On Taxes and Cars……

On Taxes and Cars……

K.M. Chandrasekhar

K.M. Chandrasekhar

Following the announcement of the Finance Minister this morning to cut corporate tax rates to levels comparable to major Asian economic powers, the Sensex zoomed up more than 2000 points . All the measures announced by her on the direct tax front is estimated to cost ₹ 1.45 lakh crore. As the Economic Times put it, “ Diwali came early for India Inc...” It is significant that Government’s loss of revenue corresponds roughly to the amount of ₹ 1.76 lakh crore transferred by the RBI from its surpluses. It is significant that she was positive about the synergy between RBI and the Government. In times of economic crisis, both these arms of governance on the economic side have to work closely together as they did in 2008-09. The country is larger than the autonomy of institutions.

The announcements made by the FM are significant in other ways too. Hopefully it signals an end to obsessive adherence to fiscal deficits. As I had mentioned in these columns some weeks ago, the fiscal deficit as a percentage figure has a numerator, the absolute amount of fiscal deficit, and a denominator, the GDP in absolute terms. However, the numerator also has an impact on the denominator. More spending on investment by the corporate sector and the public sector will have a positive impact on the GDP figures. A cut in taxes has the potential to boost business confidence and to raise private investment. As production increases, taxes will begin flowing in. When asked about the effect of these measures on the fiscal deficit, the FM said ,” Economic buoyancy will itself generate enough resources for better revenue generation. We will definitely be having a positive impact on the revenue collection.” Fiscal deficit will correct itself even as the economy expands. In times like these, the focus has to be on the growth of the economy, not on excessively restrictive policies.

Her statement that she proposes to travel across the country to ensure that the so-called “ tax terrorism is brought to an end is welcome. Excessive pressure from regulators and tax collectors can strangulate the economy. In times of economic slowdown, it is good to know that pragmatism is defining government policy. The measures that she has proposed to stimulate foreign investment, both direct and portfolio, and her readiness to give up the perceived negative measures in her Budget earlier this year bodes well for the economy.

Now that positive measures have been taken on the direct tax side, I hope the GST Council will address issues on the indirect tax side. The automobile industry is key to the revival of production and utilisation of excess capacity . India has the fourth largest automotive market in the world, but for the past several months, it has been steadily and sharply declining. It suffered its tenth consecutive decline in August and its performance has been the worst in 19 years. According to Vishnu Mathur, DG of the Society of Indian Automobile Manufacturers ( SIAM), it contributes almost 49% of manufacturing GDP and 13%-14% of GST. The industry obviously occupies a prominent position in the Indian economy. A whole range of upstream and downstream units depend for their existence on the automobile sector. The Prime Minister has stated,”“The slowdown is transient...I believe both demand and the industry will bounce back strongly and soon.” Much more needs to be done to revive this sector.

Part of the problem is global.Prof. Ferdinand Dudenhoeffer, Director of Germany’s Centre for Automotive Research,says car sales globally will fall by 4m in 2019, as compared to the previous year. ( Forbes.com, 12/6/2019). “ One of the main triggers is the great uncertainty caused by the customs wars and sanctions of the US government under President Donald Trump”, he says. Car sales will decline from 83.7 million in 2018 to 79.5 million, even without taking into account Brexit and possible further tariff increases by US and will not recover to 2018 levels until 2022. Thus, exports may not be that easy unless we are cost competitive and quality competitive.

Many reasons are cited for the automobile crisis in India. With the collapse of IL&FS and consequent fall in confidence in non- banking finance companies (NBFCs), Mutual Funds have lowered their exposure and banks have tightened lending norms to them. 60% of commercial vehicle sales, 70% of two wheeler sales and 30% of car sales are funded by NBFCs. The road infrastructure in India is insufficient to carry an ever-increasing load of vehicles and this, together with the growth of app based aggregators like Ola and Uber has reduced demand for cars. Regulatory measures, introducing measures like BS VI emission standards and anti-lock braking systems has pushed up cost. Rising fuel costs, higher road taxes, higher insurance requirements, rising GST on automotive costs - all these contribute towards making automobiles more expensive to maintain. Some uncertainty has been created regarding the speed at which low carbon emission vehicles will be introduced with legal backing, thus inducing consumers to postpone purchase of vehicles with internal combustion engines. The most important single factor is the apparent lack of purchasing power, both in urban and rural areas, which is manifested even in the market for fast moving consumer goods.

Another disturbing feature of the current slowdown has been a fall in the demand for commercial vehicles. It is not clear whether this decline is on account of the increase of 25% to 30% of axle load allowed for trucks by Government last year. This increase has been estimated to be equal to the equivalent of three years demand for new trucks. But there is also the view that the fall in demand for commercial vehicles is indicative of a decline in trade.

Despite adverse conditions at present, confidence in the future of the automobile industry remains. According to LMC Automotive, it is expected that the market for automobiles will be as high as 5.25 million in 2026. All the major manufacturers - Maruti Suzuki, Honda, Hyundai, Ashok Leyland, Tata Motors, Toyota, Mercedes Benz, Ford, Mahindra and Mahindra and others - have plans to expand capacity. The China owned MG Motor and South Korean Kia have entered the Indian market. The appetite for floating new models continues.

The movement on the Direct Taxes side has given a certain momentum to business. However, it needs to be backed up by measures aimed at inducing consumers to buy. Reduction in GST for a short period of time, say, until 31st March next year ,may induce consumers to buy when the going is good.Bunching and advance purchase of vehicles by the government for the next two or three years,particularly by the armed forces, would help. Positive measures to make bank credit more easily available would further strengthen demand.Once consumer demand is triggered in the automobile sector, there would be a ripple effect that will inevitably lead to more jobs, higher incomes, more demand and self-sustained growth.

The task is not over. While the changes announced will have a salutary impact on the supply side, further stimulus on the demand side will bring the economy back to its high growth path.