Bhargava warned that the changed emissions rules will force up car prices, dealing another blow to an industry that was in a slump even before the pandemic hit.
“Demand will fall further, and instead of any growth there will be a decline in the industry,” R.C. Bhargava said in an interview with Bloomberg. “The industry view is that it’s already suffering a decline because of Covid, and on top of that we add further to the cost of vehicles because of new regulations,” he further added.
As per reports, automakers are seeking an extra year to meet tighter rules on fuel efficiency, aimed at reducing carbon emissions, as the companies reel from the financial impact of COVID-19, sources told Reuters.
The corporate average fuel efficiency (CAFE) rules require automakers to cut carbon emissions through the launch of electric cars or vehicles that use alternative fuels. The changes will require carmakers to cut emissions about 13% to 113 grams a kilometer.
Carmakers have said it would be difficult to make further investments to meet the stricter rules, particularly when a drop in sales as the pandemic slowed demand has dented profits.
But doing so would allow India, the world’s fifth-largest car market, to curb pollution, meet its carbon reduction targets under the Paris climate agreement and reduce its fuel import bill.
The emissions curbs are critical for India’s push to tackle some of the world’s worst air pollution, which costs the country 8.5% of its gross domestic product, according to the World Bank. By 2025, India will have up to 20 million old vehicles nearing the end of their lives, causing huge environmental damage, according to the Centre for Science and Environment.
However, the changes come at a tough time for the auto industry, which was just beginning to to recover from its worst-ever slowdown before the Covid outbreak again dented demand. Passenger vehicle sales fell 2% and overall production declined 14% in the year ended March 2021, according to the latest figures from the Society of India Automobile Manufacturers (SIAM).
Automakers are also grappling with a semiconductor shortage and higher raw material costs as commodity prices surge. Mahindra & Mahindra Ltd., which makes sports utility vehicles, will increase prices if commodity prices climb further, Chief Executive Officer Anish Shah said in an interview with Bloomberg Television on Wednesday.
Any increase in car prices could deter India’s price-sensitive drivers. Just 5% of cars sold are priced above 1.5 million rupees ($20,000). The nation’s per capita income of only $2,000 a year puts cleaner, but more expensive, electric cars beyond the reach of most consumers, Bhargava said.
It will be difficult for automakers to pour resources into the new technology considering the industry invested as much as 900 billion rupees to transition to current emission standards, which set out a 68% reduction in nitrous oxide gases.
Maruti doesn’t make any electric vehicles because of their cost and the country’s sparse charging infrastructure. Hybrid models, improved technology for cars running on compressed natural gas and more efficient gasoline cars will be enough for Maruti to meet the new requirements, Bhargava said.
While the industry has asked for a deferment of one or two years, Bhargava said the new emissions rules should not be implemented until demand for cars recovers. The new standards will potentially reduce car penetration to 2% in India, where ownership currently stands at 30 per 1,000 people, he said. That compares to 816 per 1,000 people in the U.S. and 207 per 1,000 in China.
“A decline in the auto industry not only hurts carmakers, it hurts the entire economy,” Bhargava said. “If growth doesn’t take place then it will be counterproductive to do this. What is the use of getting European standards into India if people aren’t able to buy the cars? That is why the industry is saying please defer the new regulations so the price increase doesn’t come at this time which is a bad time.”
India introduced a first phase of its CAFE measures in April 2017, giving carmakers until the end of March next year to cut carbon emissions from new cars to 130 grams per km.
In a second phase starting from April 1, 2022, India has proposed a further cut to 113 grams per km.
The stricter rules also aim to align Indian regulations for carmakers with global standards.
Sales of hybrid and electric vehicle have increased in Europe, for example, where carmakers face heavy penalties if they do not develop low-emission technology.
But India has not yet set penalties for companies that fall short of its stricter CAFE norms.
With inputs from Bloomberg
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