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Why India does not need a Nano

March 24, 2009 13:11 IST

I'm travelling out of India so hadn't intended to blog on the launch today of Tata's tiny Nano car, but am doing so because, surely, the hype has gone too far.

Suhel Seth, a well known figure in India's social, media, and business circles, excitedly wrote a piece on the FT titled 'Why India needs a Nano'.

Arguably it's something of an insult to India because it suggests that the country needs this small car because "in these troubled times, India needs a symbol of hope; a symbol of the possible". It will not just be the launch of a car - "instead it will be the launch of a million possibilities". This is sheer hype from my friend Suhel.

I don't want to be a spoilsport, but what is all the fuss about?

There have been many small cars before around the world - a little Fiat 600 and a even smaller front-opening BMW Isetta 300cc three-wheeler 'bubble car' which were familiar sights on England's roads 40 or so years ago.

OK, so the Nano's basic ex-factory price will be 'One Lakh rupees' - that's Rs100,000 - roughly about $2,000 at current exchange rates.

And this means that Ratan Tata, who heads the Tata group and has direct managerial responsibility for Tata Motors, is personally honouring his promise to produce a car for that price.

But every buyer will have to pay more than one lakh of rupees even for the basic model - probably nearer $2,500, though that is of course still less than the next cheapest car, Maruti's 25-year old 800cc model which retails for about Rs190,000 upwards.

More significantly however, not many of this basic model will be built, simply because it will not be profitable. The economics of the exercise dictate that Tata Motors must focus more on higher priced models that can fetch higher prices, which it will do immediately.

About 10ft, long and just over 5ft wide, the Nano is very small, and that is one of the innovations that Tata has made to reduce the priced. The company has also worked with component suppliers to reduce the price of components and it is economising by for example only having one windscreen wiper. The basic model also does not have and safety specifications that would be needed in many overseas, markets.

And, unless Mr Tata announces it later on Monday, we do not know how these cost savings add up, nor the surely considerable contribution made to the low costs by the extremely favourable investment incentives that it was first offered for its blighted West Bengal factory at Singur and now has in Gujarat where the car will be made.

These incentives on land price and tax and other concessions, are of course available in other states for new factories but would presumably not have been offered for Tata Motor's main plant in Pune.

So let's be realistic. Sure, Tata is unveiling on Monday an exciting new small car - smaller than anything else on the India market. And other manufacturers - including India's Bajaj Motors, working with Renault, is developing a similar sized car, so it does seem to be heading where there will be a big demand.

That's great, but the 'One Lakh' price tag is a Mr Tata promise that has become a branding gimmick and is unrelated to the on-the-road price of most of Nanos that will be produced. And a proportion of those savings have come not from brilliant engineering or innovation but from state government subsidies, which will cost the tax payers of Gujarat in lost government revenue.

Secondly, if Mr Tata really wants to do something for India, wouldn't he have done better if he had developed a tiny car with serious fuel emission and fuel economy innovations, instead of simply a brand?

So, on balance, is Tata really doing India many favours today?


John Elliott was the FT's first South Asia Correspondent (1983-88) and now writes from India - see Riding the Elephant blog

Copyright The Financial Times Limited 2009

John Elliott
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