The current financial year has been a roller-coaster ride for the automotive industry. The year began with a positive demand momentum, but the industry also faced headwinds. The tax collection at source (TCS), ban on diesel vehicles above 2000cc in Delhi NCR, and finally demonetisation had an adverse impact on sales.
Automotive industry had ‘great expectations’ from this year’s Union Budget. But there were no direct measures for the industry. However, a lot of the structural initiatives announced will have derived benefit for the industry. Some of these are:
* The focus on increasing farm credit to Rs 10 lakh crore will have a positive effect on the tractor segment. The two-wheeler segment will also benefit as a result of better credit flow to the farming and rural sectors;
* Rural investment outlay has been increased by 24% to Rs 1.87 lakh crore. This will have a multiplier effect on rural income across various demographic segments. Automotive and farm equipment segment will see demand uptake;
* Aggressive growth targets to increase capital expenditure on infrastructure, affordable housing is expected to increase demand for commercial vehicles;
* Reduction in personal income tax rate for individuals earning between Rs 2.5 lakh and Rs 5 lakh will have some mild positive impact on the two-wheeler and compact car segment;
* The policy initiatives to improve the availability of credit and lower interest rates will likely support positive consumer sentiment;
* Investment in railway and driving integrated multi-modal logistics will be an interesting opportunity for the automotive industry to review their logistics network and optimise cost;
* Continued emphasis on skill development is a welcome step. Automotive industry should work together to leverage these resources to build the pipeline of technical and managerial talent. Availability of skilled human resources will build the competitiveness of the automotive industry in the longer term.
The Budget was silent on some of the automotive industry expectations that may be addressed through subsequent policy initiatives:
* Older vehicle fleets are known to be the highest polluters. End-of-life vehicle scrappage incentive should be considered to encourage modernisation of the vehicle fleet. This step will be favourable for the environment and also provide impetus to the automotive and component industry demand;
* Governments the world over have invested in supporting the demand and building the recharging infrastructure for hybrid and battery electric vehicles (xEV). The government can act as a catalyst for the development of the xEV industry in India;
* India has one of the highest levels of road fatality. The government should consider adoption of advanced safety technologies through regulatory intervention;
* Incentives to promote innovation and R&D will strengthen the industry. Support for automotive electronics like the one under the M-SIPS should be further expanded to attract global companies to invest in India.
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The automotive industry is one of the most robust sectors within manufacturing. It has a significant multiplier effect on the economy and is an employment generator. Its technology-intensive and globalised nature provides plenty of headroom for growth. To ensure the success of Make-in-India, the government must aim to prioritise the healthy development of the automotive industry.
The author is partner, Management Consulting, PwC