Budget 2023: Expectations for automotive sector | The Financial Express

Budget 2023: Expectations for automotive sector

While India has been able to manage inflation well thus far, we are not insulated from global inflation.

Toyota Takaoka plant
Representational image courtesy: Toyota Takaoka Plant.

Rajat Mahajan

Automotive sector is a large contributor to India’s manufacturing sector and employs close to 34-37 million direct and indirect jobs. Pandemic led disruptions put brakes on the growth of this sector. Industry witnessed some unprecedented times where demand dropped, commodity prices increased, key components were not available, and capacity utilisation was low. The sector has bounced back strongly on the back of revived demand with signs of improving component availability. At the same time, Electric vehicle adoption and awareness is on the rise however challenges remain as well.

While India has been able to manage inflation well thus far, we are not insulated from global inflation. Input costs including imports are expected to rise and at the same time elevated oil prices adding to inflation. This will have a direct impact on the price that the consumer is paying for vehicles. Electric vehicle is gaining popularity across segments and several OEMs are launching new EV models. Faster adoption will happen if the prices of the battery and other components come down and at the same time consumer anxiety around charging infrastructure is addressed. The industry is going through a technology transformation requiring significant investment and at the same time is facing inflationary headwinds.

Even though the outlook is uncertain, high GST and direct tax collections has enabled the government to support the industry. Consumers will be looking for affordability and safety. Automotive vehicle and component manufacturers will be seeking investment support and cushion from rising input costs. Focus of the government will be on employment generation, upskilling and reducing import bills.

At the outset, key consumer trends are very positive. Vehicle sales across sectors in PVs are all-time high. In our recent survey, nearly 93 percent of the vehicle owners who acquired their current vehicle now intend to buy a new vehicle. In case of EVs there is a jump of 60 percent from last year in terms of number of consumers preferring EVs but are cautious. Around 43 percent of the consumers are concerned about charging infrastructure and 40 percent are unsure of the safety associated with battery technology.

GST rationalisation

It is imperative to continue to aid this growth story. For EVs, while the FAME policy was introduced to solve for the affordability issue and will help in adoption by bridging the price gap between ICE and EVs, the policy is valid till Mar 2024, and a continuation plan beyond this timeframe would be helpful. It will help resolve certain concerns around high initial cost, battery replacement cost and low resale value. EVs currently attract a 5 percent GST, but the EV components are at 18 percent or 28 percent. Lowering GST for components will reduce the overall costs, along with part costs during vehicle service.

With investment in technology OEMs along with component players have been able to bring improvements in driving range. More than half of surveyed consumers would wait between 10 and 40 minutes for their vehicle to charge from empty to 80 percent at a public charging station, challenging conventional wisdom that charging time has to be at par with filling conventional fuels. Given this context, charging infrastructure needs a big solve.  FAME II provides subsidy for EV chargers, but the utilisation has been very low. Till July 2022, about 50 chargers were operationalised, while the outlay was for more than 2,700 chargers. Main roadblock is high cost of allied infrastructure like power supply and land cost. In our research, around 33 percent of the consumers want dedicated EV service station equipped with amenities which will need more land. Hence the subsidy should be revamped to cater for these needs as well to encourage set up of public charging since its crucial for the next phase of EV growth.

Future of EVs

On EV infrastructure and ecosystem, promotion of battery refurbishment, reuse (second life) and recycle of batteries needs a definite push. While this is a mid to long-term solution to reduce the overall cost of the battery, the policy around battery swapping should get finalised. Tax breaks rather than direct short-term subsidy, carbon credits/green credit for reusing or recycling EV batteries, subsidy on power supply for battery swapping setups, low-rate leasing options for land are a few areas government can focus on. There have also been requests to announce EV lending as priority sector lending given new business models will emerge like battery subscription and battery as a service.

Earlier there were differences in GST for EVs, EV without battery and the battery itself. This caused variations in input credit ability and hence increased cost for customers. Now with these products at the lowest GST bracket, it is making EVs more affordable. GST on EVs has been reduced from 12 percent to 5 percent and Li-ion battery packs and charging stations from 18 percent to 5 percent. This is a new slab created only for e-mobility. We do not expect any changes in this slab right now, bigger issue is indigenising technology and reducing the import duty especially in this inflationary world.

Currently, the import duty on lithium-ion cells is 5 percent whereas the import duty on lithium-ion battery is 15 percent. Any reduction in the import duty rates of parts to manufacture lithium-ion batteries in India, will reduce cost and increase demand.  This should be a favorable development since India is severely lagging in Li-Ion battery production and is having to import 70 percent of its Li-Ion battery requirements. Import duty reduction in duty rates of parts, will also align with the PLI schemes such as ACC Battery manufacturing as well as automotive PLI scheme, which relies heavily on domestic value addition in India. Thus, made-in-India batteries will contribute to building local manufacturing space as well as cut down import dependency.

Vehicular safety

Safety and convenience are gaining importance. We have seen a mean shift in price point to around Rs 10 lakh which indicates that consumer is willing to pay more. Government is also moving in the right direction by mandating 6 airbags. A PLI type of scheme is needed to mitigate immediate cost escalations to accommodate these mandates. The cost involved in development and procurement of safety airbags will add up to the concerns of OEMs. If this is not addressed, each car sold in the small to mid-level segment would get a minimum price hike of approximately Rs 25,000 to over Rs 35,000.

The Auto and Auto Components PLI received tremendous response and is in its first year (2022-23) out of the five years it is valid for. Since the incentive calls for 50 percent localisation (a step up from the 20 percent we see today), it is forward-looking. It remains to be seen how many OEMs can achieve the required threshold sales in the first year 2022-23 to qualify for the incentive, especially in the 4W category. Since the battery forms close to 40-60 percent of the cost of the vehicle (depending on 4w vs 2w) and certain other parts contributing to 10-15 percent of the vehicle must be imported, the 50 percent localisation is only possible if there is significant localisation in battery packs and BMS/sensor assembly. Hence the real benefits of this scheme will only come with scale.

It is imperative to address the R&D capability and investments as well, given the evolution of technology in the automotive space. These are long term changes and will need commitment from industry and government to bring the best-in-class products at affordable prices to the Indian consumer.

The author is a partner at Deloitte India.

Disclaimer: Views expressed are personal and do not reflect the official position or policy of Financial Express Online. Reproducing this content without permission is prohibited.

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First published on: 29-01-2023 at 12:27 IST