Budget 2011: Changes in automotive industry

India’s automotive sector has some positives to take from the budget announced today by India’s Finance Minister Pranab Mukherjee. Contrary to the expectation of an increase in excise duty the Finance minister spared it from any change. The move would be a certain welcome by the industry as it is already fighting rising input costs. Hopefully now we might not witness a significant increase in car prices in the short-term. The announcement has also boosted the market sentiment and has been well-received. 

Another announcement to benefit carmakers and auto component suppliers is the reduction of custom duty on raw steel. With steel prices going down the industry will benefit from strengthening margin lines as it will become cheaper to source finished steel from tier 2 & 3 suppliers.

Green cars & technology received a shot in the arm from the Finance Minister as he announced a National Mission for hybrid & electric vehicles to promote their adoption as well as incentivise them. Going forward critical parts/assemblies required to manufacture hybrid vehicles would be granted exemption from the basic custom duty of 10% and special CVD. A concessional rate of 5% excise duty will be granted to hybrid vehicles if manufactured locally. In addition, the excise duty on kits used for conversion of fossil fuel vehicles into hybrid vehicles has been reduced from 10% to 5%, thereby making them cheaper. Technology for such kits has been developed indigenously and the move will not only promote adoption by customers but will also help the R&D for such technologies. 

Full exemption from basic customs duty and a concessional rate of Central Excise duty of 4 per cent was provided to specified parts of electrical vehicles in the last Budget on actual-user basis. The concession has now been extended to batteries imported by manufacturers for the replacement market as well. Hydrogen/Fuel cell technology is still far from mass usage but the focus on such future technologies was visible in the budget. Such vehicles will now enjoy a concessional excise duty of 10%. 

The Central Excise duty on LED lights was reduced from 8% to 4% in last year’s budget but the LED material still attracts an excise duty of 10% and a special CVD of four percent. This duty has now been reduced to 5% with the special CVD fully exempted. 

In a nutshell, the budget has helped in the creation of a growth-conducive environment for the Indian automotive industry. Apart from not increasing the excise duty rates and hence not making cars more expensive the budget will also help the manufacturers, especially SMEs to improve their profitability due to reduction of excise duty for raw steel. The focus on green technology along with promoting their adoption is also a welcome move and even though the effects might not be visible right now a continued focus on the sector will ensure growth in the medium and long-term.

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