(Photo: Reuters)
(Photo: Reuters)

Opinion | A stimulus is needed but does the auto sector deserve one?

Tax cuts would work best if they are broad-based and do not favour one sector or two over the rest

Given scary stories in the media about an accelerating economic slowdown and impending job losses, it is a safe assumption that some kind of economic stimulus will be unveiled over the next few weeks. The auto sector, in particular, has assumed that it will be part of the coming tax cuts. The argument in the industry is about “when" these cuts should come, not “whether". Pawan Goenka of Mahindra and Mahindra wants goods and services tax (GST) cuts upfront; Rajiv Bajaj of Bajaj Auto wants them to take effect from April 2020, when the new Bharat Stage VI norms kick in, raising auto prices all around.

For a government that has already been attacked for failure on the jobs front, reports of the loss of lakhs of jobs in automobile companies and dealerships could well push it into offering premature tax cuts. But it should ask itself two important questions: If there is to be a stimulus, should it be sector-specific, which means giving favoured sectors a leg up and leaving the rest behind? And two, even assuming it needs to be sector-specific, should this sector be automobiles?

The answer should be a clear “no" to both questions. Every time the government plays godfather to one sector or another, the sectoral lobby will ensure that the benefits endure by painting negative scenarios if they are withdrawn. It is worth recalling that indirect tax cuts for the auto sector, which began in 2008, were finally ended only eight years later, in December 2014. The same is the problem with giving special benefits to real estate, even granted that this sector is hugely important for job creation. What this sector needs is reform of land and building laws, but that nobody is willing to touch. If India’s land market is reformed, land prices will fall and provide a natural boost to housing demand. Instead, we are demanding lower taxes. These are important, but ought to follow reform, not precede it. Otherwise, the bulk of the tax cuts will be swallowed by vested interests and demand will fall back to its old level after an initial boost.

If the finance minister were to look back at history, the reality is that the Indian auto sector’s success was built on two colossal public policy failures: gross underinvestment in public transport and bad urbanization, where settlements are spatially spread out. Urbanization works best when large populations work in concentrated areas with good infrastructure. A World Bank publication, Leveraging Urbanization In South Asia: Managing Spatial Transformation For Prosperity And Liveability, estimates that India’s actual level or urbanization may be nearly 55%, but new urban-like towns and cities are so far from city centres that the quality of urbanization is poor and spatially too spread out to optimize growth and jobs.

Our misguided auto sector policies privileged private transport over public. Bad urban infrastructure forced people to invest in personal transport vehicles to commute over long distances instead of depending on overcrowded and poor-quality public transport. This is the reason why our car and bike industries are so huge, belting out nearly 20 million vehicles annually. This is also why a country which is yet to achieve full-fledged middle-income status is so overdependent on cars, motorbikes and scooters. Giving yet another dollop of tax cuts will not only worsen this skew, but make urban areas more congested and unliveable.

If you accept the logic of the above arguments, it does not follow that the passenger vehicle industry needs a tax cut right now. It may be fine to offer a short-term cut in April 2020, in order to smoothen the transition to costlier vehicles that are BS VI-compliant. There may also be a case for removing the cess on higher-end vehicles, but this cess is intended to fund compensation to states for GST revenue losses. If this cess goes, another form of tax will have to be imposed, or the same cess will have to be imposed on a narrower band of products, worsening the slowdown for them. You can’t help the automobile sector without indirectly kicking the daylights out of some other sector. The third alternative is to let the fiscal deficit slip in the short term, but this will spike bond yields and raise interest rates. So, take your pick of which of these negative consequences you want to invite. You can’t boost one sector and not hurt another if you want to maintain tax revenues, and you can’t let the fiscal deficit slip so badly that it impacts the cost of money for everybody.

Yes, we are in a slowdown and a stimulus is called for. It could be a mix of monetary and fiscal stimulus, but should not be sector-specific. Once you make something sector-specific, vested interests will scream whenever you want to revert to the old tax levels, as happened in 2008-14 with the auto sector and consumer durables.

Any tax stimulus by the government should be across the board and given to almost all sectors, and could include speeding up the cut in corporate taxes to 25% for all companies, big or small. The GST regime could be moved to a 5-15-25% rate structure and the cess eliminated. The fiscal deficit can be allowed to slip marginally this year so as to allow the economy to deliver more revenues after the slowdown is reversed.

R. Jagannathan is editorial director, ‘Swarajya’ magazine

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