Post-Budget Article: Impact on the Automotive Sector

The first Union Budget of Amrit Kaal has allied itself with the vision of opportunities for citizens (focusing on the youth), growth and job creation, coupled with strong and stable macro-economic environment. 

As highlighted in the recent economic survey, the automotive sector is a significant contributor to the country’s growth by accounting for 7.1% of the total GDP and a massive 49% of the manufacturing GDP. The forward-looking approach adopted in the budget towards this sector has been in alignment with the government’s goals of promoting Atmanirbhar Bharat and moving firmly towards net-zero carbon emissions by 2070. Additionally, the larger macro-economic announcements, focused on- capex, manufacturing, tax regime and infrastructure are likely to stimulate vehicle sales across categories. A 33% increase in capex (from previous year) to INR 10 trillion is expected to aid growth through multiplier effect, which will support infrastructure development and lead to enhanced growth in commercial vehicles segment. Moreover, reduction in individual tax slabs and push provided to rural development (via agri-accelerator funds and increased credit funding aimed at improving liquidity and consumption in rural economy) will benefit the entry level two-wheeler and passenger vehicle segment.

The impact of the budget on the automotive sector can be analysed on the following fronts:

1. Mobilising Multiple Levers towards Green Economy: By recognising green growth as one of the priority areas, the government has laid thrust on reducing carbon intensity of the economy. 

The Green Hydrogen mission, with an outlay of INR 19,700 Cr, is aimed at facilitating demand creation, utilisation, and export of green hydrogen. This will enable creation of over 6 lakh jobs and cumulative reduction of fossil fuel imports by over INR 1 Lakh Crore by 2030. Additionally, the proposed viability gap funding under public-private partnership for domestic manufacturing of hydrogen will be critical for expediated production, paving way for India to become a net exporter of green hydrogen.

There has been a 78% increase in estimated budget allocation of Faster Adoption and Manufacturing of EV scheme which was Rs 2,908 crore in the previous financial year while for 2023-24 it will be Rs 5,172 crore. This will be pivotal in pushing demand for Electric Vehicles.

Moreover, the Union Budget has allocated INR 35,000 Cr. for priority capital investments towards energy transition and net-zero objectives. These investments will not only steer the economy towards enhanced sustainability but will also pave way for newer business models and development of globally competitive technologies. 

2. Incentivising indigenous manufacturing and green mobility through Indirect taxation: The indirect taxation proposals highlighted in the budget are aimed at promoting exports, boosting local manufacturing, enhancing domestic value addition and encouraging green mobility. 

• The Customs duty exemption has been provided on import of specified capital goods and machinery required for manufacturing lithium-ion cells for batteries used in electric vehicles. The concessional BCD rate is extended upto 31 March 2024 on import of Lithium-ion cell for battery or battery packs of EV/Hybrid vehicles, other specified parts, components and sub-parts for manufacture of lithium-ion. Additionally, BCD exemption has been introduced on import of specified capital goods/ machinery required for manufacturing of lithium-ion cells for batteries used in EV. This rationalisation will promote local manufacturing of cells, which will ease the overall cost of ownership of EVs.

• The increase in customs duty from 30% (+3% SWS) to 35% for vehicles in Semi-Knocked Down form (SKD), including EVs and 60% (+6% SWS) to 70% for Completely Built Unit, CBU EV having CIF value up to $40K; and other CBU vehicle having CIF value up to $40K or/ and engine capacity up to 3000 cc for petrol run vehicles/ up to 2500 cc for diesel-run vehicles, is in alignment with government’s focus on maintaining sustained growth via indigenous manufacturing- which aids employment and reduces import dependency, providing an impetus to Make in India 2.0 initiative.

3. Empowering auto-component manufacturers and dealers: With around 80% of auto-component companies falling under MSME category, the benefits extended to the auto-component industry (under MSMED Act) will act as a catalyst for OEMs as we pivot towards green growth. The revamped credit guarantee scheme for MSMEs, and the support provided to MSMEs in timely receipts of payments beyond time limit specified in MSMED Act to be allowed only when actual payment is made will enhance liquidity, which in turn will help in building inventory. Further, with cost of credit guarantee reducing by 1%, it will help auto dealers in raising funds.

4. Promoting Circular Economy: In furtherance of the vehicle scrappage policy mentioned in Budget 2021-22, allocation of funds to scrap old vehicles of Central government and support provided to states in replacing old vehicles will provide an impetus to circular economy. With over one crore vehicles ready for scrapping in India, the push provided to vehicle scrappage (nine lakh old vehicles owned by the central and state government to be scrapped and replaced) will help reduce pollution, create job opportunities and boost demand for new vehicles.

Overall, the Union Budget 2023-24 echoes government’s focus on green mobility and holistic growth of the automotive sector. As India surpasses Japan to become the third largest automobile market (in December 2022), and the Electric Vehicle market is expected to grow at 49% between 2022-30, the automobile sector is poised for unprecedented growth.