Opinion: Why this budget is critical for the auto industry?

Reducing personal income tax rates can leave more cash in the hands of consumers and could be one the ways of boosting domestic demand, which the manufacturing and auto sectors badly needs today. By Vinodkumar RamachandranAs the new year unfolds, the Indian auto industry is in the throes of a downturn. In such a scenario, ramifications abound for the broader economy as the industry is estimated to employ around 35 million people, directly or indirectly, and contribute more than 7 per cent to the country’s GDP. A rough ride to endure The auto industry had a bumpy ride in 2019, impeded by a confluence of challenges that led to the sharpest decline in more than two decades. The wholesale of vehicles across categories declined 13.8 per cent year-on-year in 2019, according to the Society of Indian Automobile Manufacturers (SIAM). To compound ongoing demand-side pressures, supply-side challenges have arisen too. In the coming months, auto prices are likely to increase as the industry moves to new safety norms and Bharat Stage VI (BS VI) emission standards. Manufacturers are cutting production significantly to reduce the inventory of dealers and ensure a smooth transition to BS VI norms.Weak sales have already taken a toll on employment in the sector. SIAM announced in August 2019 that around 2.3 lakh jobs have been lost in the auto industry. GST rationalisationAlthough Goods and Services Tax (GST) rates are determined by the GST council, lower taxation is vital for reviving demand in the sector. The government and the GST council could make provisions in the budget to make cars cheaper by reducing the GST rate to 18 per cent from the existing 28 per cent.Only a decade ago this was done successfully by temporarily bringing down excise duty on cars from to 8 per cent from 24 per cent That move had a positive impact on the automotive industry growth in difficult times. As demand picks up, government revenues are bound to increase. Personal income tax rateReducing personal income tax rates can leave more cash in the hands of consumers and could be one the ways of boosting domestic demand, which the manufacturing and auto sectors badly needs today. But would low GST collections and corporate tax revenue growth allows the FM to make this decision?The answer is mostly in the negative unless the government is ready to brace for a high deficit. Can at least some special deductions for interest on loans for auto and consumer durables be considered on the lines of those announced for e-vehicles last year?Most new cars are financed through loans and this could boost the sector, which is struggling with sluggish demand, an onslaught of new technologies, newer pollution standards and increased competition. And it may not be a great drain on the government’s finances.Cash for clunkers: reviving demand a sustainable wayVariants of the ‘cash-for-clunkers’ programme have had a catalytic effect on the auto industries in the U.S. and Europe, especially in the aftermath of the global financial crisis. Likewise, India has prepared the draft guidelines for its own version of a vehicle scrappage programme. It is important to accelerate the implementation of the programme in the current year. Once in place, the scrapping policy will phase out older, polluting vehicles and create demand for new ones. Electrifying prospects, prudent measures neededGlobally, electrification is one of the major shifts in the auto sector. Electric mobility is a major theme as companies have been conducting field testing as they get ready to enter the market. The government’s ongoing electric-mobility push will be pivotal in the upcoming budget. Electric vehicle (EV) manufacturers expect lower custom duty for EV battery imports in the upcoming budget. They also expect a 10 per cent peak custom duty for importers of auto parts and components for which no technology is available in the country. The manufacturers believe lower duty benefits should be extended to importers of components required for making electric vehicles.The industry requires more allocations to charging infrastructure to reduce the total cost of deploying EV charging stations. The drive aheadAs the sector goes through a cyclical slowdown, the government can alleviate some concerns by putting in place a framework that provides certainty in regulations and taxation. While the focus will be on the immediate problems at hand, it is important not to lose sight of the larger picture. In a vast market like India, low car penetration and rising disposable incomes are long-term drivers that are not going to fade away. The Indian market still evinces considerable interest. A case in point is the growing, sizeable list of new and prospective entrants to the market. With structural drivers in place, Budget 2020 is an opportunity to take steps to unfetter the full potential of the market.The author Partner and Head, Automotive and Industrial Manufacturing, KPMG in India and Global Leader for Industry 4.0, KPMG.(DISCLAIMER: The views expressed are solely of the author and ETAuto.com does not necessarily subscribe to it. ETAuto.com shall not be responsible for any damage caused to any person/organisation directly or indirectly.) Follow and connect with us on Twitter, Facebook, Linkedin, Youtube

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