India’s pain of economic transition: Policy contradictions and industrial dilemmas

Editor's note: Recently, the Indian government has consecutively imposed substantial tax bills on several foreign automotive companies. German car maker Volkswagen India faces a tax reassessment of $1.4 billion, setting a record in India, while South Korea’s Kia Motors has also received a tax demand totaling nearly $170 million. These staggering penalties have sparked a strong reaction within the global business community. This series of hefty penalties not only directly threatens the normal operations of the affected companies but also has raised significant concerns among international investors about the continued deterioration of India’s business environment.

The Indian government's recent stringent tax audits of foreign companies reflect deeper contradictions within its industrial policy. In terms of tariff structure, India imposes over 100% tariffs on imported finished vehicles, while tariff on completely knocked-down (CKD) kits ranges from 30% to 35%, and on semi-knocked-down (SKD) kits just 5% to 15%. Behind this tiered tax design is the Indian government's strategic intent to promote the localization of manufacturing through high tariffs. However, at the implementation level, this policy framework has frequently caused disputes, exposing inherent contradictions in India's industrial policy.

What concerns foreign companies the most is the sudden shift in policy execution standards. This not only creates immense uncertainty to their operations in India but, as Volkswagen has pointed out, "it places at peril the very foundation of faith and trust that foreign investors would desire to have in the actions and assurances of the administration." When Pernod Ricard had to directly inform Indian Prime Minister Modi, stating that ongoing tax disputes were hindering their new investments in India, it became clear that the policy risk had gone beyond the realm of operational challenges.

What further confuses the market is the Indian government's decision to strengthen tax audits at a critical time when the economy is in decline and foreign capital is rapidly withdrawing. This move seems to reflect a complex interplay of multiple policy goals: on one hand, with economic growth slowing to 6.4%, the government urgently needs to increase fiscal revenue through stricter tax enforcement; on the other hand, with the rapid rise of domestic automakers like Tata Motors and Mahindra, the government is under internal pressure to protect local industries. However, this multifaceted approach may ultimately have counterproductive effects.

In the long run, India's current policy direction faces deeper challenges. While high tariffs may provide short-term protection for domestic businesses, they could also marginalize India in the global division of labor. Tesla, for instance, has publicly complained about India's high tariffs on imported electric vehicles, and this dispute has extended to emerging industries like new energy vehicles. As the global industrial chain undergoes rapid restructuring, an overly restrictive policy environment not only threatens existing investments but may also cause India to miss out on the development opportunities presented by the next wave of industrial transformation.

Experts point out that India appears to be trapped in a policy dilemma: the high tariff barriers set to promote the localization of manufacturing may actually hinder India's integration into global supply chains; meanwhile, the tough measures taken to protect local businesses are shaking foreign investors' confidence in India's business environment. In an era of economic globalization, a country's industrial upgrading requires not only creating space for the growth of local enterprises but also fostering deep collaboration with multinational companies. India's current policy direction exposes its significant challenges it faces in striking this balance.

Article by Chen Xiaoyang, Guangming Daily

Translated by Wang Xinyuan, Guangming Online

Find the original article at https://news.gmw.cn/2025-02/12/content_37845590.htm