SACRIFICING LONG TERM GOALS FOR SHORT TERM GAINS

DICHOTOMY IN GOVT’S FANCY INVESTOR-FRIENDLY REGIME

 

 

 

By K Raveendran

 

The reported remarks by a key Toyota executive in India about how the company looks at its business in the country in view of the high levies on the passenger car segment typically signifies the lack of consistency in the Modi government’s much-trumpeted policy of making India more investment-friendly.

 

Initial reports of the company planning to halt further investments in India have since been disclaimed. But the clarifications seem to be part of a damage control exercise.

 

Shekar Vishwanathan, the vice-chairman of Toyota Kirloskar Motor, the Japanese automobile major’s local unit, had told Bloomberg in an interview that Toyota would go slow on further expansion of its India operations because of the country’s punitive tax regime for the automobile industry.

 

Minister Prakash Javadekar soon got into the act and issued a denial, which was followed up with a retraction by the company itself.  Company vice chairman Vikram Kirloskar said Toyota was investing over Rs 2,000 crore in electric components and technology for the domestic market and export. He also reiterated the Japanese auto giant’s commitment towards India.

 

It is satisfying that the irritant has not grown into a serious problem, but the issues thrown up by the remarks remain as valid as ever. More important is the fact that it typically signifies a convoluted approach by the government towards its stated goal of making India the manufacturing hub of the world.

 

Prime Minister Modi keeps harping on the theme, but many of the policies of his government are not commensurate with the requirements for making the dream a reality. It betrays a lack of vision in the whole approach and a clear failure to think out of the box. It also explains the failure of the government to make effective intervention to stimulate demand in the economy, which should have been the most important part of any stimulus programme. It also explains why the slew of stimulus initiatives, if these can be described as such, have failed miserably.

 

Government, of course, needs money to run its establishment. But that is not an end in itself; it is only a means to an end. So any approach that jeopardises the long term perspective for the sake of short term gains is self-defeatist. Essentially, this is the problem with the approach of the government.

 

On the one hand, the government has announced plans to offer incentives worth $23 billion to attract firms to set up manufacturing, including automobiles, which have been promised production-linked breaks. But the automobile sector attracts some of the highest rates of taxation. Motor vehicles, including cars, two-wheelers and sports utility vehicles attract taxes as high as 28 percent. There could also be additional levies, ranging up to 22 percent on a plethora of reasons, such as the type of the vehicle, length or engine size. In some cases, this could be as high as 50 percent.

 

Automobile has been one of the worst affected sectors even before the Corona virus changed everything and put the country and its economy in one of the worst crises. Lack of demand had forced manufacturers to cut down and even halt production and resort to large scale layoff for workers.

 

The automobile sector, with its high aspirational value, could have been an ideal kick-starter for revival of demand in the economy as affordable personal commute is an unavoidable necessity. But this is possible only vehicles are made affordable. The high rate of taxation in the automobile sector is actually pricing out large populations from the market, which brings out the folly of the government’s policy.

 

Lower prices would encourage more and more people to own vehicles, which could more than compensate for the loss due to a reduction in the tax. But a bigger benefit is that it could revive demand in the economy, which is what India needs currently more than anything else.

 

The absence of demand-side measures in Finance Minister Nirmala Sitharaman’s economic package has meant that there will not be any recovery even in 2021-22 and 2022-23. With practically little being offered by way of cash support in the stimulus package, no pick-up is in sight for demand, which continues to be one of the biggest pitfalls of the government’s policy. (IPA Service)

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