Budget 2016 is disappointing for the Indian automobile sector – Opinion

By: | Published: February 29, 2016 4:46 PM

In the budget, government has added the infrastructure cess / Luxury Tax which will be an additional burden for the consumers.

Budget 2016 for auto industryIn mid-term around one year later we may see demand coming on account of 7th pay commission and boosting of rural economy.

Budget 2016 is a little disappointing for the Auto industry. On one side the Government has high expectations from the industry in terms of bringing the latest technologies and on other side this will be a another consecutive year when there be no support given to the auto industry which is considered as the backbone of manufacturing sector in India and employs more than 20 million people.

In short term/2016 there is no direct or indirect quantum benefit which is visible to the auto industry. In the budget, government has added the infrastructure cess / Luxury Tax which will be an additional burden for the consumers.  Please note that auto industry was already reeling under pressure due to lesser global demand and higher investment required in next three years to upgrade their products in lieu of new safety and emission standards.  Luxury tax of 1% on vehicle more than 10 lakhs and infra cess of 1% on all cars, 2.5% Infra cess on diesel cars and 4% on SUVs can also be a physiological deterrent for consumers in 2016. The only hope left in 2016 is rate cut by RBI which can give a flip to auto sales.

In midterm around one year later we may see demand coming on account of 7th pay commission and boosting of rural economy. This should help in growth of especially A&B segment cars.  Thanks to increased allocation of funds in rural sector for infrastructure, irrigation, education and health schemes. This money will trickle down to end users in around 10-12 months and positive effect on car sales can only be seen in next year due to lag in implantation of such schemes at ground level. Two wheelers industry may pick up little early (2-3 months) though.

Additional 1% luxury tax  on SUV’s and hike of 4% infra cess on SUV once again shows government have been harsh on luxury car buyers. Please note these cars already come under high tax zone and tax on these cars is already 2.5 times as compared to smaller cars.

I think it was time to take some radical steps for the government.  like Scrappage scheme which could have been a big support for industry didn’t have a mention in budget. Also in India big cars/SUV can be a big potential and OEMs may consider exports of big cars as well but only if the domestic market becomes significant. Like when excise duty on small cars was reduced the local demand went up and OEMs invested in India seeing domestic and export potential. High tax on big cars is limiting the potential of big cars in domestic market and since sales of big cars is too less in domestic market thus making OEMs not consider India as an opportunity to export  big cars.

In long term infrastructure investment, focus on digital India, Employment generation, Make in india  and Government vision to eliminate subsidy will help in boosting investor sentiment. This means more foreign domestic investment for the country. Currently as per IHS, India is the sixth largest producer of light vehicles in the world and to attain the no 4 position as expected by 2020 the industry needs the support of government too.  This hope excites the auto industry and with penetration level as low as 22/1000 India remains an attractive market in long term.  We do hope that government timely support is required for auto sector to grow at rapid pace so that auto industry can contribute to economy in a big way.

The author is Puneet Gupta, Associate Director, South Asia Vehicle Sales Forecast, IHS Automotive

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