How can the automotive sector accelerate

The government must take the lead to increase investment in physical infrastructure, and also encourage people to buy environment-friendly small vehicles

By: | Updated: March 19, 2016 6:42 PM

Automotive is one of the key sectors within the manufacturing segment in India. The sector contributes around 7% to GDP, about 26% to industry GDP and roughly 49% to manufacturing GDP. In addition, the sector contributes almost 13% to excise revenue collection and employs close to 30 million people. From 2016 to 2026, as per the Automotive Mission Plan, the Indian auto industry is expected to grow 3.5 to 4 times, from the current value of $74 billion to $260-300 billion. By 2026, the total passenger vehicles sales in the country are likely to increase between 9.4-13.4 million units, commercial vehicles sales will rise between 2-3.9 million units, and two-wheeler sales are likely to grow between 52-55 million units. The industry is expected to contribute around 12% to India’s GDP and generate 65 million more jobs by 2026. We need to increase contribution of manufacturing GDP from 16-17% currently to 25%. This will not happen without a specific focus on the automotive sector.

Key developments

Early adoption of BS-VI norms: The government has decided on an early adoption of BS-VI norms from April 2020 for four-wheelers. This adoption will address the issue of rising pollution levels in our cities (of the 20 most polluted cities in the world, 13 are in India, according to WHO), while taking into consideration some of the international regulations on pollution control and increase in the number of vehicles annually (vehicle population on our roads is roughly 210 million and around 20 million vehicles are added annually). Probably a similar timeframe would be announced by the government for two- and three-wheelers.

Downward spiral in oil prices: With the steep drop in global oil prices (reaching a 10-year low in January 2016), the immediate impact is positive. However, in the long run, this drop can be unfavourable and deter the sales of alternate fuel vehicles (CNG and electric vehicles). Tough legislations might be required to address this issue.

Proposal of the Road Transport and Safety Bill, 2014: The Bill provides a framework for safer, faster, cost-effective and inclusive movement of passengers and freight in India. It also proposes to set up Motor Vehicle Regulation & Road Safety Authority of India, an independent agency for vehicle regulation and road safety which will be legally empowered and accountable to Parliament. With this Bill coming into action, we will have a sustainable transport system in the country.

Distress in rural economy: Rural slowdown has negatively impacted some of the segments in the automotive sector, such as motorcycles. Other segments, such as commercial vehicles and passenger vehicles, are doing well due to replacement demand, new product launches which addresses varied customer preferences, rise in the urban economy and overall positive outlook towards the economy. The government needs to adopt an out-of-the-box thinking to increase allocation to agriculture and generate rural employment to revive the demand.

Exchange rate fluctuation: Low level of exports compared to imports in the automotive sector brings about an unfavourable foreign currency exchange fluctuation, which has negative impact on the overall automotive sector.

Key issues

High taxes on vehicles: Vehicles are highly taxed, around 60-80%. Moderation in tax rates (40-60%) is required to boost sales. Tax incentives in the range of 20-30% will attract the customers to opt for environmental-friendly vehicles.

Inverted duty structure: Some segments of the industry, like trucks, are facing the inverted duty structure issue, which causes cash flow problems for the automakers. These could be resolved by refunding excess tax paid on input as well as by increasing custom duty which will provide a level-playing field for the domestic auto industry.

No income-tax incentives for environment-friendly small vehicles: No tax incentives are provided on the purchase of small environment-friendly vehicles, similar to benefits provided in the housing segment. If the government provides such incentives, it will make the purchase of environment-friendly vehicles more affordable for the public.

Budget expectations

Vehicle replacement incentives: These should be considered for replacing vehicles registered before 2005. This will also address the emissions issue.

Weighted R&D deduction: Although we have deduction for R&D, looking at the transformation in the auto industry and taking into account the drive towards Make-in-India and Skill India, we need to look at how more and more incentives can be provided for the development of innovation and skills at a local level.

Consensus to be built for implementation of GST at the earliest: GST should comprise of all indirect taxes, including tax on used vehicles, road tax, R&D cess and octroi to prevent cascading effects.

More incentives for environment-friendly vehicles: Currently, such incentives are not attractive enough to offset the increased cost while buying environment-friendly vehicles. The government could come up with attractive incentives to push customers to buy such vehicles.

Providing push to revive rural demand: Rural slump has impacted the sector a lot. With the second consecutive year of monsoon rains deficit, rural wages are unlikely to rise anytime soon. The rural consumption cycle is expected to remain under pressure in the near term. The Budget should give a push to the rural economy and help generate employment and demand.

The author is partner, Price Waterhouse, and an auto expert

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