View: Govt should exercise caution before it gives in to auto industry's claims

Auto Inc's claims may not be entirely correct. The govt must use its data carefully to take right decisions.

On its part, the government needs to view data provided by auto industry sceptically and subject them to careful scrutiny. More importantly, it must improve its own data gathering capacity.
Every crisis is an opportunity, so goes the saying. For Indian industry, it is an opportunity to lobby for a handout from the government at taxpayer’s expense. The auto industry’s case shows how far our industry leaders can cash in on this opportunity. Multiple representatives of auto industry have pleaded for help on the ground that this sector accounts for 50% of all manufacturing and has declined by 30%. Now, the latest press note on GDP by MOSPI reports that manufacturing as a whole grew 0.6% in the first quarter of 2019-20. Simple arithmetic show that this means that manufacturing other than auto grew a fantastic 31.2% during the quarter. Wow!

But let us give the auto industry some rope and accept that it is only human to exaggerate to attract attention in the midst of a crisis. Assume that the share of autos in manufacturing is not 50% but 30%, and that its sales fell not by 30% but 20%. Even then it follows that manufacturing other than auto grew a handsome 9.4% during the first quarter of 2019-20. Does anyone believe that?

A Reuters report also says that according to a senior industry source automakers, parts manufacturers and dealers have laid off 3,50,000 workers since April 2019. The same report also says, “Reuters was able to identify at least five companies that have recently cut or plan to cut hundreds of jobs, mainly from their temporary labour force.”

One would think that in a sector like auto in which employment is concentrated in large companies, it would be easy to pinpoint a large proportion of layoffs. Therefore, the fact that Reuters could only identify five companies with actual cuts or plans to cut hundreds, not thousands, of jobs and those too mainly from the temporary labour force, makes one wonder how the “senior industry source” arrived at the 3,50,000 figure. Could it be that actual layoffs are closer to a few thousand and not in hundreds of thousands?

The upshot is that the auto industry is simply not credible in its entreaties. It is building its case for relief on what appear to be concocted numbers. A crisis ought to be an opportunity for setting one’s house in order and restoring competitiveness. What the industry needs to do is seek relief from regulatory barriers that give undue power to bureaucrats, serve no public purpose and undermine productivity growth.

On its part, the government needs to view data provided by industry sceptically and subject them to careful scrutiny. More importantly, it must improve its own data gathering capacity and use effectively data that it may have at its disposal. For example, for assessing the employment situation, a good starting point would be the Periodic Labour Force Survey, which now publishes detailed industry-wise quarterly estimates for urban India.

Good economics says that if a slump is structural, it requires restructuring of the economy. In such situation, the government only adds to the pain by delaying restructuring through its intervention. If the slump is temporary, any countercyclical action should be macro-economic in nature, not targeted to specific sectors. A slump should also be a time to identify and remove regulatory barriers facing affected sectors that serve no public purpose.

Measures that the finance minister has announced in three successive packages are mostly in line with these principles. To speed up restoration of growth, we also need RBI to continue to let the rupee depreciate and cut its policy interest rate by another half per cent. It’s also time for the government to let the interest rate on small savings drop to aid transmission of reductions in policy interest rates to borrowers. Interests of one specific group cannot be allowed to compromise the recovery of the entire economy.

Finally, after five years of experience, the government must evaluate whether its chosen inflation target needs to be revised upward. The current inflation target is 4% with 2% deviation on either side of it. But going by RBI actions during the last few years, it is difficult to avoid speculation that it has interpreted the target as 4% or less. For the last two years, inflation rate has been consistently below 4% with the average in 2018-19 being just 3.4%.

Unlike a mature developed economy, a rapidly growing developing economy undergoes rapid and constant restructuring. Changes in relative prices of different activities provide critical signals for this restructuring. But given downward rigidity in prices, low inflation limits the space for relative prices to move. This calls for moderate inflation at rates such as 5-6%. Higher inflation than currently is also justified by the possibility of money illusion on the part of entrepreneurs. The latter observe profits in nominal terms. As a result, when growth in nominal profits declines due to fall in inflation rate, even though growth in real profits may have been unchanged, it may dampen animal spirits. This is the only way to understand widespread complaints of weak corporate profits when they have held up between 11 and 12% of GDP in recent years.
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