Union Budget 2021-22

Need of the hour: Measures to increase demand and consumption

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The Indian automobile industry has high expectations from the upcoming budget and is considering it as a ray of hope with robust policies and investment interventions. The continued reinforcement of the budget focus and thrust on rural economy, infrastructure investments and agri-logistics is construed upon.

As urban India gradually recovers, the post-pandemic recovery is rural focused and is manifested into relatively robust demand in the specific product categories, like tractors. Undoubtedly, as for other sectors, in the automotive sector too, measures to increase the demand and consumption of products and services is the need of the hour. Thus, a reformed strategy, both in personal and corporate taxes, is a pre-requisite to the road to economic recovery.

Expectations of EV manufacturers

As country’s ambition is towards electric mobility, the budget should aim to reduce compensation cess rates and make temporary reductions in GST to enable cheaper availability of electric vehicles (EVs). Budget must consider expanding the availability of tax deduction of interest on the loan for EVs to other vehicles. Altogether, EV manufacturers hope for policy changes, ease of finance and reduction of GST slabs from the upcoming Union Budget. The main key expectation is the enablement of charging infrastructure in the country at a faster rate. A smoother regulatory approval system would boost the sector with inclusion of retro fitment incentives in FAME II (Faster Adoption and Manufacturing of Hybrid and Electric Vehicles India) policy.

Segment Current Taxes
Bikes under 350cc 18% GST
Bikes above 350cc 3% cess + 18% GST
Small cars and mid-size vehicles 18% GST + cess
Luxury vehicles and SUVs 28% GST + cess

Clarity on Production Linked Incentive scheme

Similarly, the auto component industry awaits clarity and operational details on Production Linked Incentive (PLI) scheme to boost manufacturing. PLI had allocated INR 57,000 crore for the auto segment and another INR 18,100 crore for the advanced chemistry cell batteries (Li-Ion battery); having the potential to initiate huge forthcoming investments and further help the automobile industry achieve globally competitive scales in the chosen segments. Hence, automobile original equipment manufacturers (OEMs) are also focusing on reducing dependency on imports and establishing supply chains with Indian vendors in segments where automotive ecosystem has limited capabilities. Moreover, the competitive import tariffs need to be startegised to promote domestic manufacturing towards expected global trade trends.

Introduction of new scrappage policy

Additionally, announcing of a new scrappage policy is a high expectation from the budget this time as it would help to scrap more than 15-year-old vehicles, buses and trucks enabling in reduction of prices of automobiles with the use of recycled materials. Such steps would lead to the growth of commercial vehicles (CVs) segment, increasing the demand and consumption of M&HCVs as fleet operators had held new vehicle purchases, resulting in the 85% and 55% contraction in CV retail volumes witnessed in Q1 and Q2 FY2021, respectively. Hence, as an endeavour to drive the Atmanirbhar Bharat Abhiyan, startups and MSMEs must be encouraged with budget pronouncements. The existing sluggishness may be removed with induced government spending and investment in infrastructure.

Benefits of New Scrappage Policy
Monetary incentives to owners to surrender old vehicles
Boost demand for new vehicles
Reduce dependency on steel imports
Support in reducing carbon emissions
Combat pollution emissions from old vehicles

Focus on making vehicles affordable

With rising prices of vehicles post introduction of new safety technologies, there is high need to support demand creation. Thus, with focused incentives to OEMs and consumers, the upcoming budget moves should emphasise on making the purchase of a vehicle affordable by the potential consumers. The focus should also be made to induce the demand for vehicles from corporates with provision of Input tax credit on GST paid by corporates on vehicles used for official purposes. Road and registration taxes along with the cost of acquisition of passenger vehicles (PVs) may be reduced in this aspect. These moves would certainly provide the much-needed fillip to auto sales in the country and remove the risk aversion in people about incurring capital expenditures (capex) on purchasing a new vehicle.

Moreover, in view of sequential recovery in economic activity across segments, Investment Information and Credit Rating Agency of India has provided an improved volume outlook for most segments of auto industry. During FY2022:

  • M&HCV truck segments would grow by 40-45%
  • LCV segment to grow by 15-20%
  • PV segment to grow at 15%
  • 2W segment would grow at 11% supported by strong growth in motorcycles.

The volume estimates for succeeding years are expected to hinge on sustenance of the economic momentum and the overall infrastructure and capex spend in ensuing times.

Overall, the government needs to reiterate and take steps to make the automobile industry thriving in India thereby build an automotive hub in the nation which would certainly result in elevating India’s GDP growth.