It is now plain that sustaining a seven per cent plus growth rate next year would depend critically on the manufacturing sector. The jump in farm production this year would taper off next year and its contribution to GDP growth would be less than half of this year. With services already growing at seven to eight per cent, there is a limit to the upside in this sector. Therefore, high growth has to come from manufacturing. The need of the hour is thus to double the present growth rate of six per cent in this sector. This is the setting in which the forthcoming budget is to be presented. Will our budget makers seize this opportunity?
Thus far, revival in the sector is based largely on existing capacity, where expansion took place during the mid-90s. Since then private corporate investment has dipped and stagnated at low levels. There is little evidence that investment in manufacturing is on a strong revival course, though a few high profile companies have announced expansion plans. Investment into the sector can only be pulled in by sustained growth in demand. True, a growing number of medium and large manufacturing companies are becoming export oriented. But the mass of manufacturing in the country is still driven by domestic demand. And this is precisely what the budget has to stimulate to trigger off an investment spiral in manufacturing.
In recent years, there has been a welcome change in the mindset of tax planners, reflected in the ongoing reform of the indirect tax system. In addition to reduction in the number of rates and simplification of procedures, there has also been an attempt to lower excise duty rates. However, the incidence of indirect taxes on the final price of goods remains high and discourages consumption, and therefore, production and investment. Partly, the contribution to high incidence comes from sales tax levied by state governments. But even at the Centre, rates of excise duties remain high.
A FICCI study has shown that on an average, indirect taxes add over 44 per cent to the selling price of consumer goods, 43 per cent to capital goods, and 30 per cent each to basic and intermediate goods. Given our low per capita income, such a huge jump in selling prices lowers demand. Many a multinational, while launching their products in India, have learnt the hard way that the Indian market is extremely price sensitive. Those who can sell goods at a lower price than their competitors are more likely to succeed than those who do not. Our tax planners are only beginning to learn the pricing game.
Last year they reduced the excise duties on automobiles. The sale of cars has jumped this year. Indeed, the evidence is that in most of the major items where excise duties were reduced from 32 to 24 per cent, there has been no negative impact on indirect tax collection. But this is not the right way of assessing the impact of a cut in excise duties. Take automobiles, and assume that the excise cut has not brought about any substantial increase in excise collections from the industry this year. Does this mean that the exchequer has not gained? Wrong. Every industry has linkages to other sectors and its growth stimulates growth in others.
For example, more cars on the road would raise petrol consumption and generate more excise revenue and cess for building roads. In the coming years, each car owner would buy more tyres, other accessories and spend more on repairs. It has been estimated that every car sold generates seven jobs. This means growth in incomes and higher collection of income taxes. If all the linkages are worked out, the benefits of the excise cut would go well beyond that one excise collection figure on automobiles.
The planning commission has an input-output model that can be used to simulate the total impact of duty cuts on both, growth and tax revenues. There are other mathematical tools available to work out the numbers. It is time the debate on tax cuts was enriched by this exercise. It would then become evident that lowering of indirect taxes can play a key role in placing the manufacturing sector on a higher growth trajectory.
The author is an advisor to Ficci. Views expressed herein are personal