Toyota or pakora? Which economy will Modi govt choose?

By Andy Mukherjee

Narendra Modi says, “Make in India.” Toyota Motor Corp. says, stop treating cars as though they were drugs or alcohol.

The Japanese carmaker has a point about the tax structure being unviable for the industry, and Shekar Viswanathan, vice chairman of the India unit, made it forcefully in an interview to Anurag Kotoky of Bloomberg News. However, instead of trying to address the specific concern about the high sin levies on cars, the government turned it into a public relations issue. The minister for heavy industries, who also looks after information and broadcasting, took to Twitter to announce that “the news that Toyota... will stop investing in India is incorrect.”

The additional luxury-tax burden — 1% to 22% depending on the size of the vehicle and engine capacity — is what jacks up the overall levy in the world’s fourth-biggest car market to as much as 50% on some sports utility vehicles.

Read: Toyota halts India expansion, blames ‘we don’t want you’ taxes

Six years of headline management should have been enough for Prime Minister Modi’s government. From justifying its bizarre overnight ban on most banknotes in 2016 to defending suspiciously cheerful gross domestic product data and suppressing a not-so-rosy household consumption survey, Team Modi has left no stone unturned when it comes to spinning a narrative in which it’s doing everything right. The longer this pretense continues, the higher the risk of India getting stuck in a post-pandemic sub-5% growth rut.

It’s time to start an honest dialogue with unhappy stakeholders — labor, capital, and subnational governments. Lockdowns are easing even though the coronavirus continues to spread. Workers desperately want jobs to return because there isn’t much of a safety net beyond the family or village.

Businesses weren’t investing even before Covid-19. It’s impossible to cut consumption taxes to stoke demand. India’s fund-starved 29 state governments badly need the sin levies that are earmarked for their exclusive use. Businesses were hoping that these, which are in addition to the regular goods and services tax, would expire as planned in 2022. However, because of the hit to collections this year, they may continue well into the future.

Also Read: India to ask foreign firms to source more local materials for government projects

That isn’t the whole story. Import duties on steel and electronic components may go up, ostensibly to promote Modi’s Make in India campaign, pushing prices for cars still higher. The market will then be even smaller. So what can be done?

Auto analyst Govind Chellappa has practical suggestions. Even if taxes remain high for now, end the constant tinkering with the rates, regulation and the fuel policy — diesel, petrol or hybrid — and commit to stability for 15 years. “It takes 24 to 36 months to develop a new product and another 12 months to set up the physical infrastructure. If taxes and regulation change every 24 months, how does one decide what to invest in?” Chellappa asks. Similarly, the badly designed goods and services levy needs a one-time overhaul, followed by long-term certainty.

India must break out of this vicious cycle in which taxes are high, consumer demand is low, investment and job creation are constrained, and wage incomes are insufficient to boost purchasing power at the bottom of the pyramid. Taxes are hence exorbitant and have to be collected from a small consuming class that can afford a $23,000 Toyota sedan — and fill it up with highly taxed gasoline that costs three-quarters more than what Americans pay.

Also Read: India's external debt up nearly 3% to $ 559 bn at March-end

Modi said in an early 2018 television interview that those earning $3 a day by selling “pakoras” — Indian fritters — should also be counted as employed. That would leave the government off the hook for the absence of new jobs in the formal economy. This false pakora/Toyota equivalence must end. India should enable large companies to grow and create good jobs with social security. When they’re more productive and paid a little better, low-wage workers will be able to afford Made in India shirts and trousers, which, as economist Rathin Roy has noted, are more expensive than imported clothing from Bangladesh and Vietnam.

Ultimately, the Modi government needs to focus on one simple statistic highlighted by Ambit Capital Pvt. and Singapore-based investor Akash Prakash. As much as 40% of the country’s listed nonfinancial firms have revenue of less than $15 million. They’re tiny even by emerging-market standards, and the ratio hasn’t increased at all over the past decade.

Also Read: Centre's relief measures push up revenue expenditure

Just when India should be presenting itself as an alternative to China by making it easy for enterprises to scale up, the Soviet-style statism that New Delhi discarded three decades ago is creeping back into politics, policies,and
even court orders. The first step for course correction will be to listen to criticism, rather than dismiss concerns as sour grapes or fake news. Otherwise, India Inc. will consist of a handful of very large business islands surrounded by tiny atolls that will be first to go underwater in bad weather.