Union Budget 2024: A renewed focus is needed for India’s auto sector

As India gears up for the first Union Budget of the newly elected third-term Government, there is significant anticipation regarding continued economic reforms. Among these, the automobile sector stands out, as it contributes to over 7% of the GDP and provides employment to over 35 million people. To give context, India is the world’s 3rd largest automobile market, largest tractor manufacturer, 2nd largest bus manufacturer and 3rd largest heavy trucks manufacturer. 

THE STATE OF THE INDIAN AUTOMOBILE SECTOR

Recent years have marked a transitional phase in the automobile sector, characterized by three key transformations. Firstly, consumers are moving towards larger, more premium cars as their disposable incomes are rising. Secondly, automobiles are undergoing a technological shift with advancements like driving assistance systems, regenerative braking, and connected data analytics becoming common. Thirdly, and crucially, the sector is shifting towards sustainability through lithium-battery and hydrogen-powered vehicles, ethanol blending and tightening emissions standards, etc.

In terms of sales, the Indian automobile sector has seen ups and downs in recent years. While the turn of the decade saw strong resilience in the sector despite challenges posed by the pandemic, semiconductor shortages and fluctuating fuel prices, the past year has been relatively lacklustre. Electric vehicle (EV) sales have also stagnated to around 5% of vehicle sales, falling short of India’s 30% target by 2030.

PAST GOVERNMENTAL ASSURANCES

Recently, GoI’s support towards the sector has come through production-linked incentive (PLI) schemes to aid advanced automotive technologies and advanced chemistry cell batteries. While these schemes are currently ongoing, disbursal of these incentives has recently begun, and their impact is yet to be seen. 

Additionally, electrification has been promoted through the Faster Adoption and Manufacturing of Hybrid and Electric Vehicles (FAME) scheme in two phases for the periods 2015-2019 and 2019-2024. However, these incentives ended in March this year, extension of the scheme is still under consideration. 
 
Apart from these, support has come through forward-looking policies for vehicle scrappage, battery swapping and for charging infrastructure. However, holistic realization of these policies is still a work in progress. 

Presently, the automotive sector is divided among several ministries. The Ministry of Heavy Industries oversees schemes like PLI and FAME, while the Ministry of Road Transport and Highways sets automotive standards, vehicle scrappage, battery swapping guidelines, etc. Other ministries manage aspects related to fuels, renewable energy, and urban planning. An enhanced inter-ministerial cooperation is crucial for achieving cohesive policy implementation. 

INDUSTRY EXPECTATIONS

With the automotive industry in a transformative phase driven by technology and environmental concerns, incentives and subsidies are crucial in shaping its future.

FAME-III

The sector’s foremost need is further incentivisation towards EVs, through a subsequent phase to India’s flagship EV scheme – FAME. While demand incentives are imperative, FAME-III may prioritise charging infrastructure, which has been a key hindrance for widespread EV adoption so far. In addition, incentives may be extended to alternative technologies such as hydrogen fuel cell-based and strong hybrid vehicles, to facilitate the transition away from internal combustion engines. 

More importantly, it is important to include incentives for research and development, which may pave the way for groundbreaking innovations in sustainable transportation and allow India to become a market leader in terms of advanced EV solutions and next-gen battery technology. 

GST ON VEHICLES

Currently, passenger car cess rates vary based on engine capacity and vehicle length. While there is a correlation, these metrics may not accurately reflect vehicle emissions or sustainability in today’s age. It is recommended that alternative metrics such as ARAI mileage ratings could be considered for re-evaluation. Further, as the industry moves towards costlier cars due to stricter safety and emissions standards, automakers are urging for a progressive and rationalised GST tax rate, to accurately reflect market dynamics and alleviate the cost of entry barrier for consumers. 

GST ON AUTO-COMPONENTS

The aftermarket auto-component sub-sector involves taxation at different rates – 18% and 28%. Given that this market is largely in the unorganised sector, differing rates increases compliance complexity and may be streamlined.

GST FOR BATTERY-SWAPPING BUSINESSES

Currently, GST rates on lithium-ion batteries is 18% and 28% for other types of batteries. Conversely, GST on EVs sold with batteries is 5%. To encourage battery-swapping and mobility-as-a-service businesses, GST on batteries used for EVs may be rationalised. 

As India navigates these challenges and opportunities, proactive governmental measures aligned with industry needs will be pivotal in steering the automobile sector ahead. Above all, however, policy stability is crucial to ensuring sustained growth, competitiveness and investor confidence.

Views are personal. The authors are with INDUSLAW.