Automobiles: No Bad News, Is Good News

The Automobile industry is tensed up due to the forthcoming budget. There is a strong feeling amongst auto players that this Budget will not offer any goodies but will probably take away some of them given in budget of 2009.

There is a fear that excise duty on all automobile products may go up by 200 basis points. But the other big fear is over the specific hike on diesel cars which could be as high as 10 per cent, thereby discouraging people from buying diesel cars. The government is spending a huge amount on providing subsidy on diesel and discouraging sale of diesel cars would mean a lesser subsidy burden for the government. Some statistical data would help people to understand this perspective. In the first nine months ended December 2011 the Indian car industry experienced a negative growth of 2.28 per cent but during the same period Diesel car sales increased by 2.30 lakh as compared to the same period last year. If excise duty on diesel cars goes up, preference for diesel cars may come down and this would impact the sector negatively. Also, there are talks that the government may increase prices of Petrol and Diesel in the coming days as crude oil prices have surged. This would impact auto companies even though this price hike may not be part of the Budget.

The other issue that is bothering the industry is about the rate of interest. It is a known fact that a substantial portion of vehicles in the country are sold through finance options. In the last one year the rate of interest has kept on surging as the RBI kept on increasing the repo and reverse repo rates pushing the cost of vehicles further up (due to the higher EMIs that one has to pay on purchase of vehicles). At the same time a slowdown in the economy also impacted the sector as few people bought cars. This time the industry is expecting some benefits from the Finance Minister (please refer box on SIAM Budget Expectations), but it is unlikely that many of the demand would be met. Also, some heavy commercial vehicle manufacturers are expecting the government to increase spending on JNNURM (Jawaharlal Nehru National Urban Renewal Mission) as this would increase the demand for Buses. Looking at the fiscal deficit scenario, it is unlikely that the government would increase its allocation towards JNNURM. So, we are expecting a tough scenario for the auto industry post budget. If there is no bad news in the budget for the auto sector it would be considered as good news.

But there is yet another worry that the sector is going through in the form of a Free Trade Agreement with the European Union where there is a discussion point of reduction in import duty on automobiles imported from that region. If that happens imported cars from the European region would become cheaper creating competition for the local manufacturers.

On the stock market front, the sector has performed well Vis-a-Vis popular stock indices. The BSE Auto Index has reported a gain of 12.36 per cent since the last Budget while the Sensex during the same period has reported negative returns. We are keeping our fingers crossed and hope that the Budget doesn’t spoil the party for auto players.

Auto Sector Report card in first 9 months 

Source: SIAM

SIAM Budget Expectations

1. Additional excise duty of Rs 15000/- levied on MUVs and Passenger Cars (other than small cars) be withdrawn.
2. No additional tax on diesel vehicles.
3. Excise Duty/ Equivalent GST rate on Passenger Cars (other than small cars) should be at par with the Central CENVAT /GST rate. The suggested rate is 16% till GST is introduced.
4. Concessional Excise Duty Structure/ Equivalent GST should be applicable on small cars, MUVs, two-wheelers, three-wheelers and commercial vehicles. Central CENVAT rate should not be increased.
5. Concessional Excise Duty Structure/ Equivalent GST should be applicable on MUVs @10 per cent, which continue to attract high rate of excise duty.
6. Retain Customs tariff on CBUs for all types of vehicles.
7. Introduce GST across all states and share the draft modalities and procedures now. The industry needs a minimum of 3 months for a smoother transition. Taxation of used vehicles should be covered as well as taxes like road tax should be subsumed in the GST.
8. Increase the Depreciation rate from 15 per cent to 25 per cent for Motor Cars, MUVs and Two wheelers, other than those used in the business of Hire, irrespective of the period of addition.
9. All vehicles falling under HS 8702 with seating capacity of 10 – 13 persons should attract the same rate of excise duty as Buses.
10. For all passenger vehicles registered as taxis/maxi cabs, The government should levy a CENVAT rate of excise duty of 10 per cent. Also, extend it to cover all vehicles falling under 8703 (vehicles up to 9 seats) and “Maxi cabs” - vehicles falling under HS 8702 (10-13 seater vehicles).
11. Incentivise replacement of vehicles, which were registered before the year 2000 when the first emission norms were introduced.
12. In the speech of the Union Budget 2011-12, the Finance Minister announced setting up of National Mission for Hybrid and Electric Hybrid vehicles. Funds should be made available to encourage development of Hybrid-Electric Vehicles and Electric Vehicles.