The Hindu Business Line : Auto industry: Search for a balance

THE global automobile industry scrapes through on tests comparing the benefits of owning vehicles versus the cost to society of having them run. But portions of it are stuck in negative territory.

The deficit is largely associated with developing countries. A formal audit on the Indian motoring scene has not been done. But Mr R.K. Parimoo, Director of the Delhi-based Institute of Driving Training & Research (IDTR), managed by Maruti Udyog Ltd (MUL), said, "We could use up entire budgets meeting those costs."

The automobile industry accounts for nearly 11 per cent of the developed world's GDP, and one job in nine there. It spawns thousands of indirect jobs, besides the social benefit had from mass-mobility. While the obvious costs of vehicular traffic — emission and noise - are diminishing in developed countries (better technology is also bringing less polluting vehicles to developing markets), what worry are the costs attached to congestion (it wastes time and reduces potential economic wealth) and road-deaths.

According to IDTR, road traffic deaths account for 2.1 per cent of deaths globally, 73 per cent of all road traffic fatalities being male. More than half of these deaths occur among young adults between 15-44 years of age. While deaths are settled through compensation, the demise or maiming of the young means years of contribution to the economy, lost.

Road accidents are estimated to cost between 1 and 3 per cent of a country's GNP. One estimate put the global economic cost of road accidents at $550 billion. This is more than a third of the annual value of the new vehicle industry.

`Time for a Model Change,' a recent book on the auto industry by Graeme Maxton and John Wormald, among other issues, attempts a balance sheet on the value of automotive mobility. Globally the sector scores positive, on total 2002 GDP of $31.3 trillion (developed countries plus `main motorising developing countries'), the economic value of the auto sector was $5.6 trillion, and its cost, $2.8 trillion thereby yielding a net direct value of $2.8 trillion.

But in main motorising developing countries, which had a GDP of $6.4 trillion, the economic value of the sector was $0.6 trillion and its cost, $1.4 trillion. Net direct value was hence a negative $0.8 trillion. "All in, say the authors, developing countries would be better off without the car - even though they need the mobility," a statement on the book, in October, said.

Every year in India, 85,000-1,00,000 people die in road accidents, Mr Parimoo said. 75 per cent of accidents occur on highways, 75-80 per cent are caused by trucks and 80 per cent of those killed are pedestrians.

Poor infrastructure alone is not to blame. It is a case of bad driving and archaic driver licensing norms. Indian laws governing issue of driver's licence remain frozen in time even as vehicles get more powerful and faster. Against 30-50 hours of training prior to test required in Europe, Japan and Singapore, India is happy with 10 hours, theory included.

Against licensing fee of Rs 1,200-2,500, the UK charges 1,000-1,200 pounds and France, 1,500 euros. Worse, some tests saw driving instructors and RTO authorities return poor scores. Add this inadequate training to the ongoing highway projects nationwide, you have a fertile substratum for accidents. At higher speeds, chances of death in accidents are considerably more. But then, highways also improve mobility.

Companies such as MUL, Ashok Leyland, Volvo and Tata Motors do train drivers. A concerted effort at industry or government level to upgrade driving standards has not happened (in contrast, the industry invested Rs 25,000 crore to meet Bharat Stage III emission norms effective April 2005). Those who tried, say, it was futile and underscore it citing government decision some years back removing even the minimum educational qualification to get a driver's licence.

What may fix the problem is economics. Total motor insurance premium collected in 2003-04 was near Rs 6,500 crore. Incurred claims ratio for the motor portfolio is reckoned at 83 per cent with the own damage part at 44 per cent, but a high 256 per cent for third party liability. Cost to insurance companies further includes marketing, management and legal costs besides interest. With years taken at times to effect payment, actual claims can exceed the premium pool.

Rs 5,400 crore or 83 per cent of total motor premium, is nine per cent of the automobile industry's 2002-03 gross turnover of Rs 60,000 crore. In absolute value, compensation paid per victim is low compared to developed countries. Expectation is that once motor insurance is restructured to be viable, involved premiums will go up. Driven by the need to contain resultant larger claims, insurance companies may seek strict driver licensing norms to reduce accidents.

These are simplistic cost assumptions (for example insurance payment at death is likely less than potential returns from productive life), but alongside high cost congestion (cost to Los Angeles from this in 2000, was $12.6 billion), they bring an industry's net direct value to focus amidst booming sales.