The automotive sector, contributing nearly 40% to India’s manufacturing GDP, assumes great importance as the driver of India’s economic growth due to its linkages with multiple industries like iron, rubber, steel, aluminium, paint, plastic, glass, leather, electronics, etc. Alongside, the sector contributes significantly to the banking/NBFC space in the form of automobiles financing (most common forms of retail loans). This sector is also one of the largest spenders on advertising and among the largest users of oil and gas.
In CY2020, due to the Covid-19 related disruptions, the automotive sector faced one of its worst slumps in almost a decade, where sales declined to CY2011 levels. According to a parliamentary panel report submitted to Rajya Sabha in December 2020, the automotive sector suffered Rs 2,300 crore loss per day and an estimated job loss of about 3.5 lakh due to the outbreak of Covid-19.
Though certain segments like passenger vehicles and two wheelers are gradually witnessing an improvement in demand, for the automotive sector to witness a complete recovery, it requires adequate support from the Government in the upcoming Union Budget. While there have not been many automotive sector-specific announcements in past recent Budgets, the government’s focus on the rural economy, logistics and infrastructure investments, along with a boost to disposable income through income-tax reliefs, have indirectly benefitted the automotive sector up to an extent, especially the entry-level segment.
The following are the expectations of the players operating in the automotive sector from the upcoming Union Budget:
- Measures to promote Electric Vehicles (EVs): Encourage investments in EVs and its ancillaries by introducing weighted deduction on R&D expenses, build more charging infrastructures in the country and incentive the local sourcing of critical components for EV battery manufacturing.
- Scrappage policy: To realise the full potential of BS-6 implementation with reduced emissions, there is a need for implementation of the scrappage policy, which includes a one-time incentive in the form of tax rebates for replacing vehicles which are older than 15 years. Implementating such a policy can support higher demand creation for trucks, buses and cars and also lead to a reduction in prices of new vehicles aided by the use of recycled materials from older cars.
- Lowering of GST rates: Although GST rates are decided by the GST Council, the automotive sector has long been pressing for a cut in GST rates. At present, passenger vehicles, commercial vehicles, two and three wheelers are taxed at the highest GST rate of 28% and a cess in the range of 1-22% is added, which takes the effective rate to up to 50%. A moderation in such rates could reverse the prevailing low demand and hence increase sales, leading to a growth in tax contribution towards the government from this sector.
Implementation of the above points can help revitalise the automotive sector and bring it back on the growth trajectory, which is facing a downward trend since nearly 9-10 quarters now.
The author is a Research Analyst- Industry Research with CARE Ratings Ltd
