Efforts to strengthen norms on safety and emissions are among the top priorities of the government for the automotive sector. The year 2016 may continue to see policy interventions that have a medium- to long-term impact on shaping of the Indian automotive industry. In addition, the AMP 2026 (Automotive Mission Plan 2016-26) vision is to get India amongst the top three countries in the automotive industry for engineering, export and manufacturing of auto components and vehicles. Keeping this in mind, the pre-Budget talks from industry bodies continue to be in tune with creating demand. Lower excise duty, infrastructure spending and revival of the rural economy remain on the list from last year.
Steps such as increased spending on infrastructure, augmented industrial output, improvement in allied industries and overall economic growth are expected to have a significant impact on the commercial vehicle segment. Last year, the highways sector witnessed a 48% increase in outlay in the Union Budget; a similar increase in allocation of funds towards development of highways can be beneficial this year as well. There could be additional investments to introduce environment-friendly vehicles, if an accelerated depreciation is provided to the industry. However, the concern with reference to overloaded trucks has been ignored for a while now, which needs to be addressed to improve safety on national highways. The government should work on enforcing stricter norms on loads carried by trucks.
On the other hand, if the ‘end of life’ policy is announced in the Budget with favourable incentives, the demand for commercial vehicles is likely to improve. The policy could pro-actively and voluntarily help recycle older vehicles that breach new emissions and safety norms. With the phasing out of older diesel vehicles, the government has to allocate funds to improve their bus fleets with better and green technologies, positively impacting sales. Though the ‘end of life’ policy may only apply to commercial vehicles in the beginning, it can eventually apply to passenger vehicles as well as the two-wheeler segment. The Society of Indian Automobile Manufacturers (SIAM) has urged the retirement age of vehicle to be 15 years, with temporary incentives on the purchase of a new vehicle. It estimates that 30 million vehicles fall in this bracket, of which about 80% are two wheelers. Replacement of these can directly impact sales in the two-wheeler segment. It is the rural economy that mainly drives the domestic two-wheeler and tractor segment. Spend in the rural sector may also boost the demand for farm equipment. The agrarian economy has suffered from bad monsoon rains in the past two years. It is critical to expedite modernisation of agriculture by leveraging high-yielding seeds and bringing in robust irrigation systems to equip farmers to tackle irregular monsoon rains and maintain a regular flow of income.
The excise duty levied on SUVs, mid- and large-sized cars has proved to be a disadvantage for the segment. If addressed, it could boost demand, as sales in this segment are largely based on the cost of ownership sentiment. Rationalisation of the excise duty rate in just two brackets and merging of multiple taxes can provide some tax relief to the industry. The implementation of a unified GST is a much-awaited reform. Road tax, which is controlled largely by the state governments, and other indirect taxes which include R&D cess and octroi, if brought under the purview of GST, might provide cost benefits. However, the industry requires clarity on the implementation of GST and requests no further levy of taxes as it is already a highly taxed sector. The industry also lacks clarity on the corporate tax front, which was reduced from 30% to 25% during the previous Union Budget.
As the government moves towards green technologies, it is essential to support the hybrid and electric vehicles segment. Lack of electric vehicle infrastructure in the country is a dominant factor that affects consumer sentiment in this segment. The industry and the government have to work together to develop this segment, apart from granting substantial incentives. During the previous Union Budget, the government announced R75 crore towards electric vehicle adoption and manufacturing, and concession from customs and excise duties on specified parts for manufacturing electric vehicles and hybrid vehicles was extended to March 2016. But these measures alone are not substantial for the required growth and development of this sector.
Vehicle manufacturers are embracing more efficient and lightweight technologies. Component manufacturers may have to invest heavily in R&D to keep up with the changes. The auto component sector may also be impacted on account of policy interventions that impact vehicle manufacturers. This can potentially benefit component manufacturers if the 200% weighted deduction on in-house R&D facilities is extended to outsourced facilities. There could be an addition to capital investments in the industry if depreciation rates are enhanced, as requested by the Automotive Component Manufacturers Association of India (ACMA). To add to these, lack of power has forced manufacturers to set up gensets which involve diesel inputs increasing the cost of production, while the request for allowing input credit on diesel has been pending for a while.
For the automotive industry to meet the AMP 2026 growth targets, substantial support and policy interventions are required from the government across different levels of manufacturing right from original equipment manufacturers (OEMs) to suppliers. The government should continue to provide a stable platform for growth and development of the sector.
The author is partner & head, Automotive Sector, KPMG in India. Views are personal