Did dip in corporate tax increase biscuit dips?

It all started as a news item on the crisis in the automobile sector. It might even have been a sponsored item since it is very difficult to differentiate between advertisements and news these days. On the one hand there is paid news and some news that is paid not to be published.

A hue and cry was raised on how the automobile industry is in utter crisis, how the companies are giving holidays from production and how the ancillaries are reeling under recession. All brown-bag economists and TV studio experts began a chorus about the economy being in decline based on the earlier quarterly estimate of GDP. This quarterly estimate showed a 5% growth in real growth rate and that settled the debate.

The Auto industry faces two issues. One is the structural changes being faced not just in India, but globally. In USA, several facilities are being shut and there is a definite slump in Germany and other EU countries. Slow, but arrival of electric or hybrid vehicles and people’s hesitation to buy are some of the challenges. Ola/Uber have captured a good amount of the market in India, increasing the usage of cars but the same is achieved with lower number of vehicles. Earlier an official/executive would take their car to work and it stayed parked there, but as they switched to availing an Uber, that car makes 4 to 8 trips in those work hours. Many organizations, including of the Government, have stopped buying cars. Instead, they use hired cars.

Carpooling is also changing the concept of car ownership. Owning a car is not a status symbol among the young anymore and only the super-premium segment commands a Premium and is not bothered by the waiting time. Cities such as Bangalore or Delhi have robbed us of the joy of driving with their lack of parking spaces, traffic jams and potholed roads. Keeping a driver is not economical on an individual basis. Eco-warriors in the West have switched to cycles and some interior regions have banned cars.

On the whole, the industry is in the throes of massive changes. Tapes were replaced by Compact Discs, followed by the USB—many an industry is disappearing and new ones are taking their place.

The power of business and media in India is unbelievable, in that the story that came out on reduced demand for Parle-G biscuits causing the company to retrench thousands, was denied by Parle authorities. The reactionary Business TV channels were clearly furious and asked the FM fiery questions:‘If people can’t buy popular and cheap biscuits then are we not in deep recession?’ My dog loves the sweet rectangular biscuits and wags his tail vigorously at the sight of them.

The other important issue is outsourcing and our quarterly estimates. Initially in the nineties, many FMCG companies started outsourcing. Many major FMCG companies have more than 40% of their activities outsourced to partnership and proprietorship firms, some more than 60%. This slowly became popular among consumer durables like ceiling fans, cookers, TVs, refridgerators, etc. Soon, high tech firms like Siemens, L&T, BEL also adopted this model. Today when one needs a repair done on a television or water filter, they will invariably get a mechanic from an outsourced firm and not the company from which the item was bought.

Outsourcing has become the norm and it is maximum in service sectors, such as, banking, where we are expected to reach them by ATM, internet or phone and not in person. ATMs, credit rating, collection of instruments, reconciliation are all outsourced. Outsourcing is so invidious that my dog stopped barking in the night since the last few weeks when my neighbor brought in a new puppy. My dog has outsourced his barking.

Main focus in the quarterly data estimate is on “organized” or corporate sector and they are invariably revised later, since they do not fully capture the contribution of “unorganized”or partnership /proprietorship firms. Even this 5% is much superior to many global economies is another matter. One does not have to wait for a full year’s data to make any meaningful conclusion but our business channels and brown-bags mostly act as mouthpieces to Nifty companies (Sensex 30 is a subset of NIFTY 50 companies). What is missed is that these Nifty companies constitute less than 5% of our GDP, and the entire corporate sector constitutes only 12% to 14%. In the frenzy to extract concessions from the FM, there was an orchestrated campaign to reduce corporate taxes.

The crisis existed on the demand side but solution was obtained by supply. That’s India for you. Corporate taxes were reduced from 30% to 22% and for new manufacturing companies from 25% to 15%. Individual tax rate is 30% which when coupled with 20% bribe that we pay annually–the individual burden comes to about 50%.

How does the reduction in corporate taxes increase biscuit consumption? This is a mystery only business channels and brown-bag experts can explain. What should have been done instead is to reduce income taxes and provide more money to households so as to increase demand. The argument is that establishment of more factories will enhance employment. Setting up companies or expansion is not a tax-based decision. Factors to be considered are land, power, water, license under Shops and Establishment Act, Food and Adulteration Act—all under state governments and riddled with corruption. Sensex and Nifty soared and all in the share market are in josh—that is enough for the time being. Recession is solved and my dog continues to wags his tail for Parle-G.

The writer is a former professor at IIM Bangalore and currently Cho S. Ramaswamy Chair Professor at Sastra University.

-By R Vaidyanathan

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