Fiscal 2008 will most likely go down in the Indian automobile history as the year of the 'Nano'. Indeed, the car has made quite a splash in auto circles and has the potential to take the growth in passenger car segment beyond the current 10%-12%.

Not to forget that competition might also come out with similar priced cars, thus giving the consumer a fair amount of options to choose from. Further, this segment may also take some sheen off the motorcycles segment, especially at the higher end.

However, given the low penetration, two-wheeler sales should also continue to grow albeit at a slightly lower rate than that witnessed in the past. On the commercial vehicles front too, notwithstanding the occasional cyclical bumps, demand should continue to grow at a healthy rate for quite some years to come. As far as challenges are concerned, commodity prices and availability of finance will remain the key ones to tackle.

Industry Wish List

• Excise duty of 16% which is applicable currently only on the small cars of certain engine and length specifications should be made applicable to vehicles across all the segments.
• The weighted deduction of 150% of the expenses incurred on scientific research should be extended for a further period of at least 10 years even after 2012. Small cars, which attract 16% excise duty, should be defined on the basis of the length of 4,000 mm and the criteria based on engine capacity should be removed.
• Definition of capital goods should be amended to treat motor vehicle as capital goods for service providers such as Architect, Chartered Accountant, Cost Accountant, Company Secretary and the like.
• No interest shall be charged on differential excise duty paid on finalization of prices. Alternatively this exemption from interest can be given for modvatable inputs or in the situation where gap between provisionally assessed price and finally assessed price is upto 20%.
• An appropriate procedure/form etc. should be introduced for exempting goods from levy of CST, which is to be used in manufacture of products to be exported.

Budget over the years

Budget 2005-06

• Custom duty on second hand motorcars and motorcycles reduced to 100% as compared to 105% earlier. Custom duty on new cars maintained at 60%.
• Excise duty on tractors of engine capacity more than 1800 cc for semi trailers to attract @ 16%.
• Introduction of new income tax brackets.
• Peak customs duty reduced from 20% to 15%.
• Excise duty on tyres, tubes and flaps reduced from 24% to 16%. Customs duty on lead cut to 5%.

Budget 2006-07

• Agricultural lending target set at Rs 1,750 billion for FY07, an increase of 32.5%. One time grant to farmers who have availed loans from scheduled commercial banks, RRBs and PSCs for Kharif and Rabi 2005-06 of a principle amount up to Rs 0.1 m and interest rate of up to 2%. Short-term credit to farmers at 7% for loans up to Rs 0.3 m and 0.6 m hectors to be brought under irrigation in FY07.
• Excise duty on cars having engine capacity up to 1,200 cc (petrol based engines) and 1,500 cc (diesel based engines) and length of the car up to 4,000 mm reduced from 24% to 16%.
• Budget support for NHDP enhanced from Rs 93 billion to Rs 99 billion in 2006-07. Around 1,000 kms of access-controlled expressways (totaling six) to be developed on BOT basis.
• Custom duty on alloy steel and non-ferrous (primary and secondary) metals reduced from 10% to 7.5%. Peak customs duty reduced from 15% to 12.5%.

Budget 2007-08

• Customs duty on new and second hand motor cars/two wheelers will continue at 60% and 100% respectively
• Secondary and higher education cess @ 1% of the aggregate of duties of excise has been imposed on excisable goods including automobiles. This would be in addition to existing education cess of 2% imposed in budget 2004
• A weighted deduction of 150% for expenditure relating to in-house research and development to be extended to five more years
• Hike in the dividend distribution tax from the current 12.5% to 15%
• Farm credit outlay to be increased by Rs 500 billion and 5 m new farmers to be added to the banking system

Key positives

Rising middle class: Expansion of population between the age group of 25 to 50 years, increasing affluence of the Indian middle class and heightened competition amongst automobile manufacturers, resulting in improved quality offerings, will continue to be the key drivers for the industry in terms of both market size and production capacities.

The 'Nano' effect: Penetration of cars in India at around 7 per thousand is even below countries like Pakistan and Sri Lanka. However, the launch of Tata's small car 'Nano', touted to be the cheapest in the world is likely to change that. The price will make cars affordable to thousands of families, thus greatly pushing up the density in the country and giving a big boost to volumes.

Increasing exports: The Indian auto industry has emerged as an export hub, on account of its low cost technical manpower and increasing focus on quality. To give a perspective, in the last five years (FY02-FY07), volume exports of Indian automobiles has increased by 41% CAGR, led by motorcycles (CAGR of 57%). This development has led to domestic players increasing their share of exports in the overall pie.

Infrastructure thrust: Improvement in road infrastructure has led to increased movement of goods through roadways. Around 65% of all the goods movement in the country takes place by roads as opposed to 55% a decade ago. Also, owing to the fact that an estimated 45% of CVs (commercial vehicles) plying on the roads are more than 10 years old, demand for HCVs (heavy commercial vehicles) is expected to grow by a steady rate in the long term.

Low interest rate regime: Close to 80% of the new vehicles being purchased in the country are financed, thus underlying the importance of a low interest rate regime to the fortunes of the industry. Though the interest rates have risen significantly in recent times, we believe it is likely to have only a small impact over the medium term as there has been a substantial rise in income levels.

Regulation led benefits: Implementation of pollution norms like restriction on the age of the vehicle plying on the road and overloading of commercial vehicles would seemingly aid higher volume growth of this segment.

Key negatives

Competition from imports: With India coming under the WTO purview and the increasing free trade agreements (FTAs), competition is expected to rise multifold. Indian companies also have to contend with imports in the future. Already a number of global auto companies are introducing vehicles through the completely knocked down (CKD) route.

Taxation anomalies: Indian automobile industry is amongst the highly taxed industries as not only the final product bears heavy taxes but the cascading effect of duties on some key raw materials and components also hurts profit margins of auto companies.

Also, multiple tax rules that exist in different states are eroding the comparative advantage of a large domestic market thus making the uniform implementation of VAT (Value Added Tax) necessary.

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