Union Budget 2020 Expectations: Can The Government Revive The Ailing Automotive Sector In India?

Key Highlights:

  • The automotive sector in India has struggled in the recent months, with the economic slowdown not being kind to the sector and its supporting ecosystem
  • Consumer demand has taken a hit, with only selective silver linings in terms of growing numbers for automotive sales
  • The Union Budget 2020 is an event to watch out for, as Finance Minister Nirmala Sitharaman takes centre stage to deliver the annual budget speech on Feb 1
  • We take a look at India’s automotive sector and its growth, its current slump and what people (in the industry as well as consumers) can expect from the Union Budget 2020 with regards to seeing corrective measures for the automotive sector

Automotive Sector In India: A Brief Overview

In any economy, the automotive sector is considered to be extremely important as it has the inherent power to control and generate employment as well as revenue, increase GDP and drive industrial growth.

Following independence in 1947, the Government of India and the private sector launched efforts to create an automotive-component manufacturing industry to supply to the automobile industry as most cars in India till 1930s were imported and in the 1940s, there were companies which began setting up in India and expanding their production capacities, such as Hindustan Motors, Premier Automobiles, and Mahindra & Mahindra.

For the period post-independence and up to 1991, although companies came to India in the automotive sector including in passenger cars segment, utility and light commercial vehicles segment, medium and heavy commercial vehicle segment, scooter mopeds, and the motorcycles segment. But due to various issues such as license raj, red-tapism, corruption, closed economy, etc., major companies and big international players of the automotive sector were not able to enter the Indian market.

Growth After Liberalization Of The Indian Economy

Post liberalization in 1991, multinational automakers such as Suzuki and Toyota of Japan, Hyundai of South Korea etc., could invest into the Indian market, furthering the establishment of an automotive industry in India. As India began to liberalise its automobile market in 1991, several foreign firms also initiated joint ventures with existing Indian companies.

The variety of options available to the consumer began to multiply in the 90’s, whereas before there had usually only been one option in each price class. By 2000, there were 12 large automotive companies in the Indian market, most of them offshoots of global companies. Maruti Suzuki was the first, and the most successful of these new entries, and in part the result of government policies to promote the automotive industry.

The Indian automotive industry has seen a shift in technology from Petrol Vehicles to Diesel vehicles, from Petrol and Diesel to LPG/CNG vehicles and then to the latest technology of Hybrid or Electric vehicles.

Union Budget 2019: A Recap For Automotive Sector And Budget Provisions; Push On Electric Vehicles

In the recent Union Budget, i.e., Finance (No. 2) Act, 2019, out of the 10-point vision of Government, emphasis was laid on many sectors, including the automotive sector. Further, the government also provided tax incentives for purchase of electric vehicles. The said incentive was given by way of insertion of Section 80EEB which provides deduction of Rs. 1.5 lakh to an individual assessee, in respect of interest on loan taken for purchase of an electric vehicle from any financial institution.

However, electric vehicles are not a new concept. During April 2012, the Indian government planned to unveil the road map for the development of domestic electric and hybrid vehicles (xEV) in the country. The Government has proposed to set up Rs. 740 crore research and development fund for the sector in the 12th five-year plan during 2012-17. The idea was to reduce the high cost of key imported components such as the battery and electric motor, and to develop such capabilities locally.

Sentiment Towards Electric Vehicles And Continuing Slump For Auto Sector

Electric cars are considered as economical long-term investments, as one doesn’t need to purchase gas, but needs only to recharge the battery, using renewable energy sources. According to The Economic Times, 60% of Indian customers expect fuel prices to go up in the next 12 months and 58% expect to buy a new car in the same time frame. Most consumers are looking to buy a car which gives good mileage. According to the same source, 68% of Asian drivers expect higher mileage from their cars due to the higher fuel prices. This has encouraged 38% of Indian automobile consumers to switch to electric or hybrid cars.

Due to this change in the market, many companies, such as Toyota, have planned to introduce electric vehicles in India; and Suzuki has tested almost 50 electric prototypes in India already, according to Mashable. In 2019, Hyundai launched India’s first electric car, the Kona Electric.

Even after the Budget, the Indian Government vide Taxation Laws (Amendment) Act, 2019 reduced the tax rate for new manufacturing companies (i.e. incorporated after 01.10.2019) to 15% thereby providing a big relief to automobile sector also who can take advantage of this tax rate cut and reduce their cost and working capital.

However, despite of such amendments, the demand in the automobile sector has reduced drastically and the sector as a whole is going through a very rough patch. As per recent news report, Maruti Suzuki India’s production has been reduced continuously for seven months and eventually by 33.99% in the month of August 2019. While there have been some promising signs for Maruti Suzuki (net sales increased by 5.28% in December 2019 compared to December 2018), it remains to be seen if the demand continues to sustain going forward.

The said slow demand has considerably affected major players in the automotive sector and they are being forced to curtail their production, reduce employees, cut operating cost and take every possible measure to reduce their losses.

Union Budget 2020 Expectations For The Automotive Sector In India

With the first Union Budget of 2020 looming near, there are various factors which need to be accounted for those engaged in the automotive sector in India and certain corrective measures need to be rolled out ASAP.

Our expectations for those engaged in business in the automotive sector in India as well as for automotive consumers in India (with regards to the Union Budget 2020) include:

  • A reduction in personal tax rate and increase in the tax slabs, which can increase disposable income in the hands of buyers and may help in increasing demand overall and consequently in automotive sector also.
  • A probable reduction in current tax rate of 22% for old manufacturing companies and non-manufacturing companies to 15%, thereby reducing their cost of operations and reduced losses and increased profits.
  • Introducing incentives for persons manufacturing electric vehicles in India such as additional depreciation of 10% on plant and machinery purchased and used for manufacturing EVs.
  • Giving long-term loans at lower rates to companies manufacturing electric vehicles in India for purchase of plant and machinery; This will help in reducing interest cost and thereby increase working capital
  • The automobile industry has recommended to bring down the prices of automobiles by way of slashing the GST rate from 28% to 18% in order to boost the demand. This is of utmost importance considering the implementation of Bharat Stage – IV emission standards. The slash in GST will boost the demand and this would negate the fall in demand and increase of prices.
  • Presently, the major raw material used in manufacturing of Electric vehicles is lithium battery and the same is subject to a custom duty of 5% and GST of 18%. Although, EVs are taxable at 5% but the high tax rates on raw material makes the end product expensive. Hence, the industry seeks a cut in custom duty while importing the lithium battery to 0%. This would help the manufacturers to reduce the major cost which would in return make the EVs cheaper for the public.
  • The government shall promote and incentivise the infrastructure-related companies which are into charging of EVs. This will enable a strong EV-centric ecosystem and will add to the long-term goal of having maximum EVs on road by 2025. Even if EVs are brought to road, the major concern will be the supporting infrastructure which is almost non-existent right now.
  • Government has already announced the use of EVs in the public transport but nothing gas materialised yet. The auto makers are eagerly waiting for a word from the Finance Minister in this regard.
  • Furthermore, the EV sector shall be included in the priority sector lending which means that they will access to more credit as compared to the present scenario.
  • The personal loan interest rates on buying the two-four wheelers shall be lowered down as an interim measure to boost the demand and revive the ailing auto sector.

These measures, if implemented in a systematic and phased manner, can surely help in reviving the automotive sector of India and boost demand across the board.

While it remains to be seen how diligently the Government caters to the industry needs and improves the consumer sentiment, one surely looks for answers from the Government at a time when the economy is hitting record lows.

Your move, Mrs. Sitharaman.

Written By

Amrita Deol and Varun Garg

Amrita serves as an Assistant Manager in Coinmen’s Corporate Secretarial Services, whereas Varun is a Senior Consultant in the firm’s Financial Accounting Services.

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