A GST cut can put auto sales on fast track to revival

The question is whether there will be adequate demand and, more importantly, what the government can do to encourage sales. Mint takes a look

Automobile manufacturing is gradually restarting as curbs put in place to check the spread of coronavirus are eased. The question is whether there will be adequate demand and, more importantly, what the government can do to encourage sales. Mint takes a look.

How did auto sales fare in the last fiscal?

Automobiles comprise passenger cars and vans; two-wheelers, including motorcycles, scooters, and mopeds; commercial vehicles; three-wheelers and quadricycles. The total sales in 2019-20 were around 18% lower at 21.55 million units than in 2018-19. Two-wheeler sales, which comprise a bulk of total sales, fell 17.8% to 17.42 million units. Part of the drop in sales was due to the lockdown introduced in late March. But sales had been falling right through 2019-20. This was a reflection of a slowdown in the Indian economy and a lack of confidence among people in their economic future to be able to pay equated monthly instalments.

What can the govt do to revive auto sales?

Sales in March were hampered and there were literally no sales in April. The Centre can reduce the goods and services tax (GST) on automobiles. This cut needs to be substantial and not just a token one. A 10% GST rate cut on two-wheelers and passenger cars is likely to perk up sales because of much lower prices. This reduction will be especially important for two-wheelers. As industrialist Rajiv Bajaj pointed out, two-wheeler prices have of late gone up by 30% because of a series of new mandates. These are the Bharat Stage-VI norms, a rise in insurance costs and the introduction of new safety features.

Wouldn’t this mean the Centre earning lower taxes?

Yes, it would mean the Centre earning lower taxes for every vehicle sold. But what it would lose per vehicle sold, it is more than likely to make up through an increase in sales because of lower prices. Economists John Kay and Mervyn King wrote in Radical Uncertainty that real governments do not optimize; they cope. This is the time to do that.

How else will GST rate cuts benefit the govt?

Increased auto sales will mean better GST collections than if the rates are not reduced. Also, higher sales will mean more production and higher excise duty collections. The auto ancillary sector employs many contract workers. Higher sales will mean more work for them. More work will mean income and once they spend this money buying goods and services, the government will earn GST through these means too. With higher sales, the auto and auto-ancillary sector will end up paying higher income taxes as well.

Any other factors to be taken into account?

State governments have to be convinced about the move given that the GST Council, which also comprises finance ministers of states, decides the GST rates. Further, the supply chains of automakers should work. So, it is important for the Centre to speak to them and know how they are placed on ramping up production to meet the likely higher demand due to a cut in GST rates. Cutting GST rates is likely to provide a real stimulus to the economy.

Vivek Kaul is a Mumbai-based economist.

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