Excise hike makes cars go out of budget

By increasing excise duties by two percent across the board, all cars are now costlier. However, by not taxing diesel vehicles, the auto sector has breathed a sigh of relief.

The Union Budget is nowadays always looked at keenly for indications in which government policy is likely headed. So policy measures like the Goods and Services Tax (GST) have dominated corporate attention, for example or the Direct Tax Code (DTC), to mention another. In the pre-liberalisation era, the rate of corporate taxes itself were closely monitored.

In the run up to this year’s Budget, a tax on diesel-powered cars did the rounds creating considerable anxiety in the automotive sector. The reported figure was Rs 80,000 per car and for the auto world, the over-riding concern was what would happen to car sales if diesel ones were taxed.

The year has seen a massive swing to diesel as buyers, keen to lower the running costs, dumped petrol unceremoniously for diesel. In effect, the OEMs were caught unawares and had to hurriedly put in place plans to roll out diesel cars.

The swing to diesel benefitted companies like Hyundai, Ford, Maruti and Volkswagen which had diesel variants in their line-up. Lately, it has helped the Nissan Sunny and Skoda Rapid whose sales seem headed upwards. But the impact of the government’s lack of policy direction on diesel meant that companies weren’t sure whether they should invest in diesel engine capacity. If Hyundai put its plan for a diesel plant on a go-slow, VW wasn’t sure if the Up should be its next big thing for India given that it would involve considerable investments to add capacity. Maruti has already said it will set up a diesel plant at Gurgaon.

With this year’s Budget proposals now announced, automakers can breathe a sigh of relief in a sense. Finance minister Pranab Mukherjee has effectively pushed prices of all cars up across the board by hiking excise duties and, more importantly, signaled a brave new world of higher fuel prices for diesel by announcing that the subsidies budget will be trimmed.

If the government does raise diesel prices, it will only narrow the gap between diesel and petrol but the gap itself means that the strong diesel preference will continue. A huge hike would be unfeasible creating chaos for business in general. Some Asian countries, notably Indonesia, saw riots when fuel prices went up but India’s economy is far complicated and the political economy far too heterogeneous for such bold moves.

The decision to up excise, as SIAM’s head S Sandilya put it, is a reversal of the stimulus. Whether this makes India less attractive as a small car hub is a topic for debate. Most global OEMs with a small compact ‘suited’ for India are here already barring Peugeot, which will start with a mid-sizer, and Mitsubishi which is considering the Ecocar but only after it looks at other ASEAN candidates. Therefore, this Budget challenges Indian carmakers to think out of the box when it comes to making cars affordable. In this 2008, the then finance minister ‘took on the world” by lowering duties for small cars. Today, that onus is arguably transferred to carmakers themselves who aren’t limited by geography any longer. FTAs with ASEAN countries mean new challenges in a rapidly-changing world.

Last year, the FM announced a mission on hybrids and EVs but apart from the fact that the industries minister, Praful Patel, is in the know of things, we have seen little emerge publicly. In his Budget, the finance minister spared ‘green’ vehicles saying that specified parts required for the manufacture of hybrid vehicles enjoy full exemption from basic customs duty and special CVD with concessional excise duty/CVD of six percent. This concession is being extended to specified additional items and lithium ion batteries imported for making battery packs. The other sop that the auto sector can leverage is the extension of weighted deduction of 200 percent for in-house R&D.

Parliament has passed the Railway Budget after announcing a rollback in fares for the cheaper classes leaving second and first AC hikes proposed in place. The rail budget’s price hikes were supported by the powerful trade unions which saw the need to garner more revenue to improve the railways and enhance safety. It was a budget that generated considerable heat and dust given that it was caught in a whirlpool of coalition politics. But the budget also stated that the first contracts for freight corridors will be handed out this year and these promise to help the auto sector transport goods efficiently all over the country. A freight hike will also impact margins as well.

But as both budgets indicate, big ideas require political will. The focus on safety in the railways is one big idea and the continuing boost to local manufacture and subsequent investment and jobs that the Union Budget seems to suggest for automotive is another.

BRIAN DE SOUZA