Budget Expectations: Automobile Sector

The automobile sector survived the downturn of 2009 and saw a remarkable turnaround in 2010 and 2011. This turned sour yet again as growth became lethargic. Most of the problems faced by the automobile industry have been caused by high interest rates and soaring fuel prices leading to low demand. The harder hit commercial vehicles have faced the additional burden of a slow industrial, mining and construction activity. Since these problems are directly linked to the health of the economy, sector-specific needs would not require a special focus. A reversal of trend and a favourable macroeconomic environment will smoothly lead to the revival of the sector.

However, there have been heightened expectations around the automobile sector in this year’s budget. Some of those are:

1. Revision of excise duty structure as stated in the 10 year Auto Mission Plan (AMP)
2. Restoration of duty drawback rates to 5.5% from the current 2-2.5% to ease the negative impact it had on exporters
3. Reduction of excise duty on chassis from the current 14% to boost CV sales
4. Adoption of various schemes to enhance urban transport, public transport, healthcare, etc to augment CV sales
5. Concessions on certain expensive and imported parts for hybrid/electric vehicles
6. Increased import duty on imported CVs

The above measures would definitely work on the mechanics of end-product price depreciation. If worked on, they would do the job of compensating for higher borrowing and operational costs. Such steps had helped the industry survive the 2009 downturn as the government had reduced excise duty from 12% to 8%.

However, at the same time, there are a few steps, which if taken, would hamper the industry’s growth to a large extent. One such measure was seen in the previous year when the industry hoped for excise duty on large cars to come down from 22% to 16%. Instead, the duty went up to 27%, significantly increasing the tax for large premium cars. Among the dreaded changes that would hurt the industry further are:

1. Additional taxes on diesel cars
2. Higher duties on Utility Vehicles

The above phenomenon would hurt the industry as growth in passenger cars seems to have been supported by diesel cars and that in Passenger Vehicles by UVs. Moreover, now that diesel prices are being deregulated, the step seems less likely.

Speaking about the budget, R C Bhargava, Chairman, Maruti Suzuki India said, “Special measures for the automobile industry seem to be bleak in this year’s budget. Automobile sales are a direct reflection of economic health and any improvement on a macro front would show up in vehicle sales. Since the government would already be concentrating on reviving the economy, additional sector-specific steps could take a pause.”

The industry’s hopes lie on government action to boost sales but considering the nature of the industry, that may not happen.