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Has Budget 2021 added enough fuel to the automobile industry?

Has Budget 2021 added enough fuel to the automobile industry?

Budget 2021 boosts hopes of revival from this prolonged pandemic for the automobile industry. The Finance Minister has highlighted the commitment to infuse significant spending in all the major sectors with a special focus on infrastructure building, which will help augment the growth of the Automobile industry. 

Indian Automobile Industry is the key driver of the economic growth and accounts as a significant contributor of Gross Domestic Product, generates employment, and increased revenue from exports. The Covid-19 pandemic had brought unforeseen circumstances leading to a decline in sales due to repressed demand. 

Here are a few measures announced by the Finance Minister to boost the auto sector in the years to come:

Vehicle Scrappage policy

Budget 2021 makes an important announcement on the long-pending voluntary vehicle scrapping policy that aims at taking polluting, hazardous, and fuel-inefficient vehicles off the road to reduce the pollution and congestion on roads. The scrappage policy will encourage the sale of environmental-friendly vehicles, stimulate the automobile industry’s demand, and reduce oil imports due to the greater efficiency of current vehicles.

The scheme applies to private vehicles after 20 years and commercial vehicles after the tenure of 15 years. The cars have to undergo a fitness test in the authorized fitness centers after the predefined term. The timely scrapping of old vehicles may also provide an option to recycle critical raw materials, reducing automobile prices in the future. 

Custom Duty Slashed

The Budget 2021 has announced the reduction in primary customs duty to 7.5% on semis, flat and long products of non-alloy, alloy, and stainless steels. This move will reduce manufacturing costs for the automakers, which will indirectly lead to lower prices.

The Government has also introduced Agriculture Infrastructure and Development Cess (AIDC) on petrol and diesel. However, this imposition has come with a reduction in import duties and will not impact the end consumers. 

Tax Exemption for Foreign Investment in Infrastructure

To increase foreign investment in infrastructure, the Government has granted 100% exemption on their income, dividend, and capital gains. This move will enhance the flow of funds needed for large-scale infrastructure development. 

With accelerated infrastructure development, the automobile sector will benefit in many ways, especially electric vehicle manufactures. A good infrastructure lays the foundation for adopting electric vehicles, as there will be more charging stations, battery swap stations, and employment generation. 

Additional Read: Key Things to Know about the Union Budget 2021

Hike in taxes of specific auto components

There is a hike in the basic customs duty rate of auto components from 7.5% or 10% to 15%. The Government has undertaken this decision to boost the domestic production of cars and make the domestic manufacturers self-reliant.

The rise of import duty will increase production cost, shifting the burden of higher cost to the end consumers. Some auto manufacturers perceive this as an adverse move since domestic production is not viable considering the current volumes.

Boost to Public Transport Infrastructure

The Government has proposed to launch a scheme with an investment of Rs.18,000 crores to augment the growth of public bus transport services for better connectivity and mobility in cities.

With the increase in Government outlays for urban transport, demand for the commercial vehicles segment is expected to rise. 

Additionally, with the P-P-P (Public-Private Partnerships) model coming into the foray, private players will have better financial and operational control leading to increased productivity and efficiency in the auto sector.  

Budget 2021 has reinforced the Government’s vision to strengthen domestic manufacturers and support them to reach pre-COVID numbers or higher to bring the economy back on track. The launch of the Voluntary vehicle scrappage policy became a game-changer for the automobile industry.

Additional Read: How Will the 2021 Budget Impact the Auto Sector in India?

However, these announcements have given mixed feelings for the automobile industry. There were many expectations that the Government would rationalize the industry’s tax structure to make automobiles affordable, reduce the compensation, or reduce the GST rate on passenger vehicles. Further, the Finance Minister missed out on the new policy initiatives for Electric vehicles (EV) and inverted duty structure for components, leaving the EV industry disappointed. Nevertheless, the current measures offer enough impetus to give the much-needed boost to this industry in the short term.

Tata Capital is committed to supporting the automobile sector with curated financing solutions to ensure adequate access to capital. Reach out to us to know more about our loan offerings for the auto sector.

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