By Hemal Thakkar
Budget 2024 expectations
: India’s robust
automotive industry
is accelerating through a landscape transitioning in terms of demand, policy and technology. Given these variables, Budget 2024 will be crucial for the industry for three reasons.
One, while the industry was rebounding after the Covid-19 pandemic, passenger and commercial vehicles faced growth hurdles, such as supply-chain disruptions, semiconductor shortage and a steep rise in commodity prices.
Then in fiscal 2023 pent-up demand gushed forth and continued to chug along last fiscal. The industry could thus shake off degrowth and low-capacity utilization. Yet, recovery in a few segments continues to lag with volumes far below the pandemic levels. The right impetus will thus be key to accelerate all segments.
Two, the industry is navigating a technological overhaul. The advancements, collectively known as CASE (connected, autonomous, shared and electric), will lead to cleaner powertrains, added safety, and connected and autonomous features. These consider vehicles as a shared service rather than assets for ownership.
At the same time, transmission, mechanical and electronic systems are also becoming more advanced.
The industry is taking the disruption head-on — electrification has gained traction this year and the share of other cleaner technologies such as hybrid and compressed natural gas has increased. However, futuristic technologies, including flex fuel, hydrogen and fuel cell, will need propulsion to translate into commercial reality. Long-term policy clarity on that front will help industry navigate through short-term bumps.
Three, the structural nature of the automotive industry itself demands that it remain robust. It supports multiple sectors as part of its long value chain. Major industries such as steel, rubber, plastics, electronics, and other semi-processed and intermediary components are critical end-users. Retailing, servicing, banking, insurance, fueling, charging, logistics and personal and commercial mobility are some important forward linkages.
Given this milieu, we believe the budget should focus on the following measures:
Reward increases in capital expenditure (capex) similar to investment allowance and research and development (R&D) expenditure: It could restore the benefit of a higher deduction of 200%, as earlier. Such benefits are available to companies in many geographies, especially the ones in South Asia.
Continued focus on infrastructure: The government’s focus on infrastructure should continue. It has a multiplier effect not only on employment, thereby generating income prospects, but also creates significant opportunities for EPC (engineering, procurement and construction) players/contractors, increasing demand for steel and cement and investments thereof. This will help bolster the commercial vehicles industry segment through higher sales and logistics service providers with better turnaround time on account of improved road infrastructure, thereby supporting the objective of reducing the logistics cost.
Relook at incentive structure in scrapping specifically for the commercial vehicle sector: The scrapping policy is a step in the right direction. But the government needs to put in place adequate incentives for owners to scrap their older vehicles. Today, owners scrapping older vehicles are unlikely to afford new ones if there is no income security. So, they would tend to purchase pre-owned vehicles rather than new ones. The current incentives are just not lucrative enough to scrap vehicles. However, the right kind will help shrink the aging on-road fleet, reduce the proportion of BSI to BS-IV vehicles and lower emissions.
Lower GST for cleaner technologies in mass transport and uniform levy for components: Two-wheelers and commercial vehicles using alternative fuels (cargo vehicles, including three-wheelers L5 category and passenger segment for mass public commute and goods movement) can be made eligible for goods and services tax (GST) rationalization. The dual GST rate for auto components, i.e., 18% and 28%, encourages grey market distribution in the aftermarket space. This is a safety hazard on the one hand and an incentive to the informal economy and loss to GST revenue on the other. Hence, it would make sense to have one GST rate for all auto components at 18%.
Long-term policy for electric vehicles: FAME-2 was extended for two years but ended in March 2024; the Electric Mobility Promotion Scheme (EMPS) ends in July. The government will need to announce longer-term policy support for the electric vehicles (EV) industry in the budget. The consistency in its structure and fewer frequent changes by the government would reduce confusion, thereby enabling increased private sector capex. Inclusion of private players for charging infrastructure and light, medium and heavy commercial vehicles under the policy will also help proliferate EV adoption in India. The focus should also be to remove the challenges/issues currently existing to install chargers at a community level.
Production-Linked Incentive (PLI) scheme for tyres: The automotive tyre industry caters to local demand and has the potential to become a large foreign exchange earner for India. New technologies such as run-flat tyre, smart tyres, noise reduction, puncture-proof and tyres for EVs, have been introduced in this industry as well. These advancements require companies to invest heavily in capex and R&D. Extending the PLI scheme to tyres would be a welcome step for the industry and help it become more competitive vis-Ã -vis China, Thailand and Vietnam in the exports market.
Export enhancement measures: Rupee trade with developing countries that are curtailing imports due to foreign exchange/dollar crisis and are important trade partners such as Egypt, Nigeria and Turkey will help maintain exports. Also, high trade deficit countries from which India imports, such as the United Arab Emirates, Saudi Arabia, Iran and Iraq, do not manufacture automobiles. Free trade agreements with these countries would also help boost automobile exports.
Re-introduction of income-tax benefits for EV purchase under 80EEB: The introduction of Section 80EEB in the Income Tax Act in 2019 allowed a deduction of up to Rs 1.5 lakh per annum on interest paid for EV loans. This was a significant step, but the benefit was not extended beyond March 2023. Re-introducing the same and raising the deduction to Rs 2 lakh a year will encourage EV adoption.
Enhancement in deduction under section 80: Any further enhancement in deductions under section 80 will help improve/increase disposable incomes in the hands of people, improving buying power and supporting sales of discretionary items, including automobiles.
Taking these actionable steps in the budget can go a long way in boosting India’s automotive industry.
(The author is Senior Practice Leader & Director – Consulting, CRISIL Market Intelligence & Analytics)
