The Hindu Business Line : Taxing truth at Akurdi

In the days to come, many more companies will face the business dilemma Bajaj Auto is now wrestling with; they will also confront some bitter political truths.

Business historians and management experts studying the events leading up to the stoppage of two-wheeler production at Bajaj Auto’s oldest plant in Akurdi, near Pune, may perhaps be forgiven for recognising it as an object lesson in crisis management. Consider the events: As early as July, the company’s managing director let it slip in the course of the annual general meeting that Bajaj Auto might shut down the Pune plant. Though he was immediately contradicted by the Chairman, who said a closure was not on the agenda, the impromptu remark and the subsequent clarification did bring the unviability of the Akurdi plant’s operations into the centre of the debate.

A partial lay-off, offer of near full pay (five-and-a-half days’ wages) for a week of staying at home, the rising crescendo of opposition from trade unions and politicians, a process of political consultations, offer of restoration of six-day wages and an official clarification that the plant had not been, or would not be, shut down, etc. are happenings that followed in quick succession. Even as things settle down, with the usual claims of the media having jumped the gun and so on, a basic fact remains. From a position of insisting that everything was normal with the Akurdi plant’s operations, there has come a grudging acceptance that there is a problem that perhaps can be solved only in a spirit of accommodation from all quarters, including labour.

When Bajaj Auto says that its older manufacturing unit at Akurdi suffers from cost disadvantages relative to its plants elsewhere, the company is not off the mark. The fact is that the Centre’s policy of tax incentives for investments in backward areas has created huge cost distortions between older and newer units. In some cases these are accentuated by State-level incentives and, in the case of Maharashtra, octroi compounds the problem. But political compulsions have prompted successive governments to push for tax incentives for backward area development unmindful of the larger distortions they create in the investment and production decisions of corporates. It didn’t matter as long as production and investment decisions were controlled under the licence raj and endemic shortages made production, even at the most expensive location, eminently profitable to the point that even tax absurdities such as octroi could be taken in one’s stride. In the decade and a half of freedom, entrepreneurs have not been constrained by location, but competitive pressures have forced them to look at rationalisation of manufacturing operations. In the days to come, many more companies will face the business dilemma Bajaj Auto is now wrestling with; they will also confront some bitter political truths.

More Stories on : Editorial | Two/Three Wheelers | Bajaj Auto Ltd

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