Come Budget time and the chorus for tax cuts to spur demand growth seems to grow louder by the day. The pink papers often get into the act and have even made it a habit of predicting new excise duty rates. Both manufacturers and consumers end up completely confused till the final revelation.
But are tax cuts all the automobile industry needs? Policies designed to spur economic growth are perhaps far more beneficial for the auto industry in the long run than a mere tinkering with tax rates. Broad-spectrum economic growth puts more purchasing power in consumers' hands and if the overall interest rate regime works with lower real rate structures, consumers will accept higher levels of future indebtedness for durable consumption today. If future expectations of that income growth are positive, this will further bolster consumption spending today. What tax cuts tend to do in such a situation is primarily to move consumers up the value chain. This, in turn, causes a shifting of the price points of used cars to a level where they could arguably compete with two-wheelers. In a sense, some of the larger more affluent metropolitan centres like Delhi, Mumbai, Bangalore and Chennai are already witnessing this shift.
A Budget that encourages higher levels of more productive investments in manufacturing industry and infrastructure would be the cornerstone of a 'dream budget'. Unfortunately, that may still be far away with the CMP talking of direct grants to panchayats - a process more certain to further enrich the political classes than create new productive infrastructure at the village level.
{{/usCountry}}A Budget that encourages higher levels of more productive investments in manufacturing industry and infrastructure would be the cornerstone of a 'dream budget'. Unfortunately, that may still be far away with the CMP talking of direct grants to panchayats - a process more certain to further enrich the political classes than create new productive infrastructure at the village level.
{{/usCountry}}It would be ideal if the Budget were to progressively incentivise investments in the manufacturing sector. Thus, for instance, if a 25 per cent capacity expansion brought a 25 per cent rebate in the income tax payable, a 50 per cent capacity expansion could bring a 75 per cent rebate in the income tax payable. Sounds outlandish? Perhaps. But consider a situation where India's manufacturing industry seized the opportunity and emerged very rapidly as a global scale competitor.
India's automobile industry could be transformed. Large capacity increases and investments in new technology could spawn a fiercely competitive industry in terms of both quality and price. Productivity improvements and competition could translate into lower consumer prices - yes, even without excise rate cuts - and a consequent expansion of the local market place. In turn, that volume could engender the growth of a global scale component sector that could provide significant export competitiveness. Maybe a similar move and progressive incentives for exports - but only for manufacturer exporters - could provide a further impetus to growth.
But there ought to be two caveats. One that junk technology doesn't find a place here.
To be credible exporters, Indian companies ought to be selling global safety or emission standards even to their home consumers. Second, the implicit protection the steel industry gets will have to be done away with so that the component and auto manufacturers get truly competitive. There is an insidiously articulated argument that global steel prices if made available to Indian consumers could render the Indian steel sector's finances in a perilous state and impact the financial institutions in turn.
But is there place for 'gold-plated' projects and, therefore, uncompetitive producers and poor lending practices in an economy that seeks to grow rapidly? If we are indeed agreed that rapid growth is the only way forward to ensure poverty alleviation, can we ignore the call for higher productivity any longer - or protect the inefficient?
I do realise that with the CMP providing the broad framework, it is more likely that Budget 2004 will see a greater reliance on direct taxation. Left economists have argued, somewhat convincingly over the years, that since indirect taxes are less equitable in their impact, governments would be well advised to increase the share of direct taxes. One can only hope that this is achieved through better tax administration and a widening of the tax base - rather than by hiking rates, which could in turn impact on compliance levels.
Ultimately, all one can ask of the budget is that every rupee raised is incentivising productivity and investment, and every rupee spent ensures that productivity and infrastructure investments are given top billing. Having said that, perhaps budget-making is best left to the economists, particularly the duo in South Block and Yojana Bhavan.
The writer is President, Hyundai Motor India