Budget 2022: No immediate respite but long-term benefits for Auto sector

For the Indian automobile industry, the Union Budget 2022 is a mid to long-term as well as a forward-looking budget. The industry, which faced several roadblocks, such as the semiconductor shortage, BS-VI regulations, pandemic-induced restrictions in different states over the last one year, had expected rationalisation of GST rates and reduction of duties to create additional demand for the vehicles. As high GST rates are prevalent, the aftermarket industry faces a significant challenge of counterfeiting auto components, which has not been addressed in the budget. The announcements were expected to improve the tax base through better compliance and transparency, but these issues were not touched upon by the government. However, some other announcements which are not directly linked to the sector, are likely to give an impetus to the sector in long-term.

The budget proposals, inclusive of regulated digital currency and issue of sovereign green bonds, are a welcome move. While the regulated digital currency to harness blockchain technology is a progressive, the issue of sovereign green bonds could be the key enabler for entities in public sector to increase their efforts towards decarbonisation and reduction in oil import bill. The bonds could be used to mobilise resources as part of the government's borrowing programme for creation of large-scale battery storage projects.

The proposed battery swapping policy announced will accelerate innovation through use of emerging technologies and at the same time, reduce the cost of ownership as the end consumer will be able to use Battery-as-a-Service (BaaS) under different subscription models. The EV segment would also get a fillip along with formulation of interoperability standards to redefine mobility. Further, setting up of special mobility zones to encourage use of fossil-free fuel for public transportation is expected to bring changes in the public transportation segment and would foster manufacturing and assembly of e-buses for urban transportation.

Moreover, the allocation of INR 195 billion under Product-Linked Incentives (PLI) scheme for manufacturing of high efficiency modules for solar power would give impetus to the renewable energy sector, which would incidentally be a clear enunciation towards energy transition and climate action part of India’s commitment towards becoming Net Zero by 2070. This would also motivate original equipment manufacturers (OEMs) to invest in new technologies.

Further, the proposals in the budget would create growing opportunities for the Indian auto component manufacturers, as 25% of the defence R&D budget is set aside for start-ups and private entities in the financial year 2022-23. The slashed Customs Duty on steel products to 7.5% from 12.5%, and exempting duty on import of steel scrap resonates well with the self-reliant India. A rise in the standard rates of the electronically operated vehicles (EVs) will encourage importers to concentrate on completely knocked down (CKD) parts for imports, rather than importing EVs to India. This will promote the Aatmanirbhar Bharat goals for value-added manufacturing and reduced imports.

Overall, we see far-sightedness in the announcements and believe that the industry would resume to a level with resolutions from both demand and supply-side challenges overtime.