The deceleration in GDP [gross domestic product] which started in the second quarter of financial year [FY] 2018-19 and has continued till the first quarter of current year with the rate of growth plunging to 5 year low of 5% has led to consternation in industry and trade circles leaving a sizeable section of the fraternity worried that this trend might continue till the end of the year. This will mean further aggravation of the income and employment concerns.
The government has rightly gone into introspection mode and has demonstrated its willingness to respond to the situation. The finance minister, Nirmala Sitharaman has held a series of consultations with industry and trade and come up with a number of measures to give a boost to the sagging economy. She has already held two comprehensive interactive sessions with the media and a third one has been promised in the near term.
The approach to look into each and every issue minutely sector-wise, identify problem areas and come up with logical solutions is welcome. Indeed, that should help in revival.
In the case of micro, small and medium enterprises [MSMEs], the decision to release all pending GST refunds within 30 days and an overarching commitment to release refunds in future within 60 days from the date of claim; directions to all government departments and public sector undertakings [PSUs] clear all pending dues immediately; mechanism to ensure prompt realization of their dues from buyers of their goods and services in private sector; sanction of loans by banks within 59 minutes etc will go long way in helping them get over liquidity constraint and resume operations.
The decision to infuse Rs 70,000 crore in public sector banks [PSBs] for their recapitalization upfront, consolidation of 10 PSBs into 4 giant banks capable of meeting the credit needs of an expanding economy and compete globally, easing liquidity of non-bank finance companies [NBFCs] [they cater to financing requirement of risky ventures particularly in MSMEs] are aimed at addressing a major bottleneck afflicting industry and trade.
While, these are moves in the right direction, in certain areas, the government seems to be over-reacting. For instance, on the concerns of the automobile sector [continuing the decline that started eight months ago, sales in August, 2019 declined by a sharp 41%], minister for road transport and highways, Nitin Gadkari has promised to take up with the finance minister need for reduction in GST [goods and services tax] on cars. If, taken on board by GST Council, this could have serious implications for the overall macro-economic situation.
At present, most automobiles fall in the highest tax slab of 28%. In addition, cars attract cess @1-22% depending on the length, engine size and type [for a typical mid-size car, this is 15%]. The industry is demanding that these be brought in the 18% slab under GST. If, accepted, this will lead to revenue loss of about Rs 50,000 crore annually. Another sector hankering for similar cut is cement which would lead to loss of over Rs 20,000 crore.
Already, the tax collection scenario is grim. Against an annual growth target of 17%, actual increase during the first four months of current FY is only 5%. If, on top of that, government accedes to industry demand for cut in tax rate, this will lead to aggravation of fiscal imbalance and attendant problems viz. increase in borrowings, higher interest rate, increase in C/A deficit and even inflation.
Yet, there is no guarantee that the situation in the automobile sector will improve as the fundamental factors contributing to its current plight have little to do with the tax rate per se. In this context, three crucial factors impinging on demand for vehicles particularly for personal use merit attention.
First, in view of the massive increase in footprint of cab aggregators such as Ola and Uber, commuters in almost all cities have prompt access to taxi on demand at reasonable tariff [that suits the budget even of the middle-class]. These cabs also offer comfort and convenience almost at par with a personal vehicle besides freeing them from the hassles of parking associated with the latter. No wonder then, a sizeable chunk of persons have decided not to own a car.
Second, until hitherto an overwhelming share of automobile purchase was funded by NBFCs. This financing route has been seriously impacted by the recent crisis triggered by the behemoth Infrastructure Leasing and Financial Services [ILFS] going bust and another big one Dewan Housing Finance Corporation Limited [DHFCL] in dire straits. Consequential liquidity problems facing NBFCs has also contributed to decline in sales.
Third, in 2017, Nitin Gadkari had alluded to putting a ban on diesel and petrol based vehicles in a phased manner [this was reinforced by repeated observations by members of Niti Aayog]. This has also deterred persons from carrying out their decision to purchase. It is only now in the wake of crisis afflicting the industry that the minister has offered necessary clarification to say there is absolutely no question of the government putting a blanket ban.
It is imperative to address these factors instead of getting into side channel. If, finance is not available how will a person buy the car? If, the cars on sale [mostly on diesel and petrol] won’t be allowed on roads, why would they buy? Or if they don’t want to buy because a better alternative is available for commuting, they can’t be enticed to buy merely by reducing the tax rate.
The government has already taken steps to deal with the first two factors. It needs to give some time for seeing their impact on ground zero. As regards a better commuting option offered by cab aggregators, this should be welcome. But, it must refrain from acquiescing to demand for a cut in GST rate which will be seriously detrimental to the economy by accentuating the resource crunch.
Nirmala Sitharaman has done right by deciding not to even raise the issue in the next meeting of GST Council.