Driving Growth Indirectly

G K Ahuja, Secretary General, FADA

Union Budget 2005 has been presented by the Finance Minister. While the Budget falls short of giving a big push to the second-generation reforms, it is indeed a great balancing act, in that it seeks to do a bit for virtually all sectors of economy and all strata of society. The budget lays the renewed thrust on social, rural, and other infrastructure, including roads, ports, airports, power, irrigation and urban infrastructure. There are reductions in direct and indirect tax rates, coupled with rationalisation wherever necessary, almost across the board. At the same time, the budget proposes to tax the perks, termed as fringe benefits, collectively enjoyed by the employees, and to track black money by levying a tax of 0.1 % on cash withdrawals exceeding Rs. 10,000 from banks in a single day.

The industry and the people in general, have, by and large, welcomed the budget proposals. Fringe benefits tax and tax on withdrawal from banks, have, however, evoked widespread resentment, so has the reduction in depreciation rates. The Finance Minister has, during his interactions with the industry and the media following the presentation of Budget, agreed to revisit these measures to assure that the genuine business expenditure will not be taxed. He has also hinted at raising the threshold limit for tax on withdrawal from banks.

Rationalisation of Duties

The automotive industry and trade was expecting the excise duty on passenger cars to be rationalised at 16% at par with other vehicles to give a further boost to the car industry, which has turned in a spectacular performance in the last 3 years or so. Domestic sales of passenger cars are on exponential growth curve, so are their exports. Passenger car industry has played a pivotal role in galvanising other allied sectors of industry, namely, auto component, tyre, plastic and steel industries. The industry has been driving the modernisation, technology upgradation and improved quality standards as well as management practices.

The industry is already under tremendous cost pressure due to rising input costs and the cost of technological inputs to make the vehicles compliant with the next stage of emission and safety standards. Therefore, the cut in excise duty on passenger cars was all the more necessary to provide a cushion against the rising costs. The comfort somewhat is that the peak rate of customs duty has been reduced from 20% to 15 % and that on aluminium, copper and base metals from 15% to 10%. This is likely to result in the marginal reduction in prices of raw materials and components, benefiting particularly the manufacturers having significant import content. In fact, price cuts have already been announced by some of the manufacturers. Honda City is cheaper by Rs. 2,500, Honda Accord by Rs. 8,000, Toyota Corolla by Rs. 32,000, Innova by Rs. 14,000 and Skoda cars by about Rs. 50,000.

The lowering of peak rate of customs duty will also benefit the auto component and tyre industries and make them more competitive.

The cut in customs duty on specified parts of battery operated road vehicles from 20 to 10% and increased allocation for automobile R&D will help boost industry's growth plans and give a fillip to the alternate energy driven vehicles. Continuation of the benefit of 150% weighted deduction for in-house R&D in auto industry till March 2007 is a welcome measure, which provides a wherewithal to the domestic companies to stand up to the challenge posed by international auto majors.

Reduction in customs duty on secondhand cars and motorcycles to 100% from 105% will hardly make any adverse impact on the domestic industry. Similarly, rationalisation of customs duty and excise duty on petroleum products, as also the increase in petrol and diesel cess from Rs. 1.50 to Rs. 2.00 per litre will not have any significant effect on the Indian automotive industry either.

The lowering of excise duty on tyres from 24% to 16% will have a positive impact on the Indian tyre industry, as the tyres in replacement market will cost less. Tyre manufacturers are expected to come up with the price cuts. JK Tyres has already slashed prices of all its products across the board by 2-4%. A similar reduction in the excise duty on car air-conditioners from 24% to 16% has been announced. Since the abatement from the retail price for the purpose of charging excise duty has also been simultaneously reduced from 35% to 30%, one wonders if there will be any significant reduction in the prices of retrofitment of car air-conditioner in the after-market, especially when the prices of steel, a major input for airconditioners, are climbing up by the day.

Renewed Thrust on Rural Economy and Infrastructure

Continuing thrust on development of rural and infrastructure sectors, particularly the launch of various schemes in the areas of irrigation, drinking water, health and sanitation, telecom connectivity and rural housing & electrification at a massive scale, coupled with the proposal for NHDP III targeting to four-lane high-density highways not forming part of Golden Quadrilateral or the North-South and East-West corridors and an overall outlay of Rs. 9,320 crores in the year 2005-06 for National Highways development, will promote all-round industrialisation and development, leading to employment generation and rise in income levels of the people. National Urban Renewal Mission covering the seven mega cities, cities with a population of over one million and some other towns is another programme, which will indirectly drive the growth of Indian automotive industry.

The Budget proposes to make Mumbai as a Regional Financial Hub between Tokyo and London and to initiate reforms in banking sector. Bank Regulation Act and the RBI Act are sought to be amended to remove the limits for SLR and CRR and to provide flexibility to RBI to prescribe prudential norms. The measures proposed for the financial and banking sectors are expected to attract more investment into the Indian industry.

Direct Taxes

A notable feature of the Budget is the scaling up of income tax exemption limit for individuals and reduction in the rates of personal and corporate income tax. The increase in threshold level for income tax exemption, continuation of deduction of interest paid on housing loans and providing a consolidated limit of rupees one lakh for savings for deduction from the income, will leave more disposable income in the hands of people to spend more on consumer durables, like, passenger cars and two-wheelers.

VAT

The Finance Minister in his budget speech put at rest the doubts and uncertainty over implementation of VAT and made it clear that it will be in place come 1st April 2005. States have, subsequently, been given flexibility to raise the limit of exemption from VAT from five lakh to ten lakh rupees - a move which is likely to calm down the trading community and to bring on board the states like UP for adopting VAT. However, apprehensions continue to niggle the business community and the people.

Macroeconomic Outlook

According to the Central Statistical Organisation, the GDP growth rate in the current year is estimated to be 6.9, with manufacturing sector expected to grow at 8.9 per cent. It is a remarkable performance considering that there was a 13 per cent deficiency in the southwest monsoon and the building up of inflationary pressures due to escalation in the global petroleum prices. The petroleum prices have stabilised at around $50 per barrel and the inflation has also been reined in. Vibrant manufacturing sector and stability on oil prices and inflation fronts should enable the industry, in general, and commercial vehicles, in particular, to sustain the growth momentum. The automotive industry has been confronted with cyclic slowdown, after posting a robust growth for 3-4 years, in the past. Commercial vehicle industry is, therefore, not predicting a runaway growth in the financial year 2005-06 in spite of the buoyant sentiment painted by the budget. Of late, oil prices have again started inching up causing a lot of worry and uncertainty.

The budget is silent on labour law reforms and disinvestments, which is understandable given the compulsions of the current coalition government.

Conclusion

Although, the Budget proposals do not contain specific measures for automotive industry, the Budget, as a whole, has a lot to offer that will help promote growth, including the growth of automobile industry.
 
Implications of various Budget Proposals for Automotive Industry at a Glance

Proposal	Impact	Remarks
Income Tax Brackets have been altered. Income between Rs. 1 lakh and 1.5 lakh will attract 10 per cent tax, Rs. 1.5 lakh to Rs. 2.5 lakh 20 per cent and beyond Rs. 2.5 lakh 30 per cent. The basic exemption limit has been enhanced to Rs. 1 lakh from Rs. 50,000 at present.		Help channelise the savings to the markets. People will have more household disposable income in hand; demand for small cars and 2-wheelers may rise.
Income-Tax
Taxing employer (@ 30%) for Fringe benefits collectively enjoyed by employees.
Reduction in depreciation rates for plant and machinery to 15%.
The extension of 150 per cent deduction on in-house R&D till March 2007.		Will help boost Auto industry's R&D.
Custom Duty
Reduction in peak customs duty from 20% to 15%.		Lower the cost of production of vehicles, particularly for the vehicles having high import content.
Duty cut on aluminium, from 15 per cent to 10 per cent.		Marginally decrease the cost of production for vehicle manufacturers.
The reduction in customs duty on secondhand cars and motorcycles to 100% from 105%.		Too small to make any impact.
The customs duty on petrol and diesel has been reduced from 15% to 10%. Re 0.50 increase in cess on petrol and diesel to Rs. 2 per litre from Re 1.5 per litre, for raising additional resources for National Highways Development Projects.		FM has made it clear that readjustment of duty rates will not result in hike in petroleum prices.
Customs duty on specified parts of Battery Operated Vehicles down to 10%.		Lower the cost of production of battery operated vehicles.
Excise Duty
Excise duty on passenger cars retained at 24%.
Excise duty on tyres reduced to 16% from 24%.		Will reduce the maintenance cost of vehicles.
Hike in excise duty on steel to 16% from 12%.		Will not have much impact, as excise duty on steel for industry is modvatable.
Other Proposals
VAT to be implemented from April 1, 2005.		Will have marginally positive impact on manufacturers' margins.
Thrust on infrastructure, agriculture & rural economy: Bharat Nirman Scheme announced for Rural Infrastructure Development. National Urban Renewal Mission plan for 7 mega cities (Rs. 55 bn outlay for this mission). Announcement of NHDP III. Outlay for National Highways for FY06 up at Rs. 93.20 bn.		Will promote all-round industrialisation and development, leading to employment generation and rise in incomes.
Budget Overall		Continued thrust on the growth drivers.

Positive

Negative

Neutral