The auto sector is broadly satisfied with Finance Minister Nirmala Sitharaman's Budget 2021 announcements for the industry. The focus on increased spends for road infrastructure projects, enhancing public transport network and measures to enhance local production of auto components are some of the positives.
No other personal or corporate taxes were introduced in the Budget -- another positive -- as it could have dampened demand.
This year's budget has a significant outlay towards infrastructure spending, which usually results in increased demand for automobiles.
"The budget touched on all aspects of infrastructure -- ports, roads, freight, railways, which is positive for the auto sector," Dr Pawan Goenka, MD & CEO, Mahindra and Mahindra, one of India's largest automakers told CNBC-TV18.
The finance minister said the government has allocated Rs 1.18 lakh crore for the Road Transport and Highways Ministry in the Union Budget for 2021-22.
"The 6,575 km highway works proposed in Tamil Nadu, Kerala, West Bengal, and Assam and another 19,500 km work for Bharat Mala project will definitely add fillip to much-needed revival of commercial vehicles especially M&HCV segment," Vinkesh Gulati, President, Federation of Auto Dealers' Association said.
Voluntary Scrappage Policy
The Budget officially blessed the vehicle scrappage policy but is yet to share details and whether or not there will be incentives for vehicle owners. While this isn't exactly what the automakers were expecting, according to Dr Goenka, a voluntary policy is a right place to start.
He added incentives for scrapping need to be good till the policy gathers good acceptance with 80-85 percent vehicle owners choosing to scrap their old vehicles. After that point, it may be possible to implement a mandatory scrappage policy.
According to FADA, there are approximately 37 lakh commercial vehicles and 52 lakh personal vehicles eligible for voluntary scrappage, with an estimated 10 percent of CVs and 5 percent of PVs plying on the roads, taking 1990 as the base year.
The Finance Minister announced that passenger vehicles will have to take a fitness test every 20 years, and commercial vehicles will be required to do so every 15 years.
Public Transport Infrastructure
Addressing health and environmental concerns, Sitharaman said the government will provide for augmenting the share of public transport in urban areas by expanding the metro network and city bus services for improving last-mile connectivity.
"A scheme will be launched at the cost of Rs18,000 cr to support augmentation of public bus transport services," the FM announced. "The scheme will enable deployment of innovative P-P-P models to enable private players to finance, acquire, operate, maintain over 20,000 buses," she added.
"With government's higher focus on metro and increase in outlay for urban transport we are likely to see an increase in demand for buses and smaller vehicles for last-mile connectivity," Rajeev Singh, Partner and Automotive Leader, Deloitte India said
Bad Bank may lead to better financing
Noting that many banks and NBFCs are still cautious towards lending to the auto sector, better liquidity as banks clean up their books will boost demand for the sector, said Dr Goenka.
"The formation of a bad bank will lead to more availability of finance for auto products," he added.
No new taxes
While a section of the auto industry was looking forward to measures that increased disposable income in the hands of the consumer and therefore increase spending, most were satisfied that there were no new personal or corporate levies were announced.
Shashank Srivastava, Executive Director, Sales & Marketing, Maruti Suzuki and Vinod Aggarwal, MD& CEO of Volvo Eicher Commercial Vehicles said the fact that no new taxes or cesses were introduced was positive.
Dr Goenka said the industry was not expecting a reduction in income tax or GST rate cut on automobiles given the tight fiscal space the government has to currently contend with, but the fact that taxes weren't raised is a positive point.
Reduced duty on steel
Government’s reduction of customs duty on steel products to 7.5 percent will benefit automakers. "We expect the benefit to trickle down to end customers thus helping in boosting of demand," Vinkesh Gulati of FADA said.
While the auto components industry has hailed raising the basic import duty on certain auto components to 15 percent, it believes it is not a good long-term solution for localisation.
According to Deepak Jain, President, Auto Components Manufacturers' Association (ACMA), the increase in basic customs duty on select auto components will encourage local manufacturing of such items.
However, automakers who rely on imports of these components will see their costs go up, and the net impact on costs and demand will have to be assessed in conjunction with the reduction in duty on steel, said Dr Pawan Goenka.
Industry remains over-regulated
Dr Goenka highlighted that the finance minister's Budget speech fell short of detailing how the pillar of "maximum governance and minimum government" will play out on the ground. "The minister expressed an intent to reduce over-regulation, but we did not hear any details of how that will be done."
The auto sector has requested the government to hold off new regulations, including the upcoming CAFE-II norms, for the next 12-18 months so as to not burden the industry, which is just recouping its investments in BS-VI technology and battling a prolonged period of slack demand due to COVID-19.