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Has the Government Done Enough to Revive Automobile Sector?

revive automobile sector

Apart from the ‘synchronized slowdown’ in the global economy, the jitters of the trade-war between USA and China are felt by various sectors in India; Automobile sector is no exception to it. As explained in the earlier article, a worldwide slowdown in the automobile industry is the reality. Recognising the slowdown, Government of India has been taking timely measures to kick start the sluggish Indian auto sector.

Budgetary Measures

In the Union Budget 2019, customs duty for Completely Built Unit (CBU) of vehicles has been raised from 25% to 30% to provide level playing field to the domestic industry. The 2% interest subvention for MSMEs on fresh or incremental loans to support automobile dealers and component manufacturers.  Applicability of lower rate of corporate tax of 25% to companies with annual turnover of up to 400 crores covered 99.3% companies, including automobiles.

Further, nearly 80% of the car sales in India are financed in which NBFCs have a larger share. The credit guarantee by the government to PSBs in case of loss due to purchasing pooled assets from NBFCs is of particular importance to automobile sector to boost demand by availability of affordable retail finance.

To encourage the use of Electrical Vehicles (EVs), GST was brought down from 12% to 5%. Customs duty on parts of electric vehicles has been exempted for easier access of parts to domestic players apart from reducing the production and maintenance cost of EVs.

Boosting the Sector

To boost demand in the automobile sector, several initiatives were announced acknowledging the rough road the sector has been going through. Some of the measures were:

  • The government lifted the ban on purchase of new vehicles by government departments. It will boost demand by government agencies and departments to replace old vehicles. It will also help to reduce the pile-up of inventory of vehicles.
  • Additional depreciation of 15% for the vehicles acquired till March 2020, taking total depreciation to 30%, will mean the faster lowering of resale value. It will boost the used vehicles market apart from lowering of insurance premiums. Businesses will be encouraged to buy new cars to claim tax benefits.
  • The proposed hike in the one-time vehicle registration fee has been postponed until June 2020 effectively reducing the cost of ownership.
  • Government is actively considering ‘scrappage policy’ by which unfit vehicles will be scrapped, boosting demand for new vehicles. Government is focusing on setting up needed infrastructure for such a policy.

Moreover, the recent slashing of corporate tax rates to 22% for domestic companies and 15% for new domestic manufacturing companies will certainly provide benefits to automobile industry.

Expelling Apprehensions
  • Union minister for road transport and highways Nitin Gadkari clarified that there is no deadline to shift towards EVs and the shift towards EVs will happen in a natural progression.
  • Clearing confusion of prospective buyers of BS-IV vehicles, Finance Minister Nirmala Sitharaman announced that such vehicle purchased up to March 2020 will be allowed to run till their entire registration period. It will also help for a smoother transition to environment-friendly BS-VI vehicle emission norms effective from April 2020.
  • The government made it clear that both ICE (Internal Combustion Engine) and Electric vehicles will continue to be registered allaying fears that ICE vehicles will be taken off roads in favour of EVs.

Consequent to such responsive steps, a significant increase in sales of the automobile sector reflects the revival of positive sentiments in the domestic automobile sector amidst the ‘synchronised slowdown’ in the global economy. Indeed, the present slowdown in Indian auto industry can be said to be indicative of structural changes during the transition to next generation sustainable transportation.