Toyota and Harley: Does India have Problems on the Tax and Structural Demand Front?

While the pandemic obviously didn't help, there is also a sense that India is clearly becoming a less attractive market for global companies in its current economic phase, which may take time to structurally repair.

Is the much-touted Indian market of over a billion consumers still as attractive to foreign investors as one had taken for granted earlier? Broader demand for goods and services has been a dampener in India for quite some time now. Overall capacity utilisation in industry has slipped to around 65% as per the Reserve Bank of India (RBI) estimates. And this had happened much before COVID-19 arrived.

Post-COVID-19, of course, capacity utilisation fell dramatically from the existing level. So recovery to pre-COVID-19 levels actually means going back to sub-optimal capacity utilisation of last year. This shows a structural demand crisis which has existed for the last 7-10 years. Clearly, India is not creating enough new demand via fresh incomes from a larger segment of the consuming middle class. This crisis has been explained in detail by economists like Rathin Roy, former member of the Economic Advisory Council to the Prime Minister (PMEAC).

Does this have something to do with foreign companies expressing frustration with the stagnating Indian market, especially in the discretionary segments? Foreign companies have always found it difficult to navigate the Indian market. Most of them lose money in the initial years, hoping that critical volumes would build up later to compensate for initial losses.

Also read: Harley-Davidson Discontinues India Operations, Expects Fresh Restructuring Costs

Two recent statements cast a doubt over the attractiveness of the Indian market to global companies, especially in the luxury segment. Toyota Motor Corporation said it would not want to invest in expansion in India.

A fortnight later, the global leader in the manufacture of luxury bikes, Harley-Davidson, delivered a shock to the Modi government by announcing it was withdrawing from India and closing its manufacturing facility.

BBC News said Harley shutting down is “a blow for Indian Prime Minister Narendra Modi’s efforts to lure or retain foreign investments.”

Trump and Modi’s discussions

The big puzzle in Harley’s decision to withdraw manufacturing in India is that PM Narendra Modi had personally assured President Donald Trump in 2018 that India would reduce import tariffs for Harley as a special favour so it could import completely knocked-down kits to manufacture in India at lower costs. For Trump, Indian import duty for Harley-Davidson had become a litmus test of New Delhi’s commitment to a deeper trade and investment relations with the US. However, Harley-Davidson was not happy with import duty on its CKD reduced merely from 75% to 50%.

Trump too was evidently unhappy with the duty reduction and wanted the tariff to be brought down to zero. Trump kept raising the issue with Modi to the exclusion of other trade issues which were probably far more important.

US President Donald Trump and PM Narendra Modi at Hyderabad House. Photo: PIB/Twitter

Yet after receiving so much personal attention from the leaders of two nations, Harley-Davidson is shutting shop in India. So why is the US bike company withdrawing from the largest bike market in the world? Partly, it is the de-globalisation process in which major world brands want to focus on their core markets post-COVID-19, as demand sharply falls across the board. The more important reason is India is clearly becoming a less attractive market for global companies in the current economic phase which may structurally take time to repair.

Many foreign companies feel their efforts are not worth the returns India may be offering in the current phase of growth. This feeling has intensified over the past 7-8 years when growth, incomes and consumption have generally stagnated. There have been short upticks in growth which have not sustained beyond a year or two. This is something both domestic and foreign investors are analysing very closely. That is why hardly any new greenfield investments are being made by the private sector. One can also detect the disappointment in the statements of companies in recent times.

Toyota also said it did not want to expand operations in India, although it sought to walk-back its statement after some cajoling by the government.

The truth is that manufacturing in India – especially in the auto sector, which is seen as a bellwether for growth, has remained well below the built-up capacity even before COVID-19 hit the world. How can you expand capacity when existing ones are being utilised only at 50-60% in the auto sector. Many big global brands have been wanting to either scale down in India or not invest in further expansion after seeing the trajectory of demand in the economy.

Also read: Vodafone v. India – End of a Saga?

Frustrated by taxation and regulatory problems

Some are also frustrated by taxation and other similar regulatory problems, an issue that caused Toyota and Harley-Davidson to complain as well. Just to name two of the biggest investors in India – Vodafone & British Petroleum – who have invested over $25 billion, but have got zero returns. In fact, they have written down their entire investments as losses in their account books.

An unyielding and high tax regime has its consequences – whether dampening the demand for certain types of cars or bikes (Toyota and Harley-Davidson), or a government’s refusal to accept the results of international arbitration that it deserved to lose (Vodafone).

A man checks his mobile phone as he walks past a shop displaying the Vodafone logo on its shutter in Mumbai January 15, 2014. Credit: Reuters/Danish Siddiqui

A man checks his mobile phone as he walks past a shop displaying the Vodafone logo. Photo: Reuters/Danish Siddiqui

These experiences tell other investors that making money in India is not easy. The potential of 1.3 billion people as a largely unexplored market starts to fade after companies experience it for some years. Of course, there are structural problems which add to this negativity.

The promise of India doubling its GDP every 6-8 years doesn’t seem to hold true anymore.

The Narendra Modi government has been struggling to attract greenfield investments for some years. Last year, it lowered corporate tax rate to 15% for new investments, which is among the lowest in the world. It has introduced big changes in labour law to facilitate a “hire and fire” policy to attract foreign companies as well as new domestic investments. Yet companies like Harley-Davidson are shutting down their manufacturing operations in India. Some serious introspection is in order.