The budget aims to drive consumption by giving push to infrastructure & MSMEs sector and developments in rural areas. While the automotive industry will benefit from these measures, the budget could have done more, says Rakesh Rao.
After grappling with the issue of implementation of GST, the auto industry was expecting clarity from the government on various issues such roadmap for electrical vehicles, auto policy, etc. Though budget had no specific initiatives for auto industry (accept for hike in customs duty on some of the auto components), thrust on rural and infrastructure development are likely to have a favourable impact on the industry.
“Overall, we see this budget as focusing on the basic building blocks of the economy – rural agriculture, infrastructure and MSMEs. These will translate into demand boosters for the Indian automotive sector in the medium term. The push for localisation will have a positive impact on automotive component and supplier industry,” opined Kavan Mukhtyar, Leader - Automotive, PwC India.
Budget provides the much needed thrust to the economy by focusing on development of rural economy, manufacturing, infrastructure, education, ease of doing business, attracting investments and encouraging innovation & digitisation.
Boosting rural economy
The thrust given to the development of rural economy, infrastructure, particularly roads, augurs well towards creating a vibrant automotive market in the country, which in turn, will fuel growth and development of the domestic auto component industry, according to the Automotive Component Manufacturers Association of India (ACMA).
While re-emphasising the Government’s commitment to doubling farm income 2022, the FM has decided to maintain the MSP (minimum support prices) at a minimum of 1.5 times the cost of production. Greater availability of credit is also expected to drive the rural and agricultural sector. “These initiatives will have a positive impact on tractors, 2 wheelers and utility vehicle segments,” says Mukhtyar.
According to Society of Indian Automobile Manufacturers (SIAM), growth in most segments of the automotive sector is driven by rural demand, and these segments would receive a boost from this pro-rural budget. Furthermore, the large outlay for infrastructure development including roads and highways specifically the Bharatmala project would also have a positive impact on the growth the automotive industry.
The budget addresses the opportunities to modernise and create new infrastructure in affordable housing, railways, airports which continues the effort of the last few years. Sandeep Singh, Managing Director, Tata Hitachi Construction Machinery Company Pvt Ltd, stated, “There is huge investment announcement for suburban rail corridors in Mumbai & Bangalore of Rs 57,000 crore. The focus on investment in Smart Cities continues with the pipeline of projects expanding to Rs 2.04 lakh crores. Targeted disinvestment in 2017-18 is expected to be significantly exceeded - boosting revenue.”
Continued focus on transport infrastructure including building roads, railways, logistics parks, etc will have a positive effect on construction equipment industry. “This will present favourable opportunities for growth to the Indian construction equipment industry. Incentivisation to the MSME sector, which forms the backbone of industrialisation of a nation, as also job creation is another welcome step,” opined Vipin Sondhi, MD & CEO, JCB India Ltd.
According to Dharmesh Arora, CEO, Schaeffler India, there is a huge focus on infrastructure development towards road construction railways and air travel that bodes well for spurring economic activity in many sectors such as construction equipment, commercial vehicles in addition to the core sectors.
Construction equipment industry is quite upbeat about the budget as the government continues to place priority on building roads and bridges - allocating budget to build 35,000 km of road under phase one of the Bharatmala project, along with allocations for urban rail and airport expansion projects. “The drive to improve infrastructure will unquestionably facilitate further growth in the economy and the construction equipment industry. As a company, Volvo Construction Equipment India has an established sales and support network. We are well-positioned to play our own part in the India’s development and are excited to do so. We remain the only major manufacturer present in all equipment sectors: mining, road building or general construction,” commented Dimitrov Krishnan, Vice President and Head of Volvo CE India.
Lending support to MSME
Reduction in corporate income tax from 30 per cent to 25 per cent for companies with turnover upto Rs 250 crores will benefit firms in the automotive value chain including automotive component suppliers. As over 80 per cent of the companies engaged in the auto component manufacturing are SMEs, this measure, along with enhanced budgetary allocation of Rs 3,794 crore for credit support, capital and interest subsidy, will have a benign impact on the smaller enterprises. “The budget gave a fillip to the MSME sector by announcing several important measures such as credit support, capital and interest subsidy. The second targeted area was to give a boost to investments and rural India. Reduction in corporate tax rate for the MSME segment is positive for smaller auto ancillaries,” opined Manpreet Singh Sachdev, CEO, Elite Group.
Auto component makers will benefit from the simplification of procedure for credit availability through online-system for SMEs, who will also gain from the budget’s focus on increasing automation. “Along with the push on technology, the new provisions for financial support, in the form of credit, financing and tax relief for MSMEs, will further boost the growth of smaller businesses in the country and help spur the Indian economy at large. With the stage set, we look forward to a great year of growth for the robotics and automation sector,” said Samay Kohli, Group CEO, GreyOrange.
Probably for the first time, the budget emphases on enhancement of research activity in disruptive technologies like artificial intelligence (AI), Big Data, Internet of Things (IoT) and robotics. “A center of excellence focusing on digital manufacturing, robotics, artificial intelligence, big data analytics will be setup under NITI Aayog. The objective would be to consider these advanced technologies to promote innovation and bring these considerations in the government policies,” commented Kavan Mukhtyar.
Automation and robotics play a key role in auto manufacturing, helping companies to become globally competitive. The allocation of the investments announced in the budget 2018-19 will help research and development in areas of machine learning, AI and robotics & automation. Pradeep David, General Manager, Universal Robots - South Asia, informed, “The Digital India program, a key to Industry 4.0 wherein cobots (robots intended to physically interact with humans in a shared workspace) play an integral part as one of the key levers to supplement labour in terms of productivity, quality and ergonomics allowing India manufacturing to climb up the value chain. Lastly, the government’s outlook on the automation in major manufacturing industries, with the advent and adoption of newer technologies, will lead to increase in the efficiency of the business processes, operations and productivity.”
Pushing localisation or increasing protectionism?
Budget has increased the customs duty on auto-components and CBUs (completely built units) of bus/trucks and CKD (completely knocked down) of cars. CBU is a terminology used for vehicle that is imported as a complete car fully assembled. These units do not need an assembly before they are sold in the country. On the other hand, CKD car is imported in parts and is then assembled at an assembly plant in the target country. These kinds of units generate employment as machinery and manpower are needed to assemble the components to make the vehicle.
Welcoming the move Nirmal Minda, President, ACMA, said, “The budget unveiled by Finance Minister is indeed inclusive and pro-manufacturing. The component sector is delighted that the duty on select items such as engine & transmission parts, brakes and parts thereof, suspension and parts thereof, gear boxes and parts thereof, airbags etc have been enhanced from 7.5/10 per cent to 15 per cent. These items account for more than 50 per cent of $ 43.5 billion domestic component industry’s turnover and over 30 per cent of its $ 11 billion exports. The industry is extremely competitive in these areas and this measure will not only encourage investments but also promote technology development in these areas.”
SIAM (the apex industry body representing leading vehicle and vehicular engine manufacturers in India) has also welcomed customs duty on CBUs.“SIAM has been advocating an increase in customs duty on CBUs of commercial vehicles from 20 per cent to 40 per cent. Hence, this increase in the duty is in line with the SIAM request although only partially,” said SIAM in a statement.
However, SIAM has raised a cautionary note on hike in duties on components. It added, “The increase in duty on auto components will increase the costs for the OEMs, especially in respect of low volume vehicle models that would have a higher import content due to low scales. While this has been done with the purpose of encouraging Make in India, it will negatively impact all the companies as none of the companies would have 100 per cent localisation. Also, these companies may not be able to localise even with 15 per cent duty on components as the limitation is the unviable scale and not price. Even ACMA had asked only for a uniform duty of 10 per cent on all components and had never sought an increase in the duty level to 15 per cent.”
While hike in custom duties on auto components will increase manufacturing costs for MNCs who are already making products in India, it may also deter other global players from entering into India. “The increase in customs duties for certain components & aggregates of automotive industry along with 10 per cent social welfare surcharge will drive up costs of manufacturing,” stated Sandeep Singh.
On international forum, India has been supporting globalisation and raising the issue of increased protectionism. Raising customs duty may give a boost to domestic manufacturing, but it will be viewed by other countries a step towards protectionism. This may also led to other countries taking counter-measures to this move.
Some missed opportunities
While the industry is happy to see the government’s continued focus on infrastructure, rural areas and MSMEs, it felt that the budget could have done more. Dharmesh Arora said, “All these initiatives together are expected to create a positive effect with respect to demand, generate employment and boost investments in the private sector. While the budget has refrained from providing any direction to the country’s automotive sector, we are hopeful that the impending EV policy will provide clarity. On the whole, we expect budget 2018 to create a positive investment climate.”
There were a lot of expectations in terms of a clear policy roadmap especially with respect to electric vehicles with the government aiming to have 100 per cent electrification by 2030. Also, there was no relief in the GST rate or an announcement on incentivising R&D.
According to Manpreet Singh, several crucial announcements, such as increase in the tax slab of the personal income tax, were missing from the budget. There was no major announcement to boost electric vehicle fleet, he added.
The industry expected a reduction in corporate tax, especially when a sunset clause has already been announced for the 150 per cent weighted tax deduction on R&D expenditure. “There were several industry expectations on supporting R&D, electric vehicles, and safety which did not find mention in the budget. Measures to streamline GST rates and compliance process especially for MSME were not announced as part of the budget,” said Kavan Mukhtyar. The budget aims to drive consumption by improving the general sentiment and facilitating spending (especially in the rural areas). This will have a positive effect on the automotive industry as well. However, one has to wait and watch to see whether hike in customs duty on components leads to growth in auto manufacturing in the country.
The drive to improve infrastructure will unquestionably facilitate further growth in the economy and the construction equipment industry.
Dimitrov Krishnan, VP and Head of Volvo CE India
This (continued focus on transport infrastructure) will present favourable opportunities for growth to the Indian construction equipment industry.
Vipin Sondhi, MD & CEO, JCB India Ltd
Customs duty hike: A debate
Nirmal Minda, President, ACMA
The component sector is delighted that the duty on select items have been enhanced from 7.5/10% to 15%. The industry is extremely competitive in these areas and this measure will not only encourage investments but also promote technology development in these areas.
The increase in duty on auto components will increase the costs for the OEMs. It will negatively impact all the companies as none of the firms would have 100% localisation. Also, these companies may not be able to localise even with 15% duty on components as the limitation is the unviable scale and not price.
The government’s outlook on the automation in major manufacturing industries, with the advent and adoption of newer technologies, will lead to increase in the efficiency of the business processes, operations and productivity.
Pradeep David, GM, Universal Robots - South Asia
The increase in customs duties for certain components & aggregates of automotive industry along with 10% social welfare surcharge will drive up costs of manufacturing.
Sandeep Singh, MD, Tata Hitachi Construction Machinery Company
Promoting Make in India
Budget has increased import duty to 15 per cent for select categories of automotive components. Specifically automotive components (engines, engine components, gearboxes, transmission shafts, drive axles, brakes, radiators, silencers, clutches, etc) which earlier attracted basic customs duty of 7.5 per cent or 10 per cent would now be taxed at 15 per cent. “This is a clear signal that the Government supports the Make in India program for the automotive industry and also promotes deeper localization efforts of various vehicle programs,” said Kavan Mukhtyar.
Customs duty on completely knocked down (CKD) units - where engine, gearbox and transmission does not come in a pre-assembled condition - of motor cars, motor vehicles and motorcycles has been increased from 10 per cent to 15 per cent. According to Mukhtyar, this measure will also encourage more local sourcing of components across vehicle segments.
Motor vehicles carrying more than 10 people and Motor vehicles used for transport of goods which are imported in completely built unit (CBU) which earlier attracted a basic customs duty of 20 per cent would now attract 25 per cent duty.
The 3 per cent cess (education and higher education cess) on the aggregate customs duty has been abolished and replaced by a levy of 10 per cent Social Welfare Surcharge on the aggregate customs duty. This will marginally increase the customs duty paid by importers.
Overall, we see this budget as focusing on the basic building blocks of the economy – rural agriculture, infrastructure and MSMEs. These will translate into demand boosters for the Indian automotive sector in the medium term.
- Kavan Mukhtyar, Leader - Automotive, PwC India
The budget gave a fillip to the MSME sector by announcing several important measures. Reduction in corporate tax rate for the MSME segment is positive for smaller auto ancillaries.
Manpreet Singh Sachdev, CEO, Elite Group