Impact Of Fiscal Policy And Monetary Policy On Automotive Sector
The Indian economy is considered as seventh largest economy in the world where it is growing at a faster rate. With the GDP(at the constant 2011-2012) of 7. 2% in the fiscal year of 2018-2019, it is expected that by 2022, India would become third largest economy of the world. The end of February 2019 does not have a happy ending since the GDP fall to 6. 9% which is the lowest growth rate in five quarters due to weak consumer demand. The two most influential tools of Indian Economy are Fiscal Policy and Monetary Policy. Fiscal policies are those policies that affect the taxing and spending of government. In other way it can be defined as the government policies that will determine the limits of taxes and how government can use those taxes to spend for public’s welfare. Fiscal policies are used for rapid economic growth and development in the country, proper mobilization of resources, for maintaining price stability, for providing full employment and to reduce disparities in income and wealth. But some limitations are also there of fiscal policies like implementation of fiscal policies can lag recognition and action, also tax rates need to be limited which cannot exceed a certain limit, increase in public debt and also deficit financing can cause inflation. These are the problems related with the fiscal policies. Various tools like public expenditure, public revenue, deficit financing and public debt are the tools of fiscal policies.
The Central Bank that is Reserve Bank of India carries out the Monetary Policy of India for managing the total supply of money in the economy and also controlling the interest rates. Monetary policies spur economic activities of individuals and the organizations. These policies can act as a brake or open opportunities for people. Monetary policies control the flow of money in economy. Monetary policies induce price stability, stability in exchange rate, raise saving and capital formation. With the help of monetary policy we can achieve rapid economic growth and development and full employment. Some limitations of monetary policy are the contradiction in objectives of monetary policy, the roll of financial intermediaries and unorganized sector cause limitations to monetary policy and also the lag in monetary policy cause delay in implementation of monetary policy. The Reserve Bank of India use two types of tool for monetary policy that are qualitative tools which include bank rate, open market operation, repo rate and reverse repo rate and reserve requirement(cash reserve ratio and statutory liquidity ratio) and quantitative tool which include selective credit control, margin requirement, moral suasion and direct action.
The automotive sector contributes more than 7% to the GDP of India states how quickly this sector is growing in India. The production of domestic automobile increased at 7. 08% between financial year 2013-18. It has been estimated that 29. 07 million vehicles manufactured in year 2018. The automobile production increased 12. 53% during April- November 2018. It is expected that the sector’s compound annual growth rate would be 3. 05% during 2016-26. The sales of motor bikes crossed one million units in the financial year 2018. From the given figures it is derived that India is expected to become third largest market of passenger vehicle market by 2021. It took seven years to increase its production of vehicle from three million to four millions. But now as the GDP is above 7%, so the production of vehicle will cross five million by 2020. The automotive mission plan 2016-26 is to increase the contribution of automotive sector more than 12%. Main reasons behind this are rapid urbanization and rising income which is ensuring the need of vehicles leading to more sales of vehicles. The Automotive Mission, through the Plan National Electric Mobility Mission Plan (NEMMP) and other initiatives, the Government of India wants to fulfill two objectives, long term growth in the automotive industry is facilitated and also reduce oil and other fuel dependence so that emissions can be tackled. The government and the industry has set a target in the Automotive Mission Plan 2026 that they would triple industry revenues means the industry revenue must reach $300 billion, and sevenfold expansion of exports to $80 billion. And to achieve this, it is estimated that the automotive sector could contribute more than 60 million jobs that may be direct or indirect, and also increase investments in the sector which will result in improvement in manufacturing competitiveness and would reduce emissions. These initiatives would make India a manufacturing hub.
Fig. 1 Sales of various types of vehicles in India.
The above figure is showing that how the sales have been increasing in India in past few years. From the data given, we can better understand how much demand is increasing of the vehicles.
The fiscal policy of government in the interim union budget 2019 does not have any direct impact on the automotive sector. The policies can have indirect impact on this sector. Full tax rebate for individual taxpayers who has an annual income of Rs. 5 lakh. This can boost spending of consumers as will put more money in the hands of middle class and they can spend it on vehicles and other products. The fiscal deficit also brought down to 3. 4% from 6%. The GST filing for up to Rs 5 crore has been done quarterly. All these would indirectly impact the automotive sector. This budget does not have much effect on the automotive industry since no any announcements have been done regarding the production of GST cut down on vehicles. It only focused on people belonging to middle class and farmers where they had been given relaxation and facilities. Expenses on railway increased from Rs. 24,57,235 crore in 2018-19 to Rs. 27,84,200 crore in 2019-20 which will increase the use of vehicles for transporting goods and raw materials for construction of railway tracks and other railway related goods. The government focused on making pollution free India. The government reduced the import duty on the electric vehicle components due to which more production of electric vehicles would take place but the increase in 5% duty on batteries will be obstacle in the production of electric vehicles. This will increase employment in this sector and improve the living standard of the people. Hence, with these policies government is trying to achieve the goal of low emissions. But no detailed policy had been discussed. This fiscal policies does not have any direct encouragement regarding employment in the automotive sector but they are bent to FAME2 to encourage electric vehicles. Clear policies regarding electric vehicles are missing which has been a concern for the CEO’s of the automotive companies. The infrastructure development will increase the demand of the loading vehicles to carry raw materials and thus in this way the leading to indirect increase in the production of the vehicle. The more detailed and full fledged fiscal policies would be presented after elections in May- June 2019.
On comparing this year budget with the budget of 2018, the automotive sector got boost directly or indirectly in the 2018 budget. The investment in rural and agriculture paved ways for more and more production of tractors, utility vehicles and two wheelers. The increased investment in infrastructure resulted in boost to automotive industry for long term and the rural connectivity gave chances to automotive sector to manufacture more two wheelers and four wheelers for connectivity to rural areas. The Make in India program resulted in huge investment in automobile industry and also attracted foreign investors to invest in this sector. Moreover, custom duty increased from 10% to 15% on import of auto components. The GST rate of 15% on automotive industry resulted in increase in price of vehicles and also due to GST on goods lead to increase in production cost.
The monetary policy of RBI increased the repo rate to 6. 25% in 2018 which increased the cost of vehicles and hence the automobile market faced decline in sales of vehicles but it remained between 1% to 6%. On 7th February 2019, RBI decided to reduce the repo rate on 25 basis point due to which the new repo rate is 6. 0%. The analysis suggests that the new repo rate would give boost to the automotive sector and it can recover losses due to high rates, high fuel prices and high product rates. The decrease in repo rate will result in decrease in interest rates and people will be able to take more loan at lower interest rates. The rate cut is done in order to achieve inflation rate at medium term of 4%. If inflation rate remains at this level than it will give more money in the hands of public for purchasing things. The middle class people who find two wheeler is a basic need would be able to buy the vehicle at lower interest rates. The fuel inflation rate got down from 8. 5 in October to 4. 5 in December which will give greater heights to sales of the vehicles.
By the end of 2018, sales of tractors and motorcycles had been declined due to low demand in rural areas. Sales of passenger cars show contract in urban demand. The sales of commercial vehicle is also affected by the high interest rates and high fuel prices and that is why people are spending less on vehicles and sales reduced. So to boost up the sector repo rate is decreased.
From the above fiscal policies and monetary policies, it can be derived that in 2018, better fiscal policies were implemented to boost up the automotive sector but in 2019 no such measures have been taken and no new announcement is done other than mentioning of electric cars. And no such policies are introduced for electric cars. The monetary policy would affect the sales of automobile due to less repo rate.
