The Budget 2010-11, which has emphasised consolidated growth and inclusive development, would have a positive impact on the auto industry. The Indian auto industry, which faced rough weather in the aftermath of the global financial crisis especially in the second half of 2008 and first quarter of 2009, recovered well in the second half of 2009. This was thanks to some measures taken by the government by way of cut in the excise levies by 4% across the board for both small and big cars and reduction in service tax by 2%. With the announcement, initiatives such as increased allocation in infrastructure, weighted deduction on research and development expenses and revised tax slabs for the middle class would definitely help sustain the growth momentum.
With concerns of fiscal deficit, the government has, however, partially reversed the stimulus package by increasing the excise levies by 2%. Thankfully, the service tax rates remain unchanged. Though retention of the stimulus package would have been welcomed by the industry, the change was perhaps well foreseen. Some OEMs are likely to pass on this marginal hike to customers, but this is not expected to have any significant impact on sales.
A 50% jump in weighted deduction allocation to 200% is an important initiative that will give the much-needed thrust to the R&D activities in the auto industry. Considering the immense importance that R&D has in supporting the Indian automotive sector with cutting-edge scientific research that helps them compete with their foreign counterparts, this is a thoughtful initiative. This will also help the industry address long-term issues like climate change, fuel efficiency, safety, etc.
Another concern that the Budget addressed was regarding components used in environment friendly vehicles (EFVs). It is common knowledge that though there is zero excise duty on EFVs, components used in these vehicles attract an excise duty of 8%. As a result, OEMs were not able to take full credit of the input tax. To address this anomaly, EFVs will attract 4% duty and also certain critical components will attract zero excise duty, while for certain components the duty has been reduced to 4%. Reduction of these duties will now pave the way for OEMs in reducing the final price of such vehicles since the CVD would be available to offset with output excise duty.
This Budget has also increased allocations by 13% for road transport from Rs 17,520 crore to Rs 19,894 crore in 2010-11. This in turn will have a visible impact in the road sector and help the government achieve its intended target of constructing national highways at the pace of 20 km per day.
Among other things, specific measures announced in the Budget such as revised tax slabs would increase the purchasing power of middle-class consumers which should also help propel growth in the auto industry.
Driven by domestic sales, Indian vehicle assembly is expected to post impressive growth figures in the near to mid-term. Light vehicle assembly is expected to grow at a CAGR of 13.5% over the next seven years, amounting to an average incremental assembly of nearly 4,50,000-5,00,000 units each year. With domestic capacity expected to reach nearly 5.6 million units in four years, existing players are now focusing on ramping up their capacity and production levels to cater to the additional demand.