, leakage of remittance, and low tourist arrivals have helped to exacerbate the crisis. Vehicles are one of the major imports of Nepal. Trade figures from the Department of Customs speak volumes about the import dilemma. In the fiscal year 2020/21, the total import of vehicles was Rs 70.72 billion whereas such imports in the first nine months of the current fiscal year (2021/22) stand at Rs 46. 34 billion. It is quite surprising to know that import of playing cards was Rs 28.61 billion in the last fiscal year 2020/21 compared to Rs 19.55 billion in the first nine months of the current fiscal year (2021/22). Though the import of vehicles appears to be decreasing, the data shows the import of mobile is going up.

Nepal imported mobile sets worth Rs 37.6 billion in 2020/21. Such imports reached Rs 35.6 billion in the first nine months of the current fiscal year. Vehicles are the major source of revenue after petroleum. Passenger cars pay import and other taxes around 250% to 350% whereas two-wheelers pay between 105% and 193%. The government levies 30% to 50% tax on parts, lubricants, batteries, and tyres.

The government's decision to ban the import of vehicles has some reasons that triggered the government to make a hasty decision when Nepal Rastra Bank brought out the report about the alarming situation of foreign currency reserves. The government believes that the automobile is an unproductive sector and considers it a luxury product. Throughout the world, the automobile has become an essential part of daily life for people. But, in the case of Nepal, it is still considered a ‘luxury’ good. One reason could be the exorbitant tax rate imposed by the government. People pay more than 200% tax on the import of vehicles. It is the government that is responsible for making automobiles luxury items because of the tax burden. Karan Chaudhary, Executive Director, CG holdings believe that vehicles are not luxury items. He adds, "What should be understood is that vehicle is now no more a luxury but a necessity and needs to be reclassified. Vehicle to what extent is a luxury? As soon as a family has more than two or three members, they need a vehicle as a two-wheeler is not sufficient. The government did address this fact and exempted taxes as well. Also, the cost of EVs has not increased, which is a plus point. The way how government acknowledged these facts and attempted classification of vehicles is praiseworthy. However, it’s not a good thing the government did by restricting imports, and I am not in support of it. I would say this was a rather hasty decision taken by force. Government should have considered and explored more options for curving the outflow of forex reserve."

The living standard of people has grown tremendously over the period, increasing their purchasing power and access to automobiles amid a busy lifestyle. It makes it easier for common people to buy cars which have driven up imports of more cars to fulfill the growing demand. The government blames the automotive industry as a major contributor to depleting forex reserves and the liquidity crisis in the banking sector. It holds some truths, but not fully. There are other items like playing cards, grains, mobiles, cigarettes, alcoholic beverages, gold, and palm oil that have major roles in these problems. Unlike these items, the automobile is a golden goose for the government as it generates billions of rupees in various ways including the renewal of bill books that do not exist in many countries including India. In the fiscal year of 2020/21, the government earned Rs89.89 billion in revenue. Such earnings were Rs 74.83 billion in the first nine months of the current fiscal year. The government also believes that automobiles are responsible for increasing the consumption of other import-based products like petroleum.

In Nepal, there has been a huge expansion in the road network due to the government's various populist policies. In 1998, there was a road network of 4,740 kilometers. According to the Department of Road, the road network reached 13,447.62 kilometer in the fiscal year 2017/18. It indicates that the expansion of roads correlates with the extension of the transport system. It is quite contradictory that in one way, the government is expanding the road network, and in another way, it is either discouraging or restricting the import of vehicles. Roads are built for modern means of transportation, not for mules and bull carts. Being a landlocked country, most goods, foods, and vegetables are being carried to remote areas by transport. The shortage of transport will lead to an increase in the price of commodities. The multiplier effect it has on common people is multifold.

Among the sources of income for the country are remittances, tourism, and exports of agricultural commodities. Remittance inflow is equal to 22 percent of the GDP. The agriculture sector contributes 30 percent of the GDP. As Nepal is considered an agricultural economy, it is not a good sign that even daily necessities have to be imported. In the current fiscal year, rice worth Rs 37 billion, vegetables (Rs 27 billion), and fruits (Rs 16 billion) were imported. But, the government blames other sectors only for depleting foreign currency reserves. The government never takes the promotion of agricultural production seriously. Neither fertilizer is available on time nor does incentive reach real farmers. To control inflation and increase foreign currency reserves, the first and foremost priority should be on boosting production. It is found that Nepal exports rice, vegetables, and fruits to India when the price is low and imports again those products when the price goes up. The government must not export the food items that it needs to import later at a higher price. The interest of certain business houses should not be made a priority of the government. We import everything from India and other countries. Unless there is a balance between imports and exports, there would be an economic crisis all the time. When it comes to remittance, young people are migrating every day to other countries in search of green pastures. Their family has left the village and come to the city after receiving the money. The money that comes from remittances is being used to buy luxury goods. This vicious circle has been going around for a long time. So it is imperative to attract the youth to agriculture by commercializing it so that they do not need to go abroad. This will help in saving foreign currency spent on the imports of agricultural products.

Foreign assistance also gets spent mostly on managerial expenses and advisory and consultation services rather than on development work. There is a need to reduce the current expenditure which is increasing every year. The Economic Survey has been showing that the contribution of the industrial sector to the GDP of the country has been gradually decreasing since 2012. The government should focus on facilitating the production of exportable items by providing necessary incentives, easy access to loans, leasing the government's land, and negotiating with other countries for export.

As per data provided by NADA, the automobile industry generated Rs 89.89 billion as revenue in 2020/21 and Rs 74.83billion in nine months of the current fiscal year. Similarly, it provides direct employment to more than 100,000 people. Over 100,000 people are indirectly engaged in this sector. Nearly Rs 100 billion is estimated to have been invested in the sector. There are nearly 1,000 dealers, 25,000 garages, and 10,000 spare parts shops. These figures make it clear how the automobile industry is interconnected with the local economy.

"The government looking at the overall context needs to make a long-term and far-sighted decision. Putting a complete ban will sabotage the automobile sector with more than 100 billion worth of investment. The government now must reconsider the ban at least based on categories of the vehicle. Billion worth of orders are stuck at the borders, and companies’ especially new ones like us might collapse if we aren't unable to sell them in time" says Rupesh Sharma Bhatt, Vice President at Great Motor Works.

The number of cars/jeeps and vans imported in the fiscal year 2020/21 was 14,864 while such numbers reached 12,736 in the nine months of the current fiscal year. It generated revenue worth Rs 34.4 billion and 32.24 billion rupees respectively. Similarly, the number of two-wheelers ( above 250 ccs) imported in the fiscal year 2020/21 stood at 8,154, and 6,318 in nine months of the current fiscal year, generating revenue of 1.82 billion rupees and Rs 1.81 billion respectively.

The import ban appears to be the right step when we analyze the Nepal Rastra Bank data that shows the gross foreign exchange reserves decreased by 18.5 percent to $9.58 billion in mid-March 2022 from $11.75 billion in mid-July 2021. The figure is alarming. India also faced a similar kind of crisis when PV Narasimha Rao became Prime Minister in 1991. To address this crisis, he appointed Dr. Manmohan Singh as Finance Minister who later became Prime Minister in 2004. Singh had a long-standing experience in finance management and held many important posts including Governor of the Reserve Bank of India before taking over the Ministership. The economic vision of both the Prime Minister and Finance Minister had been well executed, and they steered India out of such a grave situation successfully heralding a new era of economic reform. He also abolished the notorious license raj which hindered the economic growth of India. Now India is a leading exporter of wheat and other food products which they used to import earlier. However, Nepal never learned the lesson from its neighbours whether it is India or China, or even Bhutan. The lack of vision among politicians who come to power coupled with lackadaisical bureaucrats has put our economy in the doldrums. They don't bother to find out the remedies. What they do is to put the ban which is considered a stopgap measure rather than a solution. It is evident everywhere in the governance.       

One of the important things the government must abide by is consistency in the fiscal policy. The government must formulate a long-term policy regarding remittance, tourism, agriculture, import policy, and foreign exchange. Economic policy should not be made keeping the interest of certain business groups in mind. Some media outlets have reported that the Nepal Rastra Bank had found consulting big business houses before announcing its monetary policy. If it is so, this kind of practice should be abandoned before it is too late.

Two major sources of foreign currency earnings are remittance and tourism. Both sectors are vulnerable to internal and external disturbances. There is no third credible source of foreign currency other than these two sectors. But in the government's policy, these two sectors hardly matter. There is no long-term policy regarding the use of remittance. After the Second World war, South Korea was devastated. In the early 60s, Nepal used to send rice to Korea as support. The major source of income for them was remittance as a large number of Koreans migrated to Europe for reconstruction work. But when they came back, they put hard currency into development rather than buying luxury, and their skills and expertise in construction and manufacturing. Within thirty years, it graduated from the third world to the first world. Nepal should learn the lesson from South Korea in managing foreign currency and the expertise that workers bring back home.  

The Nepal Government brought forth various incentives to promote electric vehicles (EVs) in Nepal by providing relaxation on import taxation duties and a yearly road tax exemption. However, then-Finance Minister Yuba Raj Khatiwada rolled back all incentives through his budget for the fiscal year 2020/21. Later, Finance Minister Bishnu Prasad Paudel introduced all-new taxation policies to rejuvenate the EV market. But the damage was already done. However, additional excise and customs duties have been announced in the budget for the upcoming fiscal year 2022/23. In the new budget, 30 percent customs duty and 30 percent excise duty have been levied on vehicles from 100-200kW power. Similarly, 45 percent customs and 45 percent excise duty have been levied on cars with a capacity of 201 to 300 kilowatts and 60 percent customs and 60 percent excise duty have been levied on cars with a capacity of more than 300 kilowatts.

Nepal currently aims to replace fuel-driven vehicles with EVs by 2031. Consumers are encouraged to convert existing petrol engines to electric. In doing so, five years of yearly renewal tax will be waived.

Sahil Shrestha, CEO of Cimex says,"The Nepali government always talks about promoting alternative energies, especially EVs but it remains limited to talks only. On paper, the policies remain unfavorable. The recent budget is an example of it. The government increased the taxes on EVs having a motor capacity of more than 100 KW. The EVs having a capacity of more than 100 KW are long-range vehicles that could be used for long travels increasing their penetration level in the market. The more long-range EVs are used and promoted, the lesser would be the dependence on fossil fuels. So the government should provide subsidies on EVs of more than 100 KW motor power not only for less than 100 KW. "    

Moreover, Nepal is planning to attract top EV brands to Nepal to establish assembly plants in the country.

Despite the government's policies coming out now and then regarding electric vehicles, we hardly see electric buses plying the road of Kathmandu. To displace old buses, the government must give a handsome incentive to the owners to buy electric buses with low bank interest as it did many years while displacing tempos from Kathmandu.

The number of companies registered for assembling vehicles in Nepal has reached 20 to date. Among them, nine are registered with local investment, eight with foreign investment, and four with joint investment of both Nepali and foreign companies, according to the Department of Industry. Presenting the budget for the fiscal year 2022/23, Finance Minister Janardan Sharma announced that the government would provide incentives for companies looking to establish an electric four-wheeler industry in the country. The government has announced to provide a 40 percent income tax exemption for electric car assembling industries on their earnings for five years. Similarly, companies looking to assemble combustion engine cars will get a waiver of 50 percent on the excise duty and 25 percent on customs duty. Moreover, companies manufacturing electric scooters will only attract a 1 percent tax.

Chaudhary Group, the official dealer of Suzuki vehicles in Nepal, has recently started the process of assembling and producing Suzuki vehicles in Nepal. A company called CG Automotive Industries Pvt. Ltd. has been registered to assemble and manufacture vehicles in Nepal. CG Holding has registered a company worth Rs 1.31 billion in Parwanipur, Bara. Suzuki brand cars and motorcycles and three-wheelers will be assembled through the company.

But assembly plants alone won't solve the problem of foreign currency crisis. Almost all parts have to be imported either from India or other countries. And, these vehicles won’t get market outside Nepal because of price. It doesn't reduce the woes of common people. If the price of the cars that are being made in Nepal reduces, it will lessen the burden on common people who aspire to buy four-wheelers.

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