The auto industry has been seeking a clear roadmap on vehicle scrappage policy. Also, there are several major announcement and steps awaited from the government of India to help the country’s auto industry at large to grow. Expect the Union Budget 2021 to come with an answer.
The Union Budget 2021 would be presented at a time when the Indian economy is limping back to normalcy and there are various opinions and views on the sustainability of the recent demand for across most industries. The question of pent-up vs. sustainable demand is a common conversation across market participants and each has his or her own view.
However, it is extremely difficult to quantify the same. In this backdrop, the Union Budget 2021 would play an important role as the Finance Minister has touted this budget to be the most significant for India in a hundred years and has asked suggestions from different industries.
We look at what it could entail for the Indian auto sector which has bounced back handsomely in the last quarter across key segments. Here are some of the expectations from the Union Budget 2021 for the Indian Auto sector.
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Vehicle Scrappage Policy
One of the most awaited announcements from the government of India. Expect it to finally happen during the Union Budget 2021. An incentive-based vehicle scrappage scheme for the removal of old vehicles, where incentive will be given in the form of 50% reduction in GST and 50% reduction in the road tax and registration charges would be announced by FM. (The age qualification should be kept for vehicles older than 15 years).
The vehicle scrappage policy has been talked about for almost 3-4 years now but has not yet seen the light of day. However, if recent comments by Union Minister for Road, Transport and Highways, Nitin Gadkari were anything to go by, there could be an announcement soon. We believe a mandatory scrappage policy would be meaningful for the industry revival (especially the CV sector) than a voluntary policy.
Boost to rural and infrastructure spending
Increased rural spending and infrastructure spending to boost two-wheeler, tractor and commercial sales are expected to be announced in the upcoming Union Budget 2021. This will not only help the government to address the concern regarding the abovementioned sectors of the auto industry during this unprecedented crisis period but will help the ailing Indian economy to move towards a faster revival.
Also, focusing on the rural sector would help the government to pacify the farmers’ agitation to some extent, which has been bothering the government for quite some time, since the announcement of the new Farm Bill. Interestingly, when the entire country’s economy was hammered so badly by the Coronavirus pandemic, the rural sector remained resilient and continued its growth story. While the other segments of the Indian auto industry suffered a major blow, the tractor sector’s sales volume remained satisfactory.
Hence, the government is expected to boost the spending in the rural sector that will improve it further and encourage the sales of two-wheelers, tractors as well. Rural India attributes a large number to the total two-wheeler sales of the country.
The Indian government, MoRTH, NHAI have already emphasised the importance and its focus on infrastructure development across the country. Hence, the Union Budget 2021 is expected to lay out a proper roadmap how the spending in this segment will take place. Also, expect a major chunk of budget allocation to go in this segment, which would encourage the sales of commercial vehicles, construction equipment etc.
Income tax incentive or cuts to boost 2W and PV sales
The Union Budget 2021 is expected to boost the domestic consumption of two-wheelers and passenger vehicles by introducing income tax incentives or cuts that would give relief to the citizens in this pandemic situation. This will also help the consumers to make buying decisions who have been holding their purchases of new two-wheelers or passenger vehicles in a bid to preserve cash.
Such a move will not only help boost the consumption in the abovementioned segments of the Indian auto industry but will also help the domestic economy at large.
EVs to be energised with new steps
Electric vehicles and electric mobility have gained much traction in the last couple of years. The current government has been focusing on the implementation of green mobility through various moves. Expect the Union Budget 2021 to come up with some major steps that would accelerate the growth of this segment. These steps could encourage the manufacturers, as well as the consumers also.
The government might reconsider the current taxation framework applicable to raw materials and the final product when it comes to electric vehicles. The raw materials currently, draw 18% GST, while the tax on outward supplies is at 5%. This leads to an implicit inverted duty structure for electric vehicle manufacturers.
The government might consider giving some special deductions for interest on loans for automobiles. It could expand the availability of tax deduction of interest on the loan for electric vehicles to other vehicles.
While several automakers in the country are willing to manufacture EVs locally, there are multiple barriers they face. Apart from the tiring tax structure, battery procurement is one step. The lack of availability in the made-in-India battery segment leads the companies to import lithium-ion battery from China mainly. The battery being the priciest part of an EV, the abolishment of 5% customs duty on lithium-ion cells will allow the battery manufacturers to commence production in India, instead of importing the whole battery unit from overseas. Such a move will not only promote electric mobility through local manufacturing but save crores as well.
Despite the availability of FAME schemes (currently FAME-II), electric mobility couldn’t gain the desired pace in India. To promote green mobility, the government should introduce incentives on purchasing of the low-speed EVs, which will enable the sustained provision of affordable and environment-friendly transportation options for the masses. Also, waiving off tolls for the EV fleets for one year could come as a huge boost to the growth of electric mobility in India. It could be one of the announcements from the FM in the Union Budget 2021.
Boost to domestic auto component industry
With the government promoting its idea of Atmanirbhar Bharat or self-reliant India through ‘Vocal for Local’ campaign, one of the major announcements could be import duty increase for many auto components. Such a move will help the growth in consumption of domestic auto parts, for both the EV and ICE components.
The auto component industry accounted for 2.3% of India’s Gross Domestic Product (GDP) and 25% of manufacturing GDP in 2018-19. Also, it provided employment to around 50 lakh people in the same fiscal. Apart from that, as Automobile Component Manufacturers Association (ACMA) forecasts, the Indian auto parts export to overseas is expected to reach $80 billion by 2026. Expect the government to outline a roadmap for the auto component industry to walk that growth path.
Also Read: Vehicle safety: To save or not to save?
(Jay Kale is the VP Equity Analyst, Auto and Auto Ancillaries at Elara Capital, working in the domain for last one decade.)
(Disclaimer: The views expressed in the article above are those of the authors’ and do not necessarily represent or reflect the views of Autofintechs.com. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.)
