|
 The year 2009 was a bad year for the global auto industry. Auto sales dropped though the impact in India was not as bad as some of the developed markets. Even today, some of the developed markets continue to reel under the effect of recession, which is threatening to kill brands like Hummer. Driving on the back of the government stimulus package, the Indian auto market managed to post good recovery in the third quarter of FY2009-10. The numbers may not be strong but some of the segments within the industry managed to post strong numbers, signaling a journey towards good times once again. The month of January 2010 saw the auto industry clock good numbers, driving discussions about roll back of stimulus package. In the Union Budget presented by the Finance Minister, Pranab Mukherjee, for the financial year 2010-11, the auto industry has received a mixed bag. The increase in excise duty by 2 per cent may be seen as a partial roll back of the stimulus package, and has had an effect of price rise on vehicles. Many automakers within a few hours of the budget being presented, announced a price hike across the range. Maruti Suzuki was probably the quickest to announce a hike in prices of various models in the range of Rs 3,000 and Rs 13,000 (ex-showroom, Delhi). This was followed by Hyundai and Fiat.
Rajeev Kapoor, managing director of Fiat India, expressed that this budget is futuristic and addresses long felt need in rationalisation of direct and indirect taxes. “The effect of increase in excise would have an inflationary trend while partial roll back of stimulus was expected,” he added. Baba Kalyani, CMD, Bharat Forge averred that this budget is visionary. “The increase in excise duty from 8% to 10% has not come as a surprise, and that the increase in price of petroleum products is quite significant and would lead to higher inflation,” he added. With food prices running high, and steel and cement prices on the rise, the effect of increase in fuel price is expected to further fuel inflation. However behind the various moves, which involve changes to the income tax, the bright side of budget reflects the government push for fiscal discipline by putting in place a road map to progressively bring down the fiscal deficit from 6.9% this year to 4.1% by 2012-13.
 Welcoming the Union Budget 2010-11, Dr Pawan Goenka, President, Society of Indian Automobile Manufacturers (SIAM), and President – Automotive, Mahindra & Mahindra, stated that the Finance Minister and his team seem to have struck the right balance in pushing reforms, maintaining a high focus on social and physical infrastructure whilst returning to fiscal responsibility in a measured manner. Dr Goenka added that the Finance Minister cited several positive proposals for the automobile industry, including the correction in excise duty on electric vehicles, which will enable the manufacturers take CENVAT credit and exemption of customs duty on electric vehicle parts. Dr Goenka also welcomed the increase in weighted deduction for in-house R&D to 200% from 150% and outsourced R&D from 125% to 175%. This, according to him, will spur industry focus on innovation, R&D and product development, which in turn would increase the competitiveness of the industry in the long term. Expressing that the 2% hike in excise duty was expected and should not have adverse impact on the market, Dr Goenka added that the result of the budget proposals is the convergence of basic excise duty rate and service tax rate to 10%, indicating a move to enable Goods and Services Tax (GST) implementation from Apr 2011.
The implementation of direct tax code and GST in 2011 is looked upon by many as a positive step towards instilling a fiscal discipline. Michael Boneham, President & Managing Director, Ford India in his reaction to the budget said, “The Union Budget was clearly focused towards fiscal consolidation and addressed some of the key medium term issues like the implementation of the GST and direct tax code by April 2011”. Terming the budget as a mixed bag, which provides a strong impetus on social and infrastructure development with the aim to achieve a 9% GDP growth rate but lacks any positive elements for the automobile industry, Boneham added that the hike in excise duty on cars by 2% is a major disappointment for the automobile industry as there was strong need to continue the stimulus to support the ongoing fragile recovery.
The hike in Excise Duty may be viewed differently by the captains of the Indian auto industry. Most however agree that the broadening the tax slabs will boost the disposable income in the hands of the middle class. A 13% increase in allocation for road transport from Rs 17,520 crore to Rs 19,894 crore will boost to the industry, most agree. Abdul Majeed, Leader Automotive Practice, PricewaterhouseCoopers opines that initiatives such as increased allocation to infrastructure, weighted deduction on R&D expenses, revised tax slabs for middle class, with partial roll-back of stimulus package would sustain the growth in the auto industry. The increased allocation for road transport is looked upon as a much needed shot in the arm for the growth of the commercial vehicle segment, sections of which failed to record strong numbers in the third and fourth quarter of FY2009-10. With the hub and spoke model falling in place, the increased allocation to infrastructure is expected to further boost the sale of heavy duty and medium duty commercial vehicles. Said Shvetal Vakil, executive director of Setco Automotive, which is a supplier of clutches to commercial vehicle majors like Tata Motors: “This year’s budget offers a mixed bag for the auto sector. While the rise in MAT by 3% is detrimental for exports driven and tax free zone units, government’s announcement of greater allocation of funds towards infrastructural development including building extensive road corridors is a welcome announcement as it will help boost demand for HCVs (Heavy Commercial Vehicles) which in turn will mean greater demand for components.”
 Expressing the budget as a balanced act, Dr R P Singhania, Vice Chairman & Managing Director, JK Tyre & Industries, added that it is supportive for the taxpayers as realigning the slab limit will help in reducing burden on the taxpayers. Its focus on development of agricultural on one hand, and infrastructure on the other, particularly at this critical phase of economy is laudable. A disappointing moment for the tyre industry, however, expressed Singhania. He stated further that the inverted duty structure on natural rubber imports has not been addressed for yet another year. Away from tyres, and an increased focused on agricultural development and rural infrastructure is expected to boost auto sales in rural markets, thus opening a new avenue of growth for the auto sector. The sale of agricultural equipment like tractors is expected to go up even if the issue of hike in fuel prices and increase in the excise duty by 2% are expected to take away some of the icing.
Issues like inverted duty structure on natural rubber imports and a reduction in the large gap in excise duties between smaller personal vehicles and CVs, and the high excise levy on larger personal vehicles are some of the issues that need to be addressed. This budget has not done that. What it has rightfully done is to try and put out a balanced act – a fact, which many in the Indian auto industry have come to agree upon. The Union Budget 2010-11 indeed comes as a mixed bag for the Indian auto industry.
|
