The Congress government in India presented the 2004 union budget yesterday and it turned out to be a mixed bag for the Indian automotive industry.
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Starting with the disappointments, the industry’s long-standing demand for a reduction in excise duty to 16% from the existing 24% has been denied. To add to the woes, a 2% educational tariff has been added to the current duty structure. It is likely that most carmakers will pass this 2% increase (which will translate into a 0.5% – 1.0% increase in prices) to customers in some form or other. In fact, market leader Maruti has already announced a corresponding price hike of 0.38% across its range.
Also of worry to the industry is the rise in domestic steel prices that will result from an increase in excise duty to 12% from the existing 8%. Though the customs duty on imported non-alloy steel has been reduced from 20% to 15% and on alloy steel from 15% to 10%, the positive impact will be lost in view of most domestic manufacturers now buying steel from Tata Steel, which has increased its market penetration over the last few years. Companies like Maruti, Honda-SIEL and Tata Motors (surprisingly!) would benefit the most from this reduction in custom duty as they import steel from overseas manufacturers like Posco.
The reduction in customs duty on imported alloy steel will benefit valve and piston ring manufacturers like Rane Valves and IP Rings.
On the positive side, automobile companies inclined to invest in R&D can deduct up to 150% of the expenditure under section 35(2AB) of the Indian Income Tax Act. This will be beneficial for manufacturers who plan to use India as an exports hub, and Toyota Kirloskar India (after GM India and DaimlerChrysler India) has already indicated its plans to do so.
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By GlobalDataThe farm equipment industry will benefit from the budget as the 16% excise duty on tractors has been removed. This, after taking into consideration the hike in steel prices, should bring the prices of tractors down by around INR15,000–25,000 (€270-450).
The budget may have many indirect implications on the automotive industry. The move towards strengthening the infrastructure including roads, finance, and marketing facilities, would go a long way in providing thrust to the rural sector and reviving the overall economy.
The budget has also increased the zero income tax limits to INR100,000 of taxable income. This, in addition to the INR30,000 standard deduction already in place means that individuals with up to INR130,000 annual income will not come under the income tax net. While the number of such individuals is huge, the positive impact of this move will mostly be limited to the two-wheeler industry and the used car market.
The budget failed to address any of the demands made by the Society of Indian Automobile Manufacturers (SIAM). The Indian automobile industry had demanded a reduction in excise duty on cars and MUVs, greater emphasis on augmentation and upgrading of test facilities for testing and certification of automobiles, a vehicle retirement and fleet modernisation plan to address the issues of road safety and air pollution caused by ill-maintained vehicles and fiscal incentives for Alternative Energy Driven Vehicles, none of which finds a place in the budget.
Deepesh Rathore / Tilak Swarup
