Will the Union Budget 2017 be able to meet auto sector’s demand after hard-hitting demonetization?

Will the Union Budget 2017 be able to meet auto sector’s demand after hard-hitting demonetization?

By Mr. Rohit Saboo, President and CEO, National Engineering Industries Limited (NEI)

Union Budget scheduled on 1st February 2017 has expectations soaring high from several sectors and one of these sectors is the Indian auto sector. The major expectation from the Budget is to help boost consumer sentiments, which is the need of the hour for the manufacturing sector in general. From what is being speculated so far, the government is likely to tread on a path to improve the disposable income, while also boosting the overall economy. This, in return, will enhance demand for vehicles especially in villages and rural areas. Reducing personal income tax rates will further allow consumers to have more disposable income, which they can spend on vehicle purchase.

The tax structure will prove to be beneficiary for the auto sector, which is one of the heaviest taxed sectors in India. These moves will help in boosting sentiments of the entire auto industry and vehicles’ total cost configuration. A uniform tax structure will help create a robust business environment for the auto sector. Currently, the Indian auto sector contributes about 7.1% to the GDP and provides employment to 29 million people, directly and indirectly. With government’s support and investment through right incentives and subsidies, the auto sector can increase its contribution in GDP as well as the employment rate.

The automotive sector is also hoping that the government can do away with multiple tax slabs and tax levy dependent on size of the cars. Additionally, the Road Transport and Highway Ministry’s proposed vehicle fleet modernization policy is expected to take shape in the Union Budget 2017. Proposed in May 2016, the policy aims to eliminate the old polluting vehicles, which are 10 to 15 years old, from the roads. According to the government estimates, the policy may take 28 million vehicles off the road and will significantly reduce emissions.

The policy proposes reduction in excise tax up to 50% at the time of purchase of new vehicle after scrapping the old vehicle. The policy also proposes receiving fair value for the scrap and discounts by automobile manufacturers. This scheme is still awaiting approval from the Finance Ministry, but once put into effect, the policy is expected to improve sales of all the automobile manufacturers. It will also help in cutting down pollution and enhancing road safety. If and when this scheme is implemented, auto manufacturing is anticipated to improve by 20% to 25 %.

What the Indian auto sector broadly expects from the Union Budget 2017 is introduction of tax measures and policies that augment the consumption in the economy. These measures will finally give much-needed confidence to the auto sector, and hopefully affect the industry in a positive way.