The 2001
Nobel-winning troika in Economics -- George A Akerlof, A Michael Spence
and Joseph E Stiglitz demystified how 'asymmetric information'-what happens
when a used-car dealer knows the car he's trying to sell a buyer is a
'lemon' (a dud) but the buyer doesn't - can send markets spiraling off
in unexpected and sometimes devastating directions. The consumer protection
laws of the developed North are underpinned by the very principle. But
Indian auto-users have remained unnoticed to such an extent that the auto-policy
is at times rightly referred to as 'auto industry policy'!
When it all began.
American economist, George Akerlof's claim-to-fame had been his pioneering
seminal paper, "The market for lemons (1970)" where he analyzed market
transactions in 'used' cars. He premised a typical second-hand car market
with two types of cars: lemons (which are of low quality) and peaches
(that of high quality standards), where the seller naturally has more
information than what a prospective buyer or a lessee has about the condition
of the vehicle. This is a problem of adverse
selection . In fact, because of this imperfect information flow in
markets, consumers are phobic about getting stuck with a 'lemon' - something
not its merit, lacking requisite safety or of diminishing utility - be
it a 'used' car, a faulty appliance or a less-than-adequate health care
insurance policy. Sellers, on the other hand, apprehensive, may charge
more to cover the risk expectations of the potential consumers.
Asymmetric information markets, hence, gyrate sub-optimal outcomes for
all consumers through greater bargaining powers of the sellers.
The American Lemon Law for Autos
Akerlof's path-breaking work heralded the end of an epoch in which laissez
faire outcomes were always considered optimal and government intervention
uniformly growth-depressing.
In markets with perfect information, it's true that the correct price
had the quality not just of ensuring that all goods available at the moment
were sold, but also of telling economic players what to do in the intertemporal
framework. For example, a high price tells sellers to produce more goods.
As a result, so the theory went, the economy was always in 'equilibrium'
and headed toward its optimal level of production and consumption. But
in cases of market-damaging information mismatches, the price has none
of the balancing and directing qualities required by economic theory to
get markets to work.
The consumer protection laws in the developed North - the Californian
Lemon Law, for instance - are heavily underpinned by the information-rid
market dynamics. It lay down the rights of consumers when they are baffled
with a 'lemon' in their vehicle purchases.
This special provision helps determine the reasonable number of repair
attempts for problems that substantially impair the user value, or safety
of the vehicle. The "Lemon Law" applies to these problems if they arise
during the first 18 months after the consumer received delivery of the
vehicle or within the first 18,000 miles on the odometer, whichever occurs
first. During the first 18 months or 18,000 miles, the "Lemon
Law" presumes that a manufacturer has had a reasonable number of attempts
to repair the vehicle if either (1) the same problem results in a condition
that is likely to cause death or serious bodily injury if the vehicle
is driven and the problem has been subject to repair two or more times
by the manufacturer or its agents, and the buyer or lessee has at least
once directly notified the manufacturer of the need to correct the problem
as provided in the warranty or owner's manual, or (2) if the same problem
has been subject to repair four or more times by the manufacturer or its
agents and the buyer has at least once directly notified the manufacturer
of the need for repairing the problem as provided in the warranty or owner's
manual, or (3) the vehicle is out of service because of the repair of
any number of problems by the manufacturer or its agents for a cumulative
total of more than 30 days since delivery of the vehicle.
When a vehicle is recognized as a 'lemon', the lessee is permitted to
acquire a new vehicle of his/her choice or a reimbursement inclusive of:
• Full purchase price including charges for undercoating, transportation
and installed options;
• All collateral and finance charges (tax, licence, registration
fees, repayment of monthly vehicle loan or lease payments);
• Attorney's fees and/or all tangible legal costs incurred for pursuing
the lemon law rights.
Although the special provisions discussed above apply to new motor vehicles,
Californian Lemon Law also encapsulates demonstrators, leased cars and
used vehicles sold with the balance of the manufacturer's new car warranty.
The January 2001 amendment now even applies to business use vehicles with
gross vehicular weight under 10000 pounds, used primarily for business
purposes by a person or organization to which not more than five vehicles
are registered in California. Similar stringent benchmarks that safeguard
consumer rights are also outlined in the Ohio Lemon Law.
Indian auto-users: offspring of lesser Gods?
It was the spearheading battle of Ralph Nader against General Motors,
USA that set the stage for consumer groups across the globe to coerce
for their demands. But the antagonists condemn consumerism as a craze
for materialistic acquisition.
In India the consumer movement came into public prominence in 1985 and
subsequently got translated into Consumer Protection Act (COPRA-1986).
This, along with the Motor Vehicles Act (MVA-1988), however, has no overt
product liability statute for consumers. COPRA is not as effectual in
protecting patrons as the US laws, since its emphasis is more on compensation
rather than penal deterrence. The MVA provisions, on the other hand, mostly
deal with driving licenses, registration and vehicle permits, third party
insurance and accident claims, thereby passing the buck of vehicular maintenance
to auto-users. Automobile manufacturers evade unscathed.
It was as early as the 1980s when the first phase of liberalization of
the Government's protectionist policies saw the advantages hitherto enjoyed
by Indian car manufacturers like monopoly and oligopoly slowly disappearing.
In 1993 the Indian automobile industry was finally delicenced to woo FDI
with a cautious eye on dumping. Import of car components was given a nod
through the Open General Licence (OGL) category but when it came to complete/semi
knocked down kits (CKD/SKD), passenger car manufacturers were required
to sign an MoU with the Government of India. But post-April 1, 2001, second-hand
cars became freely importable. It was only in the interest of the manufacturing
units that a hefty custom duty of 105% was levied in the Union Budget
of 2001.
The Government of India unabashedly admits that it interacts with apex
industry bodies like SIAM and ACMA before passing a Bill or to appraise
itself with the general propensity of the sector, but where does the beleaguered
consumer fit in there? In fact, when auto-users buy their vehicles, they
pay all forms of charges/duties to fatten the Government kitty, but the
protection of consumers' interests vis-à-vis their 'lemons' (whether manufactured
indigenously or assembled from imported components or imported completely)
more often than not elude the Government's attention. When the insouciance
of the auto industry bodies towards civic society peaked, the Supreme
Court of India had to put its foot down through the implementation of
automobile emission standards (Euro I&II) in the NCT region of Delhi,
in 1999.
Customer safety: a big farce
The rate of accidents on Indian roads is on an unprecedented high - between
November 1, 2000 and October 31, 2001, the Mumbai-Pune expressway recorded
as many as 270 accidents, 71 of them life-claiming. The chief culprit,
according to Maharashtra State Road Development Corporation (MSRDC), has
been defective tyres. It's believed that mega projects like the Golden
Quadrilateral, North-South and East-west corridors that were inaugurated
amid much fanfare, would require asphalt surface tyres with different
specifications, not required in India so far - now the moot point is do
we have a well-equipped cell to administer and at the same time monitor
these specifications? The author can't think of any.
While all multinational tyre companies are guided by the mantra of customer
safety & satisfaction, are we getting a raw deal, just because our markets
are guided by asymmetric information and we don't have our Lemon laws
in place?
A rational agent would expect that such a murky outlook would stir up
policy-makers to put in place quality norms. But with the sole thrust
been given on promoting the automobile industry in a bid to rev up bottomlines,
another chance has gone abegging in the new Auto Policy 2002.
About the author:
Arindam De is
a Sr. Macro/Industry Analyst with Indiabiznews.com
Indiabiz News & Research Service
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