The Union Budget 2013 will be presented at the time when the Indian automotive sector faces an uphill task in recovering its growth momentum. The strong comeback story of the automotive sector in 2010 and 2011 was followed by a tepid growth rate in 2012 and the performance in fiscal 2012-13 looks no different. In recent times, where India has successfully announced its potential to host the world’s costliest auto sport, Formula One India Grand Prix, sending positive signals to the world automotive economy, auto sales have strangulated amidst high interest rates, towering fuel prices, the ever-depreciating rupee, coupled with the general economic slowdown. Some of the investments have also been held back in view of the uncertainty.
The Indian auto component sector, being predominantly dependent on domestic original equipment manufacturers (OEMs), is also facing a sluggish growth. Global OEMs are increasingly shifting to indigenous production to reduce rising imports bills due to the volatile currency market, which could provide the next growth avenue for component players. While global OEMs are becoming indigenous, exports to their group entities could also grow with the focus on quality and international standards. The finance minister could restore sops in the form of export-linked incentives for companies meeting international quality standards to increase competitiveness among players to exploit this opportunity.
On a macro level, the Indian economy is on the verge of witnessing major tax and corporate reforms with the DTC, GST and the Companies Bill just around the corner. The recently concluded meet of the state finance ministers signalled further delay in the implementation of the GST. On the direct tax front, while the ministry may take some more time working on suggestions of the standing committee, it is speculated that some key DTC proposals may find their way in this year’s Budget. If so, surprises may be avoided by considering stakeholder representations before introduction of the new provisions.
With partial deregulation of diesel prices in fiscal 2012-13, the price differential between petrol and diesel is decreasing, which could result in soft diversion of demand from diesel to petrol cars. Phasing out of subsidy on