RESEARCH IT  >>  INDIAN ECONOMY  >>  BUDGET 2002

Automobile Industry

Budget Measures
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    The withdrawal of special excise duty by 8% has resulted in reduction in excise duties for scooters, motorcycles and passenger cars. Reduction of excise duties on passenger cars, from 40% to 32%. For motorcycles and scooters the reduction in excise duty will be from 24% to 16% as a result of the above.

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    With QR restrictions being lifted from April 2001, import of second hand vehicles to be permitted however at high rates of duties. Second hand passenger cars to be permitted at an import duty at 105% ( 3 times the peak rate of 35%), for which the effective duty works out to over 180%.

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    In order to give an impetus to the commercial vehicle industry, the budget has recommended a 50% accelerated depreciation rate for new commercial vehicles for a period of one year.

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    Reduction of dividend tax from 20% to 10%.

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    The measures given for reforms in the agricultural sector will benefit the auto sector.

    Budget Impact
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    The above will have a positive impact on the automobile sector as a whole as second hand imports have been a major worry for the sector. As the budget has recommended high import duties for second hand cars, this will result in protection to the domestic passenger car industry when QRs are lifted in April 2001.

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    The reduction in special excise duty of 8% will benefit the passenger car industry as the excise duty now stands at 32%. This will benefit Telco, as it will be able to pass on this reduction to consumers. This will result in lower prices and hence give an impetus to falling volumes in this segment. The other gainer will be Daewoo Motors.

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    The reduction in excise duty from 24% to 16% for scooter and motorcycles will benefit industry majors like Bajaj Auto, Hero Honda and TVS Suzuki. If they pass on the entire reduction to their consumers higher volumes in this segment will benefit the sector.

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    Speedier reforms in the agricultural sector will benefit companies like Hero Honda, Punjab Tractors and M & M. Their dependence on the rural economy for sale of motorcycles, tractors and utility vehicles will benefit these companies as currently the agricultural sector is not doing well.

    Industry wish list

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    The government should increase its spends on infrastructure, especially building of roads and highways so as to promote the growth of the automobile sector.

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    Import of second hand vehicles (QRs to be lifted in April 2001) should be permitted only at very high rate of import duties. Import tariffs should be raised for second hand commercial vehicles, cars and tractors. The import duty for motorcars should be the steepest at 100%. This is mainly to protect the industry from cheaper second hand imports post April 2001.

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    Reduction of excise duty on passenger cars from the current 40%, so as to drive demand in this segment.

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    The tractor industry is hoping for a reduction in excise duty to 8% from the current 16% so as to reduce the prices of tractors and promote demand for the industry. However, certain companies are keen for a return to a dual excise system, whereby tractors below 30 HP segment paid 8% duty and over 30 HP segment pay 16% duty.

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    Utility manufacturers are keen for a reduction in excise duty from 32% currently to 24%.

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    Commercial vehicle manufacturers are keen that the government gives some incentives to accelerate the process of scrappage so as to discourage older vehicles from plying on the streets. This in turn will boost demand for commercial vehicles.

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    Currently companies like Telco and Ashok Leyland have to pay an excise duty on buses for both the chassis and body. This makes them more costly as compared to small-scale industry. SIAM has suggested that in view of the discrepancy and also the benefits of better bodies that incorporate the latest in technology, this duty structure should be rationalised to bring companies at par with the small-scale units. Government may consider exempting the entire body building activity from the purview of excise duty, whether done either manufacturer's premises or outside.

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    The auto policy aims to lay down minimum foreign equity limits for different segments. The minimum investment limit for motorcars is to be US$ 250 m, for commercial vehicles is US$ 100 m and for 2 to 3 wheelers is US$ 25 m. This minimum amount would have to be brought in by the majority stakeholder over three to seven years of starting operations.

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    The industry is hoping for a single central excise duty rate of 16% by 2003-04.

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    Introduction of VAT for automobile industry on experimental basis.

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    Specific duties to be imposed on imports to counter possible dumping by under invoicing.

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    Need to utilise the automotive cess fund created by the Government for allocation to National Test Agencies and to extend the allocation of cess fund to industry for projects which have been approved by Ministry of Highways/Surface Transport and other organizations.

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    The earlier provision of Income Tax Act, granting depreciation irrespective of date of capitalisation to be reintroduced. In order to encourage R & D in the automobile industry increased deduction should be given for R&D expenditure.


      Key Positives
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    Since the liberalisation of the early 90's, the automobile sector has grown tremendously in terms of market size and production capacities. The growth in the economy in mid 90's too resulted in higher demand across the sector.

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    As interest rates across the board signal a lower interest rate regime, financing costs of vehicles has reduced dramatically. This is likely to increase demand for automobiles in future.

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    The Delhi government has introduced measures to ban vehicles that are over 15 years old to ply on the roads to control pollution levels. Similar measures from other state governments could stimulate demand as old vehicles are taken off the roads. This will lead to higher demand for three wheelers, buses and cars.

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    Increased competition has forced companies to focus on cutting costs and improve on technology and R & D.

    		 
      Key Negatives
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    The automobile sector has reported a sharp decline in volumes in FY01 due to uniform sales tax rate, drought conditions and lower freight demand. The hike in oil prices too has added to the woes of the industry. The two-wheeler industry, especially motorcycles however, continue to do well.

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    From April 2001, domestic automobile companies will faced increased competition from imports as under WTO regulations import of second hand vehicles in India will be permitted at lower import duties..

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    Spending on infrastructure continues to remain low leading to inadequate and poor quality roads. This is a key hurdle to the development of the automobile sector.

     
  • How was this sector impacted by Budget 2001?