Budget 2021: 5 steps can be taken to revive the automobile sector

India became the fourth largest auto market in 2019 displacing Germany with about 3.99 million units sold in the passenger and commercial vehicles categories. India is expected to displace Japan as the third largest auto market by 2021. Today, Tamil Nadu is one of the top 10 automobile hubs in the world. Chennai has the capacity to produce about 1.4 million cars a year, or three cars every minute. Chennai may be the world’s largest car manufacturing hub. The three largest Automobile Companies are: Tata Motors Ltd., Maruti Suzuki India Ltd., Mahindra & Mahindra Ltd. Where as Volkswagen is the largest Automobile company in the world.

As the automotive industry declined for the 10th month in a row in August, car sales dropped by 41% – the steepest fall in two decades. The industry is one of India’s biggest, considering it employs some 35 million people, directly or indirectly, and contributes more than 7% to the country’s GDP. As per the Society of Indian Automobile Manufacturers (SIAM), passenger vehicle wholesales in India increased by 26.45% to 2,72,027 units in September 2020, up from 2,15,124 in September 2019. Overall, automobile export reached 4.77 million vehicles in FY20, growing at a CAGR of 6.94% during FY16-FY20. While this pace of contraction is considerably slower than the 23.9% decline in the real gross domestic product (GDP) during the first quarter (April, May, June), the contraction of Q2 is crucial because it implies India that has entered a “technical recession” in the first half of 2020-21.

The automobile sector has been witnessing a slowdown even before the pandemic due to regulatory changes, millennial buying preferences and increase in cost of ownership. India is the fourth largest automobile market in the world. It is also the largest manufacturer of two-wheelers and the seventh largest manufacturer of commercial vehicles in the world. The automobile industry was hit hard in FY 2019-20 as sales fell across vehicle segments. According to data released by SIAM, the Indian automobile industry recorded a 20.3% decline in domestic sales in FY20 as compared to a 5.9% growth in FY19.

The COVID-19 has further worsened the demand for automobiles. India’s auto sector is expected to decline by 30% in calendar year 2020 amid contraction in GDP and the pandemic as per Moody’s. The industry is expected to grow by 20% in CY 2021 on the back of pent up demand, preference for private vehicles post pandemic and the low base. The industry contributes 7% to India’s GDP and provides direct employment to around 3 crore people. Its revival is key to India going back to 8% GDP growth days. The festive season has given a boost to auto sales, however, the key is sustenance of the same. For the first time in this fiscal year, registration of vehicles across India in December recorded a growth of 11% year-on-year.

The automobile industry has high hopes from Budget 2021. Some of the steps which could provide a fillip to auto sales are enumerated below.

  1. Reduce GST on two wheelers to 18%
    This is a long pending demand of the industry. How can a bike which costs Rs. 50,000 be taxed at 28%, similar to a passenger car worth lakhs? Is it a luxury or a sin product?
    Two-wheelers are neither a luxury nor sin goods and so merit a GST rate revision, Finance Minister Nirmala Sitharaman said at an industry interaction in August 2020 but nothing has happened since then. A 10% GST reduction could boost demand for two wheelers. The loss of GST is also not huge at Rs. 10,000 crores. Just like affordable housing, an affordable passenger car category should be created wherein vehicles costing up to Rs. 5 lakhs should have a reduced GST rate of either 18% or 23%.
  2. Introduce interest / principal payment on vehicle loan deduction
    Currently, interest on housing loan up to Rs. 2 lakh is deductible from income for tax purposes under Section 24. Similarly Interest on vehicle loans could also be introduced with a lower cap of Rs. 1 lakhs. The principal paid on vehicle loans should be included under the cap of Rs. 1.5 lakhs stipulated for Section 80C.
  3. Include vehicle loan under 5 lakhs as PSL
    Vehicle loans under Rs. 5 lakhs should be considered as priority sector lending by banks. This will encourage banks to dole out more such loans to customers and lead to enhanced credit creation, at the same time providing a fillip to auto demand.
  4. Announce a New Scrappage policy
    A new scrappage policy to scrap more than 15 year old cars, buses and trucks is expected to be announced in the Budget. This has been hinted at by both Nitin Gadkari as well as Nirmala Seetharaman. This would incentivize the purchase of new vehicles. The new policy is likely to result in reduction of prices of automobiles due to usage of recycled materials from old vehicles. This would also help build the nation as an automobile hub.
  5. Remove restrictions on input tax credit for corporates
    Currently, input tax credit is not available for motor vehicles used to transport persons, having a seating capacity of less than or equal to 13 persons. For bigger sized vehicles, input tax credit is allowed only for transportation of goods or passengers. Businesses purchase cars and vehicles for use by senior officials and other official work. If GST paid on such vehicles is allowed to be claimed as input tax credit this will lead to additional demand for vehicles from corporates.
    To sum up, the Finance Minister should listen to the long pending demands of the automobile sector. Without a thriving automobile industry it will be difficult for India to get back its GDP growth mojo.