Saturday, November 10, 2007

High-Price of the Low-Cost Cars

Indian automobile industry is buzzing with the low-cost (read Rs.100,000/-) car. The Tatas announced this Rs.1lac car for the aspiring Indian middle-class. Other automobile makers (M&M, Maruti, TVS, etc.) have also hinted but are keeping their plans secret.

So how low-cost is the low-cost car?

Except for the small car project in Singur, the other ventures are still in the offing, and the details are not available in public space. So perhaps the Singur small car project provides the indication of the economics involved in the other small-car projects yet to come up.

According to a LiveMint article:

"At the recent Geneva Motor Show, Mr Ratan Tata admitted that the price of Rs 100,000 would be ex-factory, excluding taxes and that models with air-conditioning and other features would cost more."

So how much are these "excluded" taxes - and who gets it?

The same article informs that the additional taxes will be:

  • 16% in terms of excise duty
  • 40% in terms of MODVAT
  • 12% in terms of local sales tax levied by the states

    In real terms, this means that the much hyped Rs.1lac (Rs.100,000) car will actually cost Rs.1.68lac (Rs.168,000/-) car to the consumer (unless you want it "with air-conditioning and other features" - which will cost more).

    At an intial capacity of 250,000 units/annum of the proposed Singur plan, this translates into about Rs. 170 crores as taxes to the govt.

    In addition, the Singur plant will also provide a rent for the Rs.855 crores for the 1000 acres of leased land.

    If I were a "Socialist" (as I am often categorised by some... even though personally, between/beyond the socialist/capitalist continuum, I prefer to remain a non-ideoligical realist/pragmatist), I would say that that this 68% tax + rent (more than Rs.1000 crores) would help the govt. to do all the good things it is supposed to do for the common citizen, e.g., invest in public infrastructure and provide basic services (healthcare, education, sanitation, land-rights, etc.).

    Unfortunately, that is not the case...

    So who gets the benfits of these taxes?

    Somehow in this economic paradigm of growth, the benefits do not "trickle down".

    As the table below (The Telegraph, March 16, 2007), shows:

  • There is no requirement for upfront payment for the land by the promoters

  • The Singur plant promoters get a soft loan of Rs200 crores (at 1% interest) from the state govt. Rationale (as explained by the industry minister: "“Unless we give these concessions to the Tatas, other states will wean them away and that would be a big jolt to our efforts to effect a turnaround for Bengal."

  • VAT to be refunded as loan at 0.1% interest to the promoters

  • The rent for leased land will be paid at 1% (i.e., Rs9.5crores) over next 90 years!!

    ...And, in terms of social cost-and benefits, how many people get benefitted from this venture?

    7,500!!... and 11,000 families get displaced

    ....overall cost to society?

    Commenting on the above, Ashok Mitra wrote in an op-ed:

    "To persuade this fabulously rich group to start a modest-sized car factory here, the state government has already spent something around Rs 150 crore to acquire close to 1,000 acres of land... this entire tract of land on a ninety-year lease without any down payment at all. For the first five years of the lease, they will pay only one crore rupees; for the next twenty-five years, the payment will increase by 25 per cent at five-year intervals; for the next thirty years payment will be raised at five-year intervals by 33 per cent; for the final twenty years, the rent will be only Rs 20 crore per year.

    The discounted present value of what the Tatas have agreed to pay, any respectable accountant will vouchsafe, will hardly exceed Rs 50 crore. Equally necessary to take into account here are the historical trends in the rate of inflation and the likely explosion of real estate values through the decades...

    ... The state government is, in addition, offering... a loan worth Rs 200 crore carrying a nominal interest of only 1 per cent (as against the rate currently charged by the banks of at least 10 per cent); the principal, one suspects, is never intended to be returned. Finally, in terms of the lease agreement, the entire proceeds for the first ten years of the value-added tax on the sale of this precious car in West Bengal are proposed to be handed back to the Tatas, again at a nominal interest of only 1 per cent. If 40,000 cars are sold every year in West Bengal — not an unreconcilable assumption — with a value-added tax at 12.5 cent, this particular act of magnanimity on the part of the state would ensure an extra bonanza of more than Rs 500 core for the Tatas.

    All told, therefore, the group is being offered the allure of around Rs 850 crore by the state government, apart from their being spared the bother of acquiring the land through their own efforts."

    What this comment does not elucidate is that even though it the state government who is paying this Rs.850 crore, in reality this money ultimately comes from the taxes paid by the citizens.

    In additionthere are the costs, which are not calculated in the economics of growth of the "low-cost" car industry, e.g.,:

    - the cost of roads - and their maintenance - on which these "low-cost"(!!) cars will move

    - the cost of air pollution (and the healthcare costs)... though that will add to GDP - naturally!!

    - the cost of livelihoods which depend on the land they subsist on... etc.

    Pl do watch Aabad Bhumi:

    Other Related Posts can be accessed here


    JC said...

    - the cost of roads - and their maintenance - on which these "low-cost"(!!) cars will move

    - the cost of air pollution (and the healthcare costs)... though that will add to GDP - naturally!!

    Not so simple professor, if one considers the cost of usage of cars what about the utility generated in terms of productivity, convenience and increased mobility by the usage of cars?

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