Tata Nano loan: HC order beats hollow Rahul Gandhi's 'Toffee model' charge on Modi

Earlier this week, the Gujarat High Court dismissed a PIL challenging the so-called “Rs. 9,000 crore loan” given by Gujarat Government to Tata Motors Limited for the Tata Nano project. The allegation was that such a loan was illegal (since it was a “refund of tax”) granted only with a view to favour Tata.

Incidentally, Rahul Gandhi had made a similar charge during one of his rallies where he described the “Rs. 10,000 crore loan” as an example of Modi’s cronyism, or as he calls it, the ‘Toffee Model’. As it turns out, the Gujarat HC is buying none of this.

Let us look at salient aspects of the Gujarat High Court judgement at length.

The nature and amount of the ’loan’ (Paragraphs 16, 21-24)

As the Gujarat HC concluded, the ’loan’ is not a straight forward Rs 9,000 crore loan (as the petitioner in that PIL quantified). Indeed, it isn’t even Rs 10,000 crore as Rahul Gandhi has quantified. So, what is this loan? The Gujarat HC describes it as a “loan dependent upon the recovery of VAT”. Let’s see what that means.

Firstly, the loan amount is really the quantum of VAT and Central Sales Tax levied on Tata Motors for 20 years. This loan amount is advanced on a year to year basis and not upfront. Therefore, at the outset, the amount of the loan depends on the sales made by Tata Motors (since that is how VAT and CST will be computed). As the HC notes, GoG has “made the entitlement of loan dependent upon the performance” of Tata Motors.

Secondly, this loan amount (which, to repeat, is the VAT and CST levied on Tata Motors) is subject to a maximum ceiling. The ceiling is 330% of the Phase-I investment by Tata Motors. As per the documents accessed by the author, the eligible amount of Phase-I investment as determined by the GoG is around Rs 2,200 crore. Therefore, the maximum ceiling would be around Rs 7,000 crore.

Again, it is useful to repeat here that this does not mean Tata Motors is given hard cash of Rs 7,000 crore upfront. Moreover, not only is the amount of loan not Rs. 9,000 crore or Rs. 10,000 crore as claimed, it is not even the maximum ceiling. Lastly, this is the maximum ceiling that the loan amount can ever go to.

Therefore, if Tata Motors do not make enough sales so as to be levied VAT and CST to the tune of Rs 7,000 crore (the maximum ceiling), it does not get yearly disbursements totalling to Rs 7,000 crore.

Thirdly, Tata Motors is required to provide prior subservient charge over its project assets in favour of GoG before the loan amount is disbursed annually. Therefore, this loan is not a simple unsecured loan frittered away to Tata Motors.

Fourthly, as the Gujarat HC notes, such a loan dependent upon recovery of VAT is found in other incentive policies of different states. Such states include Haryana, Orissa, Tamil Nadu, Andhra Pradesh, Bihar and West Bengal. Some of these states have Congress governments or governments of the UPA allies.

One wonders if Rahul Gandhi noticed this basic fact - that state governments do provide incentives to boost industrialisation - before hurling accusations. Indeed, whether or not Rahul Gandhi understands what crony capitalism means is itself a big question as this Firstbiz column says.

[Those interested in reviewing the language of the clauses conferring the loan may review Paragraph 16 of the HC judgement where the relevant resolution has been reproduced.]

Holistic approach (Paragraphs 29-31)

The Gujarat HC also particularly noted that such incentives must not be seen in isolation, but that the project must be taken as a whole and then adjudged whether it is in the larger public interest. To quote the HC:

“If the project taken as a whole is an attempt in the direction of enhancing the revenue for the State Government generating employment opportunities and securing other economic benefits to the State and the public at large, it will serve the public purpose.”

Boosting growth

As this author has previously written, the critical distinction between a business group getting government incentives, indeed, on the basis of a applicable-to-all-policy and an individual getting government largesse must be borne in mind.

It’s not as if Tata Motors is merely sitting on the land or other incentives to make a windfall as soon as it can flip the land or assign other incentives. It is establishing a serious manufacturing set up. This gives opportunities to several auto component businesses, ancillary and allied units and creates several opportunities around the area.

There is some value addition to the land and the state benefits tremendously in return. The entry of other auto giants such as Ford and Maruti Suzuki is a classic illustration.

We can perhaps contrast this directly with Robert Vadra, a family member of Rahul Gandhi, flipping land and making a windfall, benefitting from an overnight change in government policy. Whether or not there’s any illegality in the process is a matter now before the Delhi High Court.

The distinction, however, is important to understand when making off-the-cuff charges. Unfortunately, for Rahul Gandhi, the fortuitous timing of the Gujarat HC judgment in the Tata Nano case does not augur well for his campaign.