Decoding Budget 2023-24 for the automotive industry | The Financial Express

Decoding Budget 2023-24 for the automotive industry

Further, there were a few areas where the budget did not focus much. Road accidents are a major cause of death and injury in the country, hence we need measures to improve road safety.


By Rajat Mahajan

The Indian automobile industry is one of the largest in the world and plays a critical role in the country’s economic development. India has overtaken Japan as the 3rd largest light vehicle market in the world in 2022, led by a strong demand for last-mile deliveries and personal mobility after Covid-19. The Indian government has sought to further boost the industry in its recent budget for 2023-24.

In terms of positive developments, there have been various proposals strengthening ‘Make in India’ initiative by the government of India. This is a welcome move to ensure the industry is self-sustained and not affected by global disruptions.

The budget has proposed a reduction in customs duty (5 to 20%) on machinery and capital goods, used to produce lithium-ion batteries for EVs. This should help in reducing the price of EVs in the country from mid- to long-term and ensure the Advance Cell Chemistry PLI scheme is well supported. This is a big step in making electric mobility an affordable and a lucrative choice for the common man.

National Green Hydrogen Mission is an initiative by the government, focused on promoting the usage of Hydrogen as a renewable and clean energy source, has received Rs. 19,700 crore as part of the national budget 2023. This will go long way in realising the green mobility goals and aspirations.

The budget exempts denatured ethyl alcohol from basic customs duties. Denatured alcohol is ethanol which gets toxic additives, usable for petrol blending. Through this exemption, the government plans to support and boost ethanol production. The government has also made it mandatory for all cars to be ethanol-material compliant from April this year, while it should be flex-fuel ready (20% blend ethanol) from 2025. This will help in the reduction of import bills and bring clean mobility aspirations closer to its goals.

The central government has also introduced the Production Linked Incentive (PLI) scheme for 14 sectors, with an incentive outlay of Rs 1.97 lakh crore, having over 100 MSMEs among the beneficiaries. The PLI scheme for the automobile industry proposes incentives to boost domestic manufacturing of Advanced Automotive Technology (AAT) products and attract investments in the automotive manufacturing value chain.

With the new income tax slabs, the salaried population will have more disposable income to spend, considering the rise in personal income tax rebate cap from Rs 5 lakh to Rs 7 lakh and reduced tax slabs to Rs 15 lakh income. This should boost the demand, especially for two-wheelers and entry-level four-wheelers.

There is no reduction in GST rate slabs for vehicles and Indian customer still has to pay anywhere between 28 percent to 50 percent depending on vehicle type (length, weight, ground clearance, body type). A GST rate reduction was expected by the industry to capitalise on the growing demand. Growth in certain segments due to price reduction would have cushioned part of the revenue loss on account of GST. Hopefully, this will be considered in the coming future as it will support the ICE industry. As expected, no change in the GST on EVs which was earlier reduced from 12 percent to 5 percent and lithium-ion battery packs and charging stations from 18 percent to 5 percent. The demand for a uniform GST of 18 percent on all automotive components still hasn’t been addressed in this budget.

The Finance Minister has also proposed to increase the customs duties for semi-knocked down (SKDs), as well as completely built-up (CBU) cars. SKDs will be subject to 35 percent (previously 33%) and CBUs will attract 70 percent (earlier 66%) custom duty. This development can be viewed as a positive one from ‘Make in India ‘perspective but at the same time will impact the sales of luxury vehicles and EVs which are currently being imported.’

Further, there were a few areas where the budget did not focus much. Road accidents are a major cause of death and injury in the country, hence we need measures to improve road safety. The government could have introduced a PLI-type scheme for airbags to mitigate the cost escalation due to the 6 airbags implementation rule.

Also from FAME II perspective, the outlay of Rs 5,172 crore which has been announced is part the larger Rs 10,000 crore which was earmarked at the beginning of the scheme. This amount is expected to be utilised considering the uptake in EVs. However, no announcements for an extended timeframe for FAME II or additional coverage. This leaves the industry in dilemma on the situation post March 2024 expiry of FAME II. Few welcome steps on up-skilling, research and development on the new age technologies are long term but very important steps and will lead India to become a manufacturing destination known for its product quality.

In conclusion, the budget announcement has been balanced and addressed few much-needed gaps however there are few definite misses. The industry has a lot of potential and calls for significant investments hence the expectations will always remain from the government to do more. The Union budget for 2023-24 should have a positive impact on the automobile industry considering multiple proposals to boost the sector after the turbulent past few years.

The author is 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: 19-02-2023 at 10:00 IST
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