The underlying theme of Union Budget 2008-2009 has been to address three key macro economic factors that have a bearing on the Indian economy, says industry analyst Frost & Sullivan.

The first is emphasis on consumption-driven growth - the budget seeks to encourage consumption by raising consumer's disposable income. The second is the policy on inclusive growth, keeping in line with the allocations that have been made to welfare schemes. The third key issue is the attempt to address farmer's woes. Of these three factors, proposals aiming to increase the consumption expenditure of consumers and the betterment of the farming community have a direct and indirect impact on the automotive sector.

Pre-budget Demands of the Automotive Industry

The Indian Automotive Industry was going through a rough period as the demand for automobiles were diminishing. Consequently, the pre-budget demands of the Automotive Industry were like a catalyst to the soaring demand for automobiles in the country.

  • The adoption of a uniform excise structure of 16 percent across all passenger cars and utility vehicles
  • The reduction of excise duty on two-wheelers and three-wheelers from 16 percent to 8 percent to offset declining sales
  • The provision of benefits for the development of hybrid technology
  • The offer of liberal credit to the agricultural sector to encourage the purchase of tractors

Budget Proposals Directly Impacting the Indian Automotive Industry

Budget proposals on the Indian Automotive Industry give a clear picture of creating a gap between the small and big cars. However, budget failed to concentrate on exports and an excise duty cut for big cars could have been considered.

  • Excise duty on small cars reduced to 14 percent
  • Excise cut on two and three wheelers to 12 percent
  • Excise duty on buses and chassis cut from 16 percent to 12 percent
  • Excise duty on hybrid cars cut from 24 percent to 14percent
  • Custom duty on steel reduced from 5 percent to nil
Automotive Industry: Positive Impact of the Budget on the Indian Automotive Industry (India), 2008-2009 Source: Frost & Sullivan

Timely Relief for Tapering Sales

Two-wheeler sales have reduced over the last nine months, by 12 percent year on year. This is despite the fact that macro economic factors such as economic growth and consumer spending remained more or less conducive. A slowdown was also witnessed in the commercial vehicle segment. The budget has provided the much-needed impetus at the right time, to elevate the falling demand. India has a large market for two wheelers, at a time when defaults in two-wheeler loans are being reported; passing on the duty cut to customers will help boost sales.

Small cars is the most popular car segment in India, and the duty cut from the previous budget benefited the segment. The present duty cut will increase consumption demand for small cars, as this goes concurrently with the raising of the personal income tax limit.

Tata Motors new small car, the Nano, is to be launched in September 2008. It is priced at Rs. 1 lakh, and will benefit from the excise duty cut, which will attract more customers from the two-wheeler segment. For tyre companies, there has been a reduction of duty on tyre chord fabric.

Revision of Tax Slabs Affecting Affordability

Raising the limits on taxable income will increase the disposable income of consumers. The amount that could be around Rs. 5,000 per month is equivalent to the amount needed to pay off Equated Monthly Installments on car loans. This is anticipated to encourage car purchases.

Green Technology Booster

The excise duty reduction on hybrid cars is from 24 percent to 14 percent. The domestic companies that will be benefited from this move are Tata Motors and Mahindra and Mahindra, which are planning to launch hybrid vehicles soon. Honda will be another beneficiary, as the company is planning to launch the Civic Hybrid in the Indian market. The reduction in countervailing duty from 114 percent to 104 percent will benefit this launch.

With regard to electric cars, there has been full exemption of excise duty, but this might not have a decrease on the price of these cars, as the customs duty on imported inputs is still at 16.0 percent.

The proposal to allow a 125.0 percent weighted deduction for outsourced R&D will help gain access to the latest technologies and develop advanced products.

Unfinished Agenda

Even as duty reduction is seen as a measure to help revive the manufacturing sector, there has been no announcement of vehicle retirement policy.

The budget did not take any specific measures to promote automotive exports. Exporters' supplication to exempt export profits from taxation in view of the appreciating rupee were not accepted by the Finance Minister. The provision under Section 80HHC in the income tax law, which exempts export profits from taxation, cannot be restored at this stage, as this would go against WTO regulations.

Two-wheeler manufacturers have asked for a further cut in excise duty - to 8 percent from 12 percent. Excise duty has been reduced at the same level for two wheelers and small cars; hence, the rate of reduction has also been the same.

Budget Aftermath

75 percent of the total car sales in India happen in the compact car segment. Following the reduction in excise duty, Hyundai Motor Company has reduced prices in the range of Rs. 8,700 to Rs. 20,000. Maruti Suzuki India Limited small cars will see a price reduction in the range of Rs.6,500 to Rs. 18,000. General Motors Corporation is likely to offer a reduction of Rs. 7,500 to Rs. 14,000 on its small car - the Spark U-VA. Tata Motors is expected to lower the prices of its small cars and commercial vehicles, including buses, bus chassis, and bus body./

Following the budget announcement, the Sensex and the Nifty closed with a marginal loss of 1 percent. The Sensex suddenly declined more than 500 points in during the course of that session. At the same time, the BSE auto index has been performing well, and scrips of Mahindra and Mahindra and Maruti Suzuki India Limited's have recorded gains in the bourses.

GM has announced that it plans to launch a sub 1 liter car in India. The expanding small car market has received a boost with the budget proposals, and with the launch of new models, the segment is moving toward more competition, which augurs well for the consumer.

An Egalitarian Budget

The budget has targeted a layman's need. As the article's title states, significant importance is given to the small cars in the automotive industry. The consumer composition especially of the middle income group of the two-wheeler segment will witness a drastic change toward the small cars segment as the budget is providing an excise duty cut and affordable prices of the small cars.

Agriculture is an important sector in the Indian economy. Flexible consumer credit will help in the purchase of tractors, equalizing with the motor vehicle segment as people employed directly and indirectly in the agricultural sector in India is huge.

Overall, the Indian budget has focused on the manufacturing segment of the automotive industry, leaving the exporters and the R&D sector behind. In addition, the budget has provided a number of excise and custom duty cuts, which would create robust automotive production in India in the future.

By Lavanya P. Arun, Research Associate, Economic Research and Analytics Team, Frost & Sullivan