Excise Duty Benefit withdrawn -Unjustified -Indian Automobile Industry

Withdrawal of the excise duty benefits for the automobile industry from 1st Jan-2015 is simply devastating for the Indian automobile industry as well as for the long term industry growth. I don’t understand what are the Indian government’s rationales behind formulation of sector specific policies which kills the growth of a particular Industry? As a macroeconomic researcher and as journalist I have the right of pointing to the gaps in policy making which will create a adverse long term affect on the industry or economy. We have seen historically these types of mistakes committed by the government and the prolonged crisis suffered by industry. The point of discussion is that not only the one of the particular industry gets banged against the wall but also the ancillary industries which also gets affected and the affects rolls out to employment opportunities either drying up or pink slips are being handed over in the long term.

In 2012 the UPA government increased its duties on SUV’s and now again the same thing is being proposed by the current government. Then suddenly in 2013 it reduced after destroying the growth prospects of the Industry, at time when the sector was in its worst phase. When crude prices are low and very much supportive for the Indian buyers to buy their dream car then does this rate hike/revoke of excise duties proposal from 1^st Jan 2015 sounds good? It would have been prudent that the government should have reduced the duty/or kept the excise unchanged to support the sector which may have resulted in increase in automobile sector growthand resultant increase in growth of ancillary sector.When crude prices are low and we all know that crude prices would remain on the lower side then its clear that people would plan to buy automobile. Increase in volume would result multiple taxation earnings for the government as volumes pickups in raw material consumption and production of various end user based products.

If we make a quick look towards the automobile market performance we witness clearly that over the last couple of years slow down of the Indian economy followed with high interest cost and prices have deterred the buyers from the market.

We should not forget that automobile is one of the asset classes which is directly linked with interest rates. Hence when we all projecting for a rate cut over the next 1 years time frame, at the same time when crude prices are low the reducing or keeping the taxes unchanged would have spooked more buyers resulting more production and consumption. That’s why I raised the question on the very beginning about the rationale behind the hike/revoke of benefits of duties and taxes for the automobile when the industry is very much well positioned for growth.

We are all talking about Indian economic growth and using very strong phrases and theories but did we ever calculate the place from where this growth will generate. If, domestic people are unable to buy ,then how the government earns its revenues from slow moving industry. Now this same statement also eradicates the economist theories who are justifying the rate hike to fill up the government pocket through high taxes incomes. Now when we are increasing the taxes and duties of an industry then obviously the demand of the product will take a hit. Now at the same time the government is inviting FDI investors to start manufacturing in India. If the market becomes less competitive then how it makes senses for them to start manufacturing here. We always forget that an economic or an industry growth does not happen only based on one sided policies. When the Indian IT industry grew it grew riding upon the wheel of SEZ which was a tax sop based incentive scheme promoting business for the Indian economy for the long term.

Increasing taxes on various industries and products to increase government revenue is a wrong theory in today’s market conditions. When global economy is under severer slowdown then domestic consumption is the best strategy to grow the business. We are just killing the industry and the ancillary industries associated with the same. Now theory has erupted while is discussing the same with my friends. They said that if duties and taxes are being hikes or benefits are being revoked then the same would adjust somewhere as luxury goods and inferior goods have a game to play. In today’s economic era inferior and luxury goods has lost its meaning since technology has replaced the productivity and availability of the goods. Further automobile is the best way to grow and develop business and grow the rural connectivity. The initial price hike might appear to be negligible but it always has a long term affect on the industry and economy. Increasing duties of cigarettes is justified but not on automobile industry which is linked with multiple industries and employments.

A special thanks to CMA Amit Apte for their support and inputs on the same. Without their help I should not have been able to write the same.