The numerous annual appeals to the Finance Minister makes one think of poor beggars stretching out their hands for charity. In no other country is the annual budget given so much importance and generates so much debate. It is perhaps a throwback to the colonial times when an imperial government deigned to graciously dole out a few crumbs to its poor subjects. In modern times a people’s government should pension off its high horses and lay out an open and transparent tax structure as in most modern countries. And in times of global connectivity it is also time to align with global trends.
Every country needs taxes to feed the huge appetite of its government but few countries have so many government stomachs to feed. Many people are unaware that the numerous taxes under the central government, the state governments, local governments and authorities etc. have a horrific cascading effect. Every Indian made car carries the burden of 40% Modvat that includes the customs duties on its imports, plus16 to 24% excise duty, plus 12% sales tax plus octroi and local government taxes. So the basic cost of every indigenous car is weighed down by 89 to 104% taxes. The impact is greater on imported or substantially imported cars. Not surprisingly many cars sold in India cost much more than similar models in Thailand and other ASEAN countries. Most buyers in Europe, America and many developed countries pay a flat 15% VAT that includes all customs and local taxes. India should work towards a similar uniform tax rate.
The Union Budget will only address two of these taxes. Customs duties and central excise. We carry forward strong protectionist sentiments that had once upon a time needed customs duty barriers to protect a weak local auto industry. This is now ancient history with many leading foreign automakers making India the hub for its global manufacture and with many Indian auto makers striding out into global markets. So customs duties on imported kits need to be aligned with those of our neighboring countries and the punitive duties on fully imported cars can be safely lowered. Lowering the duties on some 5,000 exotic cars from Audi, BMW, Mercedes, Porsche, Volkswagen, Volvo and others will not cost the government very much and will in no way endanger a very robust local industry.
Lowering the excise duties to a level 16% for all vehicles would level the unseemly juggling that is presently needed to make the lower mark and will also be easier to administer. As the several hundreds component vendors make 70% of every car they need encouragement to become a strong force in both the local and international markets. Lower modvattable excise duties would be a great encouragement.
Although it is outside the scope of the union budget it is also high time that strong public pressure were raised so that the local state tax rates were leveled and the interstate tax barriers were removed as these cause huge delays for the supply of parts to local and foreign buyers in these days of Just In Time delivery to say nothing of the pollution and the huge waste of fuel as the trucks idle uselessly at the state borders.
In many countries taxes have been used to restrict the proliferation of cars and many people have suggested that such punitive taxes should be applied to India where there are growing problems with traffic congestion and parking in all Indian cities. But these critics forget that the density of cars in India is among the lowest in the world and that the problem is not too many cars or bikes but an inadequate infrastructure that never planned adequately for the demands of modern development. India today has one car for 120 people as compared to 9 in Thailand, 6 in Malaysia, 2.6 in Japan, 2.1 in USA and UK. If progress is measured in cars, India has a long way to go.
Few economists realize that the automotive Industry is a huge driver of employment and growth. According to Japan Automobile Manufacturer's Association, Automobiles contributes to 21% of Japan's GDP and is the main engine of its economic growth employing 7.3 million people. According to Society of Indian Automobile Manufacturers, the industry already contributes to nearly 12% of India's GDP but the Industry is capable of far greater acceleration.
The impact on employment can be seen from the example of Maruti that employs about 5,000 people (after the VRS) and will make some 600,000 cars this year. But 5,000 trucks needed to deliver them create employment for about 20,000 people. Their 1,200 dealers employ over 50,000. Maruti makes no steel, castings, forgings, tyres, batteries, electricals, brakes, glass and components. Their vendors and suppliers of materials make 70% of their cars. The employment by these vendors, just dedicated to Maruti cars, must exceed 100,000. Then there are many more people engaged in supplying music systems, accessories, sale and service of for millions of old cars on the road.
Thus the production of 600,000 Maruti cars creates indirect employment for over 250,000 people and all the other makers of cars, trucks, tractors, and 2-wheelers may generate some 2,000,000 salaried jobs. But these salaries create another huge multiplier effect of tertiary employment for the millions who supply these salaried employees with food, clothing, shelter, education, medical facilities, entertainment, etc.
Anyone who has seen the sudden explosion of new townships like Daruhera near the Hero Honda plant, Surajpur, near the Honda, Daewoo and Honda plants, Sriperumbudur, near Hyundai's plant or at Bidadi near the Toyota plant can see the quick impact of automobiles on employment and economic growth. As local housing was a need, teashops became hotels and hotels expanded into housing estates. Grocery stores became supermarkets. Schools, cinemas, video parlours and fast food outlets and real estate developers multiplied. Doctors, architects, interior decorators and caterers streamed in. Unlettered locals prospered as contractors and their children going to better schools learned new skills. Prosperity created even more prosperity.
And the impact spreads wider. The people who own and run India's 50 million two-wheelers, 12 million cars and some 6 million trucks and buses need many millions of people to service them in every small town. And these millions of local mechanics having learned technical skills and to work with their hands will never be unemployed.
India’s annual growth rate at 8 to 9% is deceptive as it is pulled down by slow growth in agriculture. Studies show that middle incomes are growing at 18% per year. India is a country with a hot and dusty climate where an increasingly prosperous people will demand the comfort and efficiencies of motorized transport instead of the agony of bicycles and bullock carts. If they do not get the cars, bikes and buses they need and the roads to drive them on the millions who use 70 million automobiles every day will become an angry political force.
Automobiles drove America to prosperity and led the recovery of Germany, Japan and Korea after their wars. Hopefully our planners will see the light and lead India to a new prosperity. But this process can be greatly accelerated if the gigantic and complicated tax structures are reduced to reasonable proportions.
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