Budget flags off ‘green’ vehicle initiatives

The run-up to the Union Budget 2011 presented by finance minister Pranab Mukherjee on February 28 took place in somewhat unusual circumstances. When parliament met last November, no business was transacted in that three-week session as the Opposition tore into the government for what was seen as no action being taken on tackling the unravelling scam in the telecommunications sector. Consequently, several bills could not be debated as the main demand of the Opposition for the constitution of a joint parliamentary committee did not go down favourably with the government.

With that demand having been agreed to at the start of this Budget session, uppermost on the mind of industry and the common man were what decisions the government would take to promote growth and rein in price rise. In the run-up to the Budget, the government has sought to control an overheating economy by increasing interest rates even as food inflation soared as a result of supply-side bottlenecks and increasing fuel prices.

For the auto sector, all eyes were on whether the government would increase excise duties or rationalise the prevailing rates. The sector has seen car sales grow by an estimated 30 percent even as other sectors continue to record good growth rates.

The minister did listen to the auto sector and did not raise excise rates, which is a cause for cheer to a sector that is currently grappling with increasing input costs and an increasing interest rate regime. Dr Pawan Goenka, president, SIAM and president, Automotive & Farm Equipment Sectors, Mahindra & Mahindra, said: “The Budget took away a lot of fears.” The absence of any levy of tax on diesel vehicles added to a “sigh of relief”.

However, what the captains of industry may not have expected is the significant focus that the Budget has given to electric vehicles (EVs) as well as hybrids. Mukherjee announced the setting up of a National Mission for these two green vehicles as well as a host of measures to boost the sector.

These proposals include:

Full exemption from basic customs duty and a concessional rate of central excise. Duty extended to batteries imported by EV manufacturers.

l Concessional excise duty of 10 percent to vehicles based on fuel cell technology.

l Exemption granted from basic customs duty and special CVD to critical parts/assemblies needed for hybrid vehicles.

l Reduction in excise duty on kits used for conversion of fossil fuel vehicles into hybrid vehicles.

Reacting to the decision to set up a National Mission for hybrid and electric vehicles, Karl Slym, president & CEO, GM India, said: “It is a much more welcome move than just reducing the excise duty of a component.” Slym feels this announcement will help the government to take informed decisions regarding greener technologies which will benefit the industry. “The Automotive Mission Plan is a good example of such a move,” he added.

One company that would have welcomed the finance minister’s green thrust the most is KPIT Cummins Infosystems. The Pune-based company is set to be India’s first supplier to launch a plug-in hybrid system called Revolo. The launch of the product is scheduled in a month or so. Kishor Patil, its MD and CEO, said: “The finance minister’s announcement on setting up of a National Mission for hybrid and electric vehicles, coupled with reduction in excise duty on the hybrid conversion kits and their parts, are welcome measures that reinforce the government’s commitment to promote sustainable growth in India through hybrid and electric vehicles.”

In the area of urban transport, the finance minister said that financial assistance would be made available for the metro projects under implementation in Delhi, Mumbai, Bangalore, Kolkata and Chennai. Mukherjee noted how the public transport upgradation under the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) has improved the quality of public transport in urban centres. An estimated 15,620 low-floor modern buses were ordered by players like Tata Motors, Ashok Leyland under this scheme.

In its reaction, Ford India said, “The government’s support towards environment-friendly technologies with the launch of the National Mission for hybrid and electric vehicles is, indeed, visionary. This, along with the renewed focus on infrastructure and development of rural economy, will pave the way for the next stage of growth for the sector.’’

According to Gaurav Dua, Head of Research at share broking house Sharekhan: "The unchanged excise duty structure is sentimentally positive for the automobile industry. The finance minister has stressed on sustaining profitability for the sector which is experiencing macro headwinds. The increase in credit allocation to the priority sector (agriculture) is positive for Mahindra & Mahindra and Escorts while the refund of 20 percent excise duty paid on taxis with seating capacity upto 13 will benefit Tata Motors’ Ace and Magic, Mahindra's Bolero and Xylo and the Maruti Eeco."

Infrastructure

A dominant theme in the Budget presentation was the focus on infrastructure. To enhance the flow of funds, it is proposed that FII investment in corporate bonds be increased. The Budget has proposed an allocation of Rs 2,14,000 crore in 2011-12, 23 percent over the last fiscal. To boost infrastructure development, the government has proposed that tax-free bonds of Rs 30,000 crore be issued by the government undertakings in this coming fiscal. (Here the incentive aims to mop up funds from a liquidity strapped market. The railways also plans to issue tax-free bonds to fund its projects). Agriculture

Budget proposals in the agriculture sector and farmer credit impact the automotive sector, especially the demand for tractors and related machinery. The Budget has proposed that credit flows for farmers go up from Rs 3,75,000 crore to Rs 4,75,000 crore in the coming fiscal. It also proposed an interest sop of an additional one percent to help farmers who pay back short-term loans on time. The Budget also proposed that basic customs duty on agricultural machinery be reduced from five percent to 2.5 percent.

The auto sector, which is a key part of the supply chain of the food processing industry, could also get an indirect boost with the Budget’s decision to establish 15 more mega Food Parks in the coming fiscal. Capital investment in the creation of modern storage capacity will now be eligible for viability gap funding if the proposal is passed.

Material inputs

The finance minister imposed a 20 percent customs duty on iron ore exports. This move is expected to bring down the input cost of steel makers, and in turn moderate steel prices. If it happens, it will be a positive for automobile suppliers and OEMs.

Human resources

The Budget did not leave out the human resources sector. Mukherjee proposed an additional Rs 500 crore for the National Skills Development Fund for the coming year as well as a special grant for various universities and academic institutions to recognise excellence in skills development.

Overall, the government has reiterated its commitment to the Direct Taxes Code which the minister said would be finalised for enactment in 2011-12. On the GST, he said the areas of divergence have now been narrowed and that to roll out this key legislation, a Constitution Amendment Bill is proposed to be introduced in this session of the parliament.

Slym added that he would have liked to see some announcement related to labour reforms, as a significant number of people – over 12 million – are employed in the automobile industry which is cyclical in nature. Any move to incentivise removal of old vehicles would have also contributed to the environment and to the further growth of the industry, he said. However, Slym lauded the Budget for the commitment to implement GST in 11 States by June. He also expressed a concern which is there on almost everyone’s mind. Money may not be a big problem but it is the implementation that needs big focus.

One industrialist interviewed on television before the Budget said it reveals the mind of the government. He further said that there is a need for economic regulators in order to ensure clean and efficient governance. That possibly explains why the finance minister has said very categorically that a five-fold strategy is being put into place to deal with the generation and spread of unaccounted or black money.