By Parul Nagpal and Shailja Sood
The Union Budget 2022 made some announcements that are expected to boost the local manufacturing and overall ecosystem for electric vehicles in India in the long run.
The past two years have been difficult for the economy with the onset of the second wave of the pandemic coupled with the looming threat of Omicron that has decelerated the growth of the Indian economy. With this background, responding to these anticipations, Finance Minister Nirmala Sitharaman presented the Union Budget for 2022-23 this week, which was the second budget amid the pandemic and aimed to set the tone for focused government spending to boost growth and provided a sharp increase in public investment and capital expenditure provision, thus, laying a foundation and blueprint of the economy over ‘Amrit Kal’ of the next 25 years – from India at 75 to India at 100.
Union Budget 2022 sets the pace for the Indian Economy’s growth trajectory amidst the challenges brought forth by the pandemic. Budget 2022 seems to be an articulation of purposeful intent enabled by a clear action plan; the government has wisely continued on the path of prioritizing economic growth with calibrated fiscal prudence.
The Indian automotive sector, which is a significant contributor to the nation’s GDP, is witnessing rapid developments triggered by the implementation of the ‘Production Linked Incentive’ (PLI) schemes which is a key pillar of the “Atmanirbhar Bharat” coupled with various other measures for uplifting the Electric Vehicles (EV) sector which is proving to be a gamechanger for automotive ecosystem.
Although the budget did not offer much relief to the automobile sector, but it has announced a couple of measures to boost the Indian auto industry and offers continuity and additional opportunities to drive multi-year growth. These would include the new battery swap policy to encourage electric vehicle adoption, electric vehicles for public transport, and opening defence R&D to private players for the development of auto components, support for MSMEs etc. and are demonstrative of the government’s intent to create a paradigm shift to cleaner and environment-friendly automotive ecosystem.
Key takeaways of the Budget 2022:
- Capital Investment commitments – Government’s focus on infrastructure through PM Gati Shakti and National Infrastructure Pipeline would be a big boost to the sector. The government has announced a sharp jump of 35.4% in capex outlay to Rs 7.5 lakh crore next year as against Rs 5.54 lakh crore in the current year.This move will provide the much-needed impetus for the commercial vehicle sector, especially the M&HCV segment, which has witnessed sharp demand contractions over past two years.
- EV Battery Policy – One of the significant announcements of the Budget 2022 is the battery swapping policyand interoperability standards, which has the potential to be game-changer in catalysing the migration to EVs and furthers the agenda for green mobility. Also, the government’s move to create special mobility zones for EV along with encouraging the private players involvement to create sustainable and innovative busines models for battery will boost the entire EVindustry of the country. This is expected to go hand in hand with the recently concluded PLI scheme for ACC batteries and automobile and auto components.
- Electric Vehicles for Public transport – The Budget 2022 proposed the implementation of clean & electric vehicles in the commercial vehicle sector. The move will help auto companies to produce and manufacture electric buses and electric commercial vehicles for public transport, thus reducing the toll on fossil-fuel-generated vehicles. Moreover, public transport running on battery-powered vehicles will certainly benefit from a lower cost of running, as well as see a drop in emissions.
- Opening R&D defence to private auto component makers – Another big announcement of the Budget 2022 as now, private automakers can make bids for supplying auto components to our defence arsenal. This move could provide auto component players with a new revenue and growth area.
- Boost to local parts manufacturing – To catalyse growth in the auto sector, the Budget 2022 proposed to increase customs duty rate on kits for conversion of petrol/diesel to CNG/LPG/ Propane driven vehicle and revocation of anti-dumping & CVD duty on certain steel products in order to boost domestic manufacturing by increasing capex programs. Further, an amendment is made to clarify that import of EV in an SKD form even when some of the parts / sub-assemblies are inter-connected would attract the concessional rate of BCD of 25%/ 30% (depending on vehicle type) is a welcome change for the industry.
However, the other expectations of the auto industry for instance the long-standing demand of the automotive industry for lowering GST rates was yet again side-lined by the government. All the auto and related products are currently taxed at the levels of luxury items and fall in the bracket of highest 28% slab topped by GST cess levied at the rate of 1% to 22% if the vehicle exceeds a certain engine or body size, thus, making vehicles unaffordable for the Indian buyers.
In conclusion, overall, the Budget 2022 clearly seems to be growth-oriented with a clear focus on digitization, electrification, infrastructure development and ease of doing business; aiming to propel a long-term growth and progressive development of the Indian economy but it is unlikely to immediately trigger a growth and consumption revival within the auto sector though it is curated to generate long term boost and growth of EV ecosystem in the country.
(Parul Nagpal is Director with Indirect Tax practice of Ernst & Young. Supported by Shailja Sood, EY.)
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