A pragmatic step

Government right to defy lobbies and end excise concessions

The Narendra Modi government has ended the concessions to the automobile and the consumer electronics sectors that had been introduced by the United Progressive Alliance in February, and were extended by the new government in June. The concessions were in the form of excise duty cuts of up to six per cent and were meant to revive the two industries. Faced with a stiff challenge to meet the fiscal deficit target of 4.1 per cent of gross domestic product in the current financial year, the government has decided to roll back the concessions. Both the industries, as expected, are up in arms. They have no option but to pass on the higher taxes to buyers, which, they say, will hit sales, at least in the short run.

Their argument can be contested on at least four grounds. One, it is clear that the tax concessions didn't give a huge boost to manufacturing. During April-November 2014, according to statistics compiled by the Society of Indian Automobile Manufacturers, passenger vehicle production grew just 2.5 per cent and commercial vehicle output fell 4.12 per cent, though the production of two-wheelers increased 13.85 per cent. Within passenger vehicles, the only segment that saw strong growth in production was utility vehicles (almost 15 per cent); in contrast, cars, the largest segment, grew just 1.6 per cent, while the third segment of vans contracted 17.3 per cent.

Two, almost all car makers are offering huge discounts across models and categories. It shows that the market is far from buoyant, which reinforces the contention that the tax concessions have not been able to stimulate demand among consumers. The discounts could go down now that the excise cuts have been restored. The car makers' argument, that they will have to rewrite the price tags, sounds far-fetched. Three, the two largest chunks of the automobile market are small cars and two-wheelers, and a large majority of them are bought on instalments. Even if the discounts reduce, the extra monthly burden on buyers is likely to be small. And four, the showroom price is one of the three ownership costs of a vehicle, apart from fuel and spare parts. With the steep decline in global crude oil prices, fuel has become significantly cheaper in the country, which has brought down the ownership cost. All these factors play on a prospective buyer's mind. There is little reason to believe that the rollback of the concessions will derail manufacturing in India.

Even otherwise, sector-specific sops don't work. In fact, these distort markets by attempting to give a direction to investments. For efficient allocation of scarce resources, it is essential not to succumb to lobbies and hand out incentives to particular sectors in the belief that they will help in overall economic growth. In the past, the government had offered tax breaks to set up factories in backward areas. The result was counterproductive. Units were set up where they didn't make any sense. After the economic liberalisation in the 1990s, many of these went into terminal decline.