This Article is From Aug 22, 2019

PM Modi, Please Bail Out Car Buyers, Not Car Makers

Every parent-teacher day in my daughter's school, I am suckered into buying cupcakes or cookies from a sad looking child who enthusiastically set up her stall, but then couldn't find buyers. Being a softie, I end up filling up the demand-supply gap. This happens every single year. There is always a greater supply of cupcakes than takers for them.

India's car manufacturers are a bit like those little cupcake entrepreneurs. They have produced far too many cars and there are simply not enough buyers in the market. This isn't new. Car sales have fallen almost every month since July 2018.

If one compares the first three months of this fiscal with the first quarter of the previous fiscal, overall auto sales are down 10.6%. Passenger car sales are down by a massive 26%, motorbikes down 11%, scooter sales down about 16%, and commercial vehicle sales are down nearly 14%. It's a generalised recession in the auto industry that is affecting all segments.

Why aren't people buying cars or bikes anymore? The answer is simple: they don't have the money. And those who do are keeping it aside for bad times to come. In the 1990s and 2000s, we used to talk about 'the feel-good factor' and 'the wealth effect'. Right now, there's a 'feel-bad factor' and 'poverty-effect' that is afflicting even affluent consumers in India.

New cars have three kinds of buyers - young people buying their first four-wheel ride after getting a job, families buying a second car as kids begin to grow up, and people replacing old cars or upgrading them. Motorbikes and scooters are more commonly bought by youngsters and the urban lower-middle class. There's a market for two-wheelers in India's villages, too, mostly because they are the most efficient modes of transport, given the state of our rural roads. 

We know that white collar job-growth has been stagnant, and increments are hard to come by. Smaller pay-packets and lower real income have made the middle class think twice before getting a new set of wheels. Add to that, low-cost Uber and Ola cabs, and there's really no reason for India's buying classes to splurge on new cars or bikes.

Rural incomes have been slowing down for the past several years. The latest NSSO data shows that, on average, a person living in an Indian village is spending about 4% less per month than they were four years ago. In urban areas, average monthly expenditure is also marginally down.

Anecdotal evidence, from the sales of fast-moving consumer goods, confirms this picture of a slide in rural spending. Varun Berry, chief of Britannia, said recently that even 5-rupee packs aren't selling any more. And, now, Parle India has said that the rural consumption slowdown is going to force it to sack 8,000-10,000 people. Again, this is not very new. Hindustan Unilever had uttered the dreaded R-word in its previous investor call, when it said the company is "recession-proof, but not recession-resistant".

So why is there so much noise about slowdown and economic distress all of a sudden?

One reason is that India Inc was hoping to get some tax breaks in the post-election budget. Instead, it got a higher tax on the super-rich, and an extension of income tax on Foreign Portfolio Investors (FPIs). Top honchos in the corporate sector are feeling blue about dishing out more income-tax at a time when there's a general push towards austerity. The markets have tanked since then, making it the worst July in 17 years for the Sensex. If someone had invested one lakh rupees on the 4th of June, they would be down Rs. 7,500 in just one-and-a-half months. That's half the amount they would have gained in the entire one year before that.

Now that the slowdown is pinching the Big Boys, there are alarmist headlines every day about massive job-losses in the national media. And these warnings aren't coming from bleeding-heart activists or trade unions. They are coming from corporates and business journalists who would otherwise argue that job losses are the markets way of rooting out inefficiencies. So you hear of 10 lakh jobs on the line in the auto sector, 50 lakhs in the construction and real estate industry, thousands in consumer goods companies and, if the Indian Spinning Mills Association is to be believed, then crores of job losses in the textile sector.

Corporates and the punditry industry will tell you that the only solution is to cut GST and reduce corporate taxes, and while the government is working out a laundry list of corporate freebies, it should also roll back the tax on FPIs. In other words, industry should get a stimulus, even if it means reducing the government's revenues. Corporates also want the government to keep its borrowing down, so as to not raise interest rates and 'crowd out' private investment. 

In other words, India Inc, which backed PM Modi because he promised 'minimum government', now want him to bail them out through governmental intervention. The argument is that if taxes are cut, retail prices can be reduced sustainably without eating into corporate profits. At lower prices, demand will meet supply and induce factories to produce more. They, in turn, will have to buy more raw material and hire more people. In short, being benevolent towards the corporate sector will be beneficial to the entire economy.

But is there any reason to believe that corporates will simply not use tax cuts to increase their profit margins? After all, India's manufacturing sector isn't really short of cash. Companies are simply retaining their profits and distributing it to their investors in the form of dividends and buy-backs. On top of that, corporate direct tax as a proportion of pre-tax profits has more than doubled from about 24% in 2005-06 to 55% in 2017-18. Any tax relief will, most likely, be first used to reduce the share of corporate taxes, before being passed on to consumers in the form of reduced prices.

So, what should PM Modi do instead? Instead of giving a stimulus to corporates, he should put more money in the hands of the consumer. He needs to increase the MSP (Minimum Support Price) for farmers so that those with a marketable surplus are able to earn more. At the same time, he needs to push out cheap food through ration shops to protect the rural poor. The government needs to directly spend in the infrastructure space through PSUs and government-monitored projects. It needs to fill all vacancies in government and quasi-government posts. Public servants, PSU employees, teachers and doctors in government-run institutions, need to get better salaries.

The Modi government needs to judiciously spend money to generate demand directly. It cannot be left to corporate India to decide. The fact that a PSU like NBCC has had to takeover so many real estate projects tells us that private enterprise is not necessarily more efficient in using resources to deliver public good. The standard argument that the public sector is corrupt doesn't hold water when it comes to a strong government like that of Narendra Modi. It has the political mandate to act tough wherever needed. 

So, Mr Modi, please bail out the car-buyer and not the car-maker. 

(Aunindyo Chakravarty was Senior Managing Editor of NDTV's Hindi and Business news channels. He now anchors Simple Samachar on NDTV India.)

Disclaimer: The opinions expressed within this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of NDTV and NDTV does not assume any responsibility or liability for the same.