Change is the only constant for the auto industry, and more so in recent times. Continuous change in its environment and evolving technologies have made this industry full of uncertainties. We are gradually seeing people saying ‘no’ to owning vehicles and, instead, preferring hired vehicles due to high cost of ownership, lack of parking spaces and stressful driving conditions in big cities. This ‘Uberisation’ of the demand for personal transport will impact composition of sales across segments of OEMs, pushing up sales of cars in economy variants. It is creating a new class of car users like young professionals who cannot afford to buy a car but find it affordable to hire a cab as it is safer than a two-wheeler and more comfortable than public transport. This will again result in higher sales, but in certain product segments. Increased safety awareness, stringent environment norms, and threat of alternate fuel and EVs is another uncertainty. The growing importance of public transport, with countries seeking to penalise private transport through higher taxes, is further adding to the complexities. The sector, thus, was looking at clear directions from the government in the midst of such uncertainties, especially after it battled frequent changes in GST rates.
The government, on the other hand, expects this bellwether of Indian industry that impacts millions of jobs directly and indirectly, through sectors like transportation and logistics, to kick-start the industrial revival after seeing a few green shoots in the last two months. A slew of measures were introduced in the Budget to strengthen rural economy, such as increase in MSP, aspiration to double farmers’ income by 2022, and increasing expenditure on rural infra. The above 4% growth in agriculture in 2016-17 almost halved in current fiscal. But if measures in the Budget could push up farm and non-farm incomes, two-wheelers and passenger vehicles can see a positive impact. Allocation of funds to ambitious road infrastructure under Bharatmala project would also provide a big boost to the auto sector as the sale of commercial vehicles, two-wheelers and utility vehicles are expected to increase. Further, better road infrastructure would improve fuel efficiency, reduce travelling time and cost, and, therefore, improve competitive advantage of road transport vis-à-vis rail and other modes.
Reduction in corporate tax rate from 30% to 25% for firms with turnover of up to Rs 250 crore would shore up disposable incomes for MSMEs and benefit auto ancillary units who can plough back additional funds in their business. From indirect tax perspective, cars are one of the highest taxed commodities. With many changes made by GST Council since last July, it was expected that indirect taxes applicable to auto industry would stabilise. However, basic custom duty rates were increased for import of motor vehicles as CBU and CKD and certain components, including engines, of two- and four-wheelers. This indicates the government wants to the support indigenisation of technology and push value addition in India. In the short run, this will negatively impact auto OEMs with heavy import content and give a relative advantage to those who already have a high level of indigenisation.
Only time will tell if these measures will really hasten indigenisation of component manufacturing. Developing a vendor for an auto components is a long-drawn process and global brands may take a few years to localise production of key components. They may also ask their global vendors to set up shop in India to quicken this process. But even this is a time-consuming process of 4-5 years, if not more. A move that can benefit Make-in-India and employment generation has perhaps come too late in the day. The auto industry needs respite from constant changes. While it has no control over uncertainties and changes in technology or consumer preferences, the least it can demand, and deserves, is stability in the tax regime, especially on indirect tax side, and other regulations. This sector can then take on the other uncertainties in its stride. The government should seriously give this a thought if it wants the sector to fuel manufacturing growth in the country.
The author is partner, Indirect Tax, KPMG in India