Few weeks back there were fears of an excise hike, particularly on diesel vehicles but, those apprehensions were put to rest and most people expect it to be a status quo for the auto sector. Sunil Munjal, joint MD of Hero Motocorp and Chairman of Hero Corporate Service said he doesn't see any change in excise structure in the upcoming Budget. According to him, the additional excise on diesel is still under discussion and it may not come through in the FY14 Budget. The government may impose such a duty on diesel cars over the longer term, he added.
As far as this year's Budget is concerned, the government will be focused on cutting expenditure and it may have to reduce spends on some of the rural schemes, opined Munjal. Besides, fiscal tightening may impact consumer spending in fiscal year 2013-14.
Munjal also expects stability in the tax structure to encourage investment. However, an increase in taxes will not be lauded by the industry, he mentioned. Going forward, he is hopeful of seeing a turnaround in the consumption cycle in the next 5 to 6 months.
Here is the edited transcript of the interview on CNBC-TV18.
Q: You think now people have come around to thinking that there may not be significant excise changes for the auto sector?
A: If one looks at the market and the environment today, logically one should have asked for reduction in excise duties with the current economic slowdown going on. But, it is clear that the state of the government's finances will not allow any reduction. I think an increase clearly at this time is certainly not called for.
Q: Is it still on the government's agenda though you think to put out some kind of specified or special tax on diesel vehicles?
A: I think diesel is something which is still under discussion because that is the differential which has been around for a bit and increasingly there has been an active debate going on as to how you can take away subsidies from those who do not need it. This is an active debate which is going on. I am sure they would do it in the Budget because they have already initiated diesel price increases but, somewhere down the road, there will be some changes.
Q: The Society for Indian Automobile Manufacturers (SIAM) representation has been to the government and to the finance minister and given what we are hearing in terms of how poor demand is and the inventory situation is that a lot of companies are dealing with over the last few months?
A: I would like to focus on the larger picture in which automotive is one of the key sectors. If one looks at what is going on right now, the biggest requirement we have is to bring back growth in the system. The slowdown in investment, high interest rate, continuing of policies which are in some sense a hurdle to growth have been a serious concern right now for the industry. We are hoping some of these will get addressed in the Budget itself because the finance minister has a pretty tough job ahead of him.
On the one hand, he is going to try and bring the fiscal deficit down to what has been promised, at 5.3 percent and stick to the Fiscal Responsibility and Budget Management (FRBM) in future. On the other hand, he has to provide environment facilitation which will encourage investment and growth. It is a tough task ahead but he is up to it. He has demonstrated earlier, on more than one occasion and therefore, we are hoping to see more action on the front of disinvestment.
A clear roadmap for goods and service tax (GST) announcement is expected and we will hear about things like focusing on increasing palm oil production in the country. There is a whole host of issues at this moment which are pending and there is an active discussion going on.
The other thing which has been discussed now is cut back on government’s own expenditure because that clearly seems to be the more obvious or the more practical way of bringing the fiscal deficit down. While the concern is continuous on the current account deficit as well, it is much less in the government’s control.
I think the automotive industry within this has similar concern. It wants to find ways to bring growth back. Therefore, it does not need excise to go up at this moment. It also needs facilitation for export. It wants additional benefits to be brought in for export because the overall global market is very slow and very tough and competing countries along with competing companies outside India are making a massive effort at this moment to grow their businesses.
Q: But from everything that the finance minister has been saying, he has indicated it will be a tight Budget which means maybe cutting expenditure, maybe re-looking at some of the government schemes. Do you fear that could crimp basic demand from the rural space or the semi urban space, something which is critical for even companies like two-wheeler manufacturers?
A: There is a focus at this moment not necessarily on cutting back schemes, I think there is a serious political compulsion also which we need to recognise. They will try to bring in much more efficiency into these schemes and one of the very powerful tools available to them is the direct cash transfer of the Aadhaar card and the general belief is, if that Aashaar card is rolled out efficiently and quickly, it may not have a negative impact.
In fact, it could be the reverse. Then those people who are not currently getting benefitted would become new consumers. But you are right, there is very little choice but to cutback expenditure on some of these schemes. There will certainly be some negative impact of that. I don't think there is any doubt about that.
Q: The recently concluded earnings season has not gone very well in terms of how corporate India is dealing with this slowdown. Any fears that the finance minister may actually go hammer and tongs in terms of hiking corporate taxes or some kind of additional cess on corporates because he is in a tight situation himself and taxation maybe one easy way out?
A: I know this has been out in the press of and on, there have been discussions but knowing the finance minister, his biggest strength is to bring about stability. He has made a lot of effort to demonstrate stability in taxes and tax rates and tax administration. In fact, he said we will constantly keep improving while bringing stability in the system.
At this moment, anything which disrupts the potential for growth, anything which scares away additional investment is certainly not required and certainly not welcome. That is why I said his challenge is pretty severe at this moment and increasing taxes is something that the industry would certainly not encourage now. In fact, it would strongly push back because it is clear that the earnings are under severe stress. It is not just earnings, if one looks at investments, our capital formation quarter after quarter has dropped for 11 quarters now and part of the reason has been high interest rate and part of the reason is the mood itself.
While people in the long run may not be affected because the mood is not good at this moment, people are not investing in fresh capacities and that is also a concern that we have as a nation. When this consumption cycle does turn around, as we are all hoping it would somewhere in the next five to six months, we may hit another volume of capacity and that is something we need to find ways to encourage. That is why we have recommended the provision for additional investment allowance for some time. It would accelerate depreciation on some activities to bring more investment into the system.
That itself will be a good multiplier for job creation and for additional growth. We have also recommended the governments pickup specific sectors like housing, especially low cost housing because it has a massive multiplier effect on some of these, like it has on the automotive industry.