Union Budget 2022

Budget 2022: Why auto sector needs a holistic long-term strategy

Saket Mehra,
Krishan Arora
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Union Budget 2022 is crucial for upliftment of the beleaguered Indian automotive industry. The double whammy of the global semiconductor shortage and subsequent COVID-19 waves coupled with price hikes for fuel and commodity prices have led to higher input costs for automobiles as well as increase in logistics and shipping costs.

The effect has been seen across all segments and more particularly in the commercial vehicle segment due to lower demand for public transportation. Some immediate measures and a long-term strategy outline from the government in the upcoming budget are requisite for a sector which contributes almost half of the industrial GDP and is experiencing disruptions due to the pandemic as well as advent of new technologies around electric mobility and regulatory changes.

Industry expects the Union Budget to recommend certain provisions to ease the cost of doing business in India as well as incentivise manufacturers to invest in new age technologies and make India a preferred sourcing option in the global supply chain.

Automotive and mobility sector is expected to contribute very significantly for India to achieve its net zero emission status by 2070 through reducing emissions intensity by use of battery operated EV’s which have been identified as a viable option for ICE based vehicles.

The industry, which is now technically dependent on new age technology in electric mobility and peripheral infrastructure, welcomes any foreign or domestic investment across the segments as long as it promotes good value addition and localisation.

However, the current tax structures and pricing of inter-company transactions do impact the earnings and the Union Budget provisions should consider slew of incentives to foreign manufacturers such as concessional financing options, fixed interest subvention on loans availed in Indian Rupees, or a reduction in Minimum Alternative Tax (MAT) and should also consider simplifying the provisions around cross border transactions including transfer pricing procedures.

Further with the advent of mobility as a service (MaaS), clear interpretation regarding Equalisation levy will benefit the non-residents doing business in India. Additionally, bringing in certain relaxations in other regulatory areas such as transfer pricing margins, using specific period data for comparable, use of similar approach and methodology in transfer pricing as for Customs/SVB would surely help provide some needed relief to the sector.

In context to electric vehicles (EVs), states have come out with their own incentives’ schemes for EVs but the segment is yet to see a thrust from the central government dedicated to the establishment of EV infrastructure within the country. While an EV attracts a GST of 12%, lithium-ion batteries, when sold separately, attract a GST of 18%. The GST rates need to be standardised for better promotion of EVs and demand creation.

Also, with over 250 start-ups working on EVs, there is a need to provide necessary fiscal support to start-up enterprises which would further help in reducing the cost of e-mobility; pushing industry’s futuristic goal of net-zero carbon emissions in vehicles. Majorly, some new policy initiatives for EVs and inverted duty structure for components which were missed in the earlier budget announcement need to be emphasised on.

One of the key challenges the auto component industry faces is the widespread counterfeiting of auto parts causing losses to component players to the tune of over $15 billion. One of the reasons for growing grey is the high GST rate on auto components. A much more stable GST rate for auto components will play a crucial role in not only moderating the cost of vehicles but also in reducing the grey market operations.

There is a need to make the vehicles affordable (particularly the electric vehicles) for the end consumer as with the new stage of Corporate Average Fuel Economy (CAFE) norms, from next fiscal, further hike in prices is likely to happen. Apart from this, some cost percentage is being passed down to consumers, as industry witnesses stressed financials on the back of increased commodity prices.

If the government’s course of action is aligned with stabilising commodity prices, it will definitely help bolster consumer demand. Considering, amid the economic slowdown, the regulators had earlier made indelible efforts and implemented numerous norms to improve the safety aspect of vehicles and reduce harmful carbon emissions which have augured well for consumers and for the overall nation.

Altogether, the industry entails advanced automotive technologies in the global supply chain and reduced prices of new vehicles. Introduction of benefit in form of the much awaited RoDTEP scheme, with benefit varying between 0.5-1.5%, even though not comparable to erstwhile MEIS scheme (both having different objectives), was taken as a fair move by the industry especially in the two-wheeler segment and has some positive impact on the overall costs incurred.

There stands some bit of room to revisit this benefit especially for other segments apart from two-wheelers. In addition, the recently introduced Production-Linked Incentive (PLI) Scheme in the automobile and auto components sectors with specific focus on EV segment, is another significant step which envisions higher demand creation.

While it needs to be seen how the scheme will ultimately perform at an overall level, the industry has welcomed the move and is also awaiting addition of more products as part of the remaining budget outlay that was initially planned for this sector.

For the market suffering the after-effects of COVID-19, rising fuel prices have further been detrimental to consumer demand. With multiple pain-points as discussed above, there is a high expectation from the government in the upcoming budget to take useful steps and make constructive projections for the automobile industry to post growth in the coming financial year.

This article was originally published in The Times of India.