Budget 2021's focus on economic revival to increase demand for automobiles

While voluntary vehicle scrapping policy, augmenting public transport system, etc were positives of the Budget 2021-22, some feel that increasing duties on auto components would increase production cost.
Budget 2021's focus on economic revival to increase demand for automobiles
The Indian auto industry has, in general, welcomed Budget 2021 announcements such as increased spending on infrastructure, voluntary vehicle scrapping policy, augmenting public transport system in urban areas, etc. However, some feel that increasing duties on auto components was uncalled for in such a revival period. Here are few industry reactions:

Kenichi Ayukawa, President, Society of Indian Automobile Manufacturers (SIAM) 

In a visionary budget, the government has adopted an expansionary stance with a thrust on infrastructure building with measures for efficiency improvement and increasing competitiveness. Good macroeconomic growth will translate to good auto sector demand. Specifically, the vehicle scrappage scheme has a good intent and the auto industry would be keen to work with the Government on suggestions for maximizing benefits to environment and society.

Guenter Butschek, CEO & MD, Tata Motors

Budget 2021 is a progressive statement of intent and action that aims to both stimulate and sustain growth following an unprecedented year. The significant increase in overall allocation towards capital expenditure has been complemented with comprehensive measures to catalyse multiple levers- focus on rural, infrastructure investment, impetus to manufacturing, social welfare, entrepreneurship and digital - to enable overall holistic development.

For the automobile sector, which is a significant contributor to India’s GDP, there are multiple welcome announcements including a voluntary vehicle scrapping policy to phase out old and unfit vehicles, augmenting public transport system in urban areas, continuing focus on adoption of cleaner fuels, and enhancing outlays for developing road infrastructure and expanding the Swachh Bharat Mission.

Deepak Jain, President, Automotive Component Manufacturers Association Of India (ACMA)

The vision of an Aatma-nirbhar Bharat enshrined in the Union Budget, coupled with the ‘Sankalp’ of ‘Nation-First’ will be the bedrock to propel us further as we redefine our economy in a post-pandemic world. Significant outlay for vaccination in the country will add to the confidence of a resurgent India.

Announcements with regards increased spend on road infrastructure, voluntary scrappage policy, Research & Development and PLI among others, augur well for the automotive sector. Further, continued focus on building rural and agricultural infrastructure and prioritising agriculture credit growth will have long-term positive impact on rural demand for vehicles.

Increase in basic customs duty on select auto components will encourage local manufacturing of such items. It is also heartening that the budget outlay for the MSME sector has been doubled compared to last year. The auto component industry is dominated by MSME and this will provide them the necessary succour as the industry recovers.

Gurpratap Boparai, Managing Director, ŠKODA AUTO Volkswagen India Pvt Ltd  

The union budget for 2021-22 presented by Honorable Finance Minister Smt. Nirmala Sitharaman, augers well to create capacity for developmental and growth in the country. Increased outlays in the road sector, infrastructure development and introduction of the voluntary vehicle scrappage policy will not only create a safer and environment-friendly auto sector but also drive replacement demand in the sector. The support announced for the rural economy and farm sector will be a big boost for wealth creation in the non-urban markets and increase the scope for auto demand in these regions. While further details of the prior announced PLI scheme is awaited, the same is expected to help the Indian auto industry to improve production efficiency and become self-reliant - "atmanirbhar'.

It is important to keep in mind that even in the coming financial year, the passenger vehicle market is unlikely to reach the level of 2018 and the much-required rationalisation of GST and cess to aid the auto industry was missing. Additionally, the increase in customs duty on certain auto parts to 15% will further increase input costs and prices for cars which depend on specialised components which cannot be manufactured locally due to unviable volumes.

Farrokh Cooper, Chairman & MD, Cooper Corporation Pvt Ltd 

Budget 2021 is optimistic, driving the country towards Aatmanirbhar Bharat by putting significant stress on Railways, Power sector, infrastructure healthcare, banking, insurance, and agriculture, which will not only enable the country to revive its economy but will also stimulate growth. Voluntary policy on the scrapping of vehicles would have a positive effect and will move the commercial and automobile industries ahead. The industry would definitely be encouraged by the decision to double the allocation of MSME and to reduce the customs duty on steel. Focusing on highways and the investment plan would certainly give the CV and construction equipment the requisite impetus. The government’s increased focus on the infrastructure sector will certainly bring in positive impact.

Martin Schwenk, Managing Director and CEO, Mercedes-Benz India 

We welcome the policy stability that the budget provides to the industry by no new announcement of direct taxes, though we would have liked some reduction in compensation cess. It’s good to see some positive movement through the scrappage policy and we also expect the capital expenditures to indirectly help the industry. The decision to spend more on infrastructure despite of the high fiscal deficit, will boost the overall economic revival and we should see positive impact on the PV market. However, the increase in the rise in auto component duties is unexpected in such revival period, and it will increase the production cost, leading to higher cost for consumers. There could have been further push towards e-mobility by lowering import duties on EV.

Prashanth Doreswamy, Country Head, Continental India & Managing Director, Continental Automotive Components (India) Pvt Ltd

The Union Budget of 2021-22 has a few vital benefits for the automotive and manufacturing industry. Several of the initiatives announced today, such as the commitment of Rs 1.97 lakh crore for PLI schemes and guidelines on scrappage policies will have long-term gains for the industry. Especially the scrappage policy will help in generating demand for new vehicles and also further the cause in curbing vehicle emissions. 

The relaxation in the customs duty on steel products, ferrous, and non-ferrous materials etc., is a welcome move, however, raise in the customs duty for certain auto parts will further inflate the overall cost of the vehicle. 

While the focus on renewable energy sources, with the Hydrogen Energy Mission and allotment to development of Solar Power, looks futuristic, electrification of vehicles is the future of the automotive industry.

To allow private players to finance, acquire, operate over 20,000 buses is a promising step. We await further clarification on the scrappage policy to evaluate the actual impact and benefits to the industry. 

Anurag Garg, Managing Director & Country Head, Vitesco Technologies, India  

The Union Budget 2021 was the most anticipated budget for the Indian automotive and manufacturing sector. There was a strong push towards manufacturing and localization in this budget. Apart from the usual focus on fiscal deficit, this time the government has shown a great focus on health and infrastructure development this time.

The announcement of a voluntary Scrappage policy is a move in the right direction. We look forward to further details on this to understand how this can encourage the adoption of electric vehicles, gradual reduction of air pollution in coming years, and newer Bharat Stage Norms in the future. Now, we look forward to the proper implementation of this policy at a larger stage as soon as possible will help us to enhance demand in the market.

The finalisation of the Production-Linked Incentive (PLI) Scheme and the allotments are also positive. The PLI Scheme will get a better push to boost manufacturing and attract investments in the automotive sector, benefitting us in the long run. 

The increase in customs duties in some sectors is designed to push self-reliance and localization. As we look towards a future with electrified automotives, localization will definitely help in cost optimization in the future. Though it might create initial challenges through price hikes and demand generation, it will be better for our economy in the long run.

Additionally, the focus on renewable energy is welcome. The Hydrogen Energy Mission and focus on solar energy will help meet our energy requirements in the future adequately. Health outlay in the budget has increased by almost 100% considering the pandemic situation, this will help us to uplift the health infrastructure in both urban and rural segments of our country.

Nishant Arya, Executive Director, JBM Group

The allocation of Rs 18,000 crores for the public bus transport services has come as a sigh of relief for the bus makers who have been caught in the doldrums from 2019. The proposed PPP model will in turn help the sector to create employment as well and overcome the adverse effect of the pandemic. We, as an industry player, are now looking forward to the details of the vehicle scrappage scheme which will be an added advantage for the auto sector. The heavy and medium commercial vehicle sector will also have a boost in demand as a sum of Rs 5.54 trillion has been allocated for infrastructure development. The 2.5-5 percent reduction in the customs duty on some of the semi-finished and finished steel products will have a positive impact on the automotive industry.

The solar sector is now awaiting notification on phased manufacturing for solar cells and solar panels. The increased custom duty on solar inverters, solar lanterns/lamps from 5% to 20% and 15% respectively will encourage domestic production which is the need of the hour to fulfill the dream of “Aatmanirbhar Bharat”. The government's thrust towards green energy generation has further been consolidated and initiatives such as SATAT aimed towards setting up biogas projects will see speedy deployment.

Suyash Gupta, Director General, Indian Auto LPG Coalition 

While the budget has appropriately focused on healthcare, infrastructure and of course an economic revival, energy transition and renewable energy has also received the Finance Minister’s attention. A notable announcement in this regard has been the announcement of the Hydrogen Energy Mission for generating hydrogen from green power sources. Similarly, the budget furthers government’s longstanding commitment to non-conventional energy with a capital infusion of Rs 1,000 crores to the Solar Energy Corporation of India and Rs 1,500 crores to the Indian Renewable Energy Development Agency. The Finance Minister also announced the extension of the city gas distribution project to 100 additional districts. While all these announcements are highly welcome, we sincerely hope the city gas project is diversified to include Auto LPG in its ambit along with CNG which is the current focus. Despite being one of the cleanest and most easily available gas, Auto LPG remains highly under-utilized in India’s transport sector. Inclusion of Autogas in the city gas distribution project will not only allow a wider choice for consumers but will also be a major boost efforts to clean up the environment. We absolutely need a low hanging fruit like Auto LPG, which can be implemented immediately. With 14 of the world top 20 most polluted cities in India, we cannot wait until the next decade to breathe cleaner air.

In another welcome move, the government has given due importance to environmental concerns and laid out Rs 2,217 crore in allocation for 42 urban centres for efforts to clean up urban pollution. We hope under this outlay, the government also undertakes schemes to encourage and incentivise vehicle owners to switch from petrol/diesel to clean gaseous fuels like Auto LPG and CNG.

Overall, we are satisfied with the budget focus on economic revival, improving public healthcare services, easing of tax compliance and promoting clean energy.

Parthasarathi Patnaik, Chief Risk Officer, Vayana Network

While the vehicle scrappage policy seems voluntary at this stage, I think this may be the first of many bold steps the government is likely to take to aggressively curb use of polluting vehicles and usher an era of electric vehicles in line with global trends. This measure portends well for the auto sector in the medium term as it is likely that a large number of older commercial and private vehicles will be replaced by newer fuel efficient vehicles, thus requiring large additional investments by auto and auto parts manufacturers. 

Further, with the FM’s budget proposing to make large outlays for capital investments in infrastructure and on improving public transport, the auto sector is likely to see a surge in investments and employment opportunities in the near to mid-term’.

Pankaj M Munjal, Chairman and Managing Director, HMC, a Hero Motors Company

As expected, the Finance Minister has ensured that the focus of the budget has been on inducing a much-needed economic revival in a contracting economy. The commitment to infuse significant spending into building infrastructure projects and strengthening roads, public transport and metro systems augurs well for the automobile sector as well as for the economy at large as it will generate much-needed activity and employment in the economy. Taking note of the menace of air pollution, the Finance Minister has also proposed an outlay of Rs 2,217 crore to help 42 urban centers address the environmental concern. This is a highly welcome move. However, we hope the measures initiated to utilizes these funds to tackle air pollution give due importance to promoting cycling as an environmentally friendly mode of transport. We would like to see the 42 urban centres demarcated for this support using it among other things to lay down dedicated and safe cycling tracks.

However, from the manufacturing perspective, we would have liked to see dedicated announcements to help India’s bicycle sector improve its manufacturing capacity and export competitiveness under the Atm Nirbhar Bharat initiative. We would also liked to see a greater rationalization of GST structure and its compliance.

Deepak MV, Co-founder & CEO, Etrio

This budget definitely demonstrates the commitment by the government to boost demand and generate employment through investments in areas like infrastructure, finance, and healthcare. Also, the budget extends support to start-ups and MSMEs through tax exemptions and increase coverage of small companies threshold and, higher allocation towards MSME sector.

From an overall Auto industry standpoint, the soft step towards the introduction of a voluntary scrappage policy is a welcome move. However, driving implementation of the same through incentives/ disincentives and necessary infrastructure is going to be critical. Further, the allocation of Rs 1.97 lacs crore towards PLI along with custom duty increase on components should spur investments in domestic manufacturing. The infrastructure investment focus would definitely drive demand for M&HCVs and construction equipments specifically along with boosting demand for mobility at large.

For the EV industry, it's been a bit of disappointment with no direct mention of any EV focussed initiative or policy including FAME. There were a lot of expectations from the budget including ramping up of charging infrastructure, enablement of retail financing for EVs, and moderation of the inverted GST tax structure with lowering taxes on EV input components including battery.

R Sridhar, Executive Vice Chairman & CEO, IndoStar Capital Finance

There are approximately one million commercial vehicles in India, which are more than 15 years old. Scrapping them and creating a replacement demand will modernise the fleet and has the potential to add approximately $15 billion to the sales of new commercial vehicles. This replacement demand is nearly 1.5 times the average annual sales of new commercial vehicles. The biggest beneficiaries of the huge replacement market will be vehicle manufacturers, ancillaries and vehicle financiers. Not only will this policy encourage fuel efficient and environment friendly vehicles, there will also be a marked reduction in our fuel import bills. The nation's logistics infrastructure will see a tremendous boost in the form of reduced travel times and safer national corridors. While the finer details of the policy are awaited, this is a much awaited and very welcome reform announced by the government. The execution of the scheme will be key and if the government provides for an additional incentive by way of an upgrade discount, the scheme will be extremely successful and truly modernize India’s fleet of vehicles.

L Viswanathan, Partner, Cyril Amarchand Mangaldas

The announcement of the Scrappage Policy is expected to significantly boost the auto industry as also contribute to a clean India.

It is expected that this policy would nudge electric vehicles which would also be a boost for manufacturing in India and will trigger investment in clean technology.

The success of this policy would be felt in multiple fronts, from giving a fillip to the automobile sector, boosting manufacturing in India and also reducing our fuel import bill.

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