03 February 2017 09:02:59 IST

Auto sector awaits breaks beyond Budget

Timely rollout of GST is crucial for the growth story

At one level, the auto sector will have reasons to be optimistic about some of the announcements in the Budget. With tax levels lowered for those in the ₹2.5-5 lakh slab, this will translate into higher disposable income that will boost sales of two-wheelers and affordable compact cars. The incentives for affordable housing, likewise, will help fuel a ‘feel good’ sentiment, which will also contribute to the cause of buying vehicles.

Tractor makers will hope that the outlay for rural credit will bring sales back on track even while parts of the south have been reeling from a poor monsoon. The emphasis on road building will be music to the ears of manufacturers of construction equipment and heavy commercial vehicles.

After the demonetisation shocker of November 8, the auto industry hoped the Budget would do something to trigger consumption. To that extent, manufacturers may not have too much to complain about and it remains to be seen how soon customers queue up at showrooms all over again.

Ignored EV makers

There was surprisingly no incentives for electric vehicle makers at a time the country has drawn up its most ambitious clean air roadmap with Bharat Stage VI norms due in April 2020. It would have sent the right message of support from the Centre but then perhaps this does not have to come on the day of the Budget.

To that extent, manufacturers pretty much expected little in the form of excise duty reliefs considering that the big bang announcement will hopefully come in July. This is when the Goods and Services Tax (GST) is scheduled to become a reality and industry will only hope that there is no political bottleneck between now and then.

There is some apprehension that outcome of the Assembly elections in important States such as Punjab and Uttar Pradesh could impact implementation of GST if a stronger opposition takes on the BJP. A further delay in this important tax reform will hardly help the auto industry’s cause especially when things were thrown completely out of gear with demonetisation.

Tie 2/3 ancillary suppliers will also breathe a lot more easily with the tax relief on medium and small scale enterprises. Change, though, will not come overnight and this is, where GST can take the story forward. “Setting off the right sentiment among customers is important and we can only keep our fingers crossed about July,” says an industry executive.

It is not going to be the easiest of years for some sections of industry. BS IV norms come into play nationwide from April 1 and commercial vehicle makers are preparing for the reality of tepid sales for the first half of 2017-18. This is because cleaner vehicles will cost more and buyers will naturally make a beeline for the less expensive BS III option till March.

The silver lining in the cloud, therefore, is that truck sales will be brisk over the next couple of months and could stay on the slow track six months thereafter. Manufacturers are optimistic that things will pick up thereafter but this is still a million dollar question.

The bigger challenge

The next big challenge is getting ready for BS VI in 2020 and if past experience is anything to go by, there is every cause for pessimism and panic. It is for the first time globally that a country will be skipping one clean air cycle (in this case BS V) and working towards a huge makeover in very little time.

This will involve substantial investments in technology which will drive prices of vehicles upwards. How customers react to this new, expensive scenario remains to be seen at a time when India will have climbed to the third slot globally in car sales. No wonder then that industry captains are worried especially when it comes to timely fuel supplies across the country. The auto industry and oil companies have their work cut out for the reminder of this decade when they face their biggest test in recent times.

It is, therefore, understandable why manufacturers were hoping for more incentives for electric cars in this Budget. Models like the Mahindra e20 have had little to show in terms of monthly sales numbers and fiscal sops may have just helped incentivise buyers to go in for electric options as the country prepares for BS VI.

It has been a rough ride for automakers lately starting from the time the Supreme Court banned registration of 2000cc diesel cars in Delhi for over eight months last year. Then came the demonetisation drama which again threw planning schedules at factories out of gear while crippling smaller suppliers.

From manufacturers’ point of view, it will be just ideal if there are no hiccups till 2020 when BS VI is due to be implemented. As an automotive CEO says, there are just too many things coming together which gives little time for product planning. In his view, if companies are going to focus solely on making vehicles that are compatible with BS VI norms, there may not be too many new capacity investments happening which will then stifle job creation.

Entry of newcomers

The good news is that the coming months could see some newcomers into the Indian automobile space. PSA of France has already announced its intent to begin operations near Chennai while Kia Motors is scheduled to follow suit soon. Throw in a couple of Chinese brands such as SAIC and Changan and the mood will just turn more buoyant. Hopefully, all this will happen during the course of this year, which will then give industry reason to celebrate.

(The article first appeared in The Hindu BusinessLine.)