WOWs and WOEs for the automobile sector

Updated: Jul 12 2014, 18:35pm hrs
AutoNew finance minister Arun Jaitley had already extended these excise duty concessions till December 2014.
A robust automobile sector represents the countrys collective aspirations and the overall health of the economy. However, the Indian automobile sector had been witnessing a decline in sales for the past two years.

In the Interim Budget presented by the UPA in February, excise duty on small cars, scooters, motorcycles, commercial vehicles and SUVs was reduced with an aim to give some impetus to declining sales. New finance minister Arun Jaitley had already extended these excise duty concessions till December 2014. This will enable automakers to maintain their prices and will sustain the upward momentum in vehicle sales.

Greater confidence for MNCs

In his Budget speech, the finance minister has proposed that the transfer-pricing regulations will be simplified in order to reduce litigation. This is a welcome step for MNC auto companies, especially luxury car manufacturers, who import knocked-down kits from their parents and assemble them locally. Similarly, it will benefit Indian auto companies who are exporting cars and kits to global markets.

The finance ministers assurance to investors that retrospective amendments to tax laws will be undertaken with extreme caution will improve the confidence of MNC auto companies who are looking to make fresh investments in the country.

Infrastructure development measures

The government has announced a number of investments in the infrastructure sector such as up-gradation of ports, building new airports, constructing metro network in cities with more than 20 lakh population, and an investment in the National Highways Authority of India and state roads of an amount of R37,880 crore. With this investment, the target of highway building of 8,500 km will be achieved in the current financial year. These investments in the infrastructure sector will positively impact commercial vehicles and construction equipment players.

The required push for rural growth

Arun Jaitley has announced several positive measures for the agriculture sector such as a price stabilisation fund, steps to set up a national market for farm produce, allocation of R8,000 crore for rural housing, irrigation schemes, new agricultural universities as well as initiatives to increase warehousing and rural internet connectivity. Although these measures will not have any direct impact on the auto sector, but as these measures will lead to the well-being of the farmers, they would have an indirect effect on the tractor segment.

The finance minister has announced that RBI will create a framework for licensing small banks and other differentiated banks. Differentiated banks serving niche interests, local area banks, payment banks, etc, are contemplated to meet credit and remittance needs of small businesses, unorganised sector, low income households, farmers and migrant workforce. The improvement in availability of finance is a major driver for increasing penetration of automobiles in the country.

Capability development measures

The increase in the FDI cap in the defence sector from 26% to 49% will help improving the overall capability and skill-sets of the manufacturing sector as the defence sector utilises complex and hi-tech processes for component manufacturing. Some auto component firms will also consider this as an opportunity to diversify into the defence sector. With the proposed launch of the national multi-skill programme Skill India, five new IITs and five new IIMs there will be a greater focus on developing technical and managerial skills for the entire manufacturing sector.

But there are some unmet demands

The auto industry had many more demands that have not been met in Budget 2014, such as equal rate of excise duty for all passenger cars, increased rate of depreciation to compensate for shorter ownership cycles, accelerated depreciation for commercial vehicles and vehicle life terminal policy. It remains to be seen how these will be looked at in the years going forward.

Rajeev Singh

(Nikhil Pingle, associate director, KPMG in India, also contributed to this article)

Rajeev Singh is partner, KPMG in India. Views are personal