Budget expectations that can provide fillip to the auto industry.

Budget expectations that can provide fillip to the auto industry.

Government initiatives towards increasing rural incomes and augmenting demand will help the auto sector.

  • February 19, 2016  
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P.V.K MOHAN, Head- Equities, Principal PNB Asset Management Co.

The performance of the automobile industry in FY16 has been varied - commercial vehicles have witnessed strong growth, passenger cars have seen modest growth, while two-wheeler and tractors sales have been sluggish.

Here are a few expected developments that can provide a fillip to the automobile industry:

  • Any announcement by the government in the coming Budget for taking steps to boost the agriculture sector will be positive for the two-wheeler and farm equipment space. These initiatives will increase rural incomes and, hence, provide a fillip to demand, which will be a boost for the auto industry.
  • Government's initiatives with respect to irrigation and crop insurance are some of the steps that augur well for the two wheeler and tractor categories.
  • Continuing thrust on the road sector and any new steps/measures announced for it will also help the auto industry.
  • Another interesting aspect of the Budget will be any change in the excise duty structure for been highlighted by the Society of Indian Automobile Manufacturers in its pre-Budget presentation to the fi nance ministry. Any announcement on this front will be of importance as taxation accounts for 77 per cent costs in the industry.
  • The other point that the finance minster may seek to address will be in relation to the recent experiment carried out in Delhi - the odd-even programme, under which odd numbered vehicles were allowed to be run on odd days and even numbered on even days. It is very likely that the government will look seriously into emission norms, which, most probably, will gather momentum in the weeks ahead.
  • The Prime Minister, thus far, has shown great interest in climate change/ clean energy initiatives. In light of this, there may be custom duty and/or excise duty concessions on electric vehicles beyond March 2016. Any changes proposed, linked to climate change, may end up having a bearing on the sector.

Some of the other reforms that could favourably impact the automobile industry, which may or may not be a part of the Budget, include:

  • Passage of the Goods and Services Tax Bill, which will reduce effective taxes and, hence, lower prices of vehicles and stimulate demand.
  •   Implementation of the 7th Pay Commission will increase disposable incomes and drive demand.
  • The auto industry would also benefit from the government's push to improve credit availability to the rural sector and likely transmission of lower policy rates to consumers.

Written by P.V.K MOHAN, Head – Equities, Principal PNB Asset Management Co.