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Budget 2003: Foot on the accelerator

Reducing excise duties will be good for the auto sector, consumers & the country, writes Maruti MD, Jagdish Khattar. It will unshackle the Indian automobile and component industry and help it secure a foothold in the global markets, he says.

india Updated: Feb 20, 2003 19:49 IST

I have a straightforward expectation from the Union Budget. I expect the finance minister to announce a reduction in excise duty on automobiles, notably on cars. I have no doubt that such a step will be good for my company, my sector, my consumer and my country. It will also be good for manufacturing, for income and employment and for industry. It will unshackle the Indian automobile and component industry and help it secure a foothold in the global markets.

Let me explain why I expect the finance minister to bring down the excise duty on cars and other automobiles.

Less Tax, More Jobs

The automobile sector is much hyped in the country today. Car companies are spending tons of money to persuade film stars, cricketers, (anyone), to endorse their brands. This sector is one of the largest media buyers. It is making the slickest ads and the loudest noise.

But this marketing activity should not detract us from the reality of the auto business. Because the automobile business, in India and elsewhere, is big, complex and of far-reaching significance to the economy. Our perspectives on fiscal and policy issues about this sector should not be limited only by what we see of it on prime-time.

At any given time, several hundreds of thousands of skilled and semi-skilled people work in the automobile industry, matching metal to metal in a pre-designed way to create products that excel in both aesthetics and functionality. Several thousands of other people despatch these products to the customer. Many more make a living out of selling, maintaining and servicing these automobiles up to the time they become scrap.

A recent study shows that every new truck manufactured in India generates 11 jobs somewhere in the economy. There is no such study available for cars. But it is easy to see that there would be a similar multiplier effect of car production and sales on income and employment in the economy.

Impact on vendors

While most people visualise the car industry in terms of car models and the companies assembling them, the fact is that hundreds of manufacturing and service units, big and small, are a critical part of the automobile economy.

Their significance can be gauged from the fact that in a company like Maruti, nearly 80 per cent of the components that go into a car are not produced by the company. Rather, they are outsourced from component manufacturers across the country and assembled in-house. These component manufacturers, in turn, source raw materials like rubber, steel, aluminium and so on, from the rest of the economy.

Vehicle manufacturers take responsibility for product quality and for building product brands. But they and their brands are only the external face of the industry. The core, comprising hundreds of thousands of people in component manufacturing units, sales outlets and servicing workshops, never figure in competition marked by market growth, new products and aggressive expansion of sales and distribution. Many of the domestic component manufacturing units are now showing the potential to achieve global television ad spots.

Today, this 'core' of the Indian automobile industry is ready for take-off -- after almost a decade of domestic competitiveness. For them to make a mark in the export economy, they have to first achieve a much higher scale of production for their products. In all manufacturing businesses -- especially in automobiles -- scale plays a critical role in lowering cost and improving quality.

In reaching that scale of production, they are hampered by the high, almost debilitating, level of taxation on automobiles. The excise duty on cars is 32 per cent while two-wheelers and heavy vehicles attract an excise of 16 per cent.

There is more. Owing to the levies and taxes along the value chain of the car, the total incidence of tax on a car customer is today more than 55 per cent. This is too high. Most Indians cannot afford to pay so much tax for a car. As a result, there will never be enough market demand for cars to enable component manufacturers to scale up to the level that makes them globally competitive.

China's experience in the car industry is instructive. Till two years back, the Chinese car industry was behind Indian industry in terms of sales. Thereafter, the government in China took a series of measures to facilitate growth of the industry. Car sales in China grew by 18 per cent in 2001. In 2002, growth was a scorching 38 per cent. Sales have thus grown by 55 per cent in two years, and crossed one million in 2002. Already, there are positive multiplier effects for raw materials and component industries in China. In India, we have been selling only around 600,000 units per year for the last three years.

The China Story

Recently, the Society of Indian Automobile Manufacturers (SIAM) had commissioned ICRA to study the automobile sector in China. The study throws up several interesting conclusions. One of them is that for cars, the manufacturing cost in China is about 22 per cent less than in India. Of this, 9.6 per cent is accounted for by excise duty, sales tax and the cascading impact of taxes and higher local taxes.

While differences in cost of funds, power and fuel and engineering costs were also responsible, the study found that import duty on raw materials contributed 7.6 per cent difference in cost.

This leads me to conclude that while the government is making major strides in developing the road network in the country, its fiscal and tax policies could be holding up the motorisation of India. Today, penetration of cars is six per 1000 in India, half that of Sri Lanka and Pakistan. Car penetration ratio in South Korea is 27 times that of India. Making the tax burden reasonable will aid the process of catching up.

Finally, there is one (non-argument) for bringing down excise duty on cars and other automobiles. That is the fact that most car companies in this country are bleeding. In the effort to woo customers in a depressed market with high taxes, they are having to take huge hits to their bottomline through 'strategic pricing', discount schemes and offers.

But I firmly believe that this cannot justify the request for a tax reduction. The finance minister would be persuaded to reduce excise not because it tidies up the income statement of companies, but because it generates a positive wave of growth and prosperity across the economy.

(The author is Managing Director, Maruti Udyog Limited)

First Published: Feb 20, 2003 23:00 IST