Budget 2018-19 has only derived benefits for auto

With a lot of focus on infrastructure where roads and urban development continue to be the main drivers besides railways, there could be an increased demand for vehicles - both two wheelers and passenger cars on these counts.

By Madan Sabnavis, Chief Economist, CARE Ratings calendar 01 Feb 2018 Views icon10624 Views Share - Share to Facebook Share to Twitter Share to LinkedIn Share to Whatsapp
Budget 2018-19 has only derived benefits for auto

The Budget has been strictly a fiscal exercise where the starting point has been the deficit level and the other numbers have been built around it. Further, it has been explicitly stated that the focus is on agriculture, social sectors and infrastructure. Therefore, most expenditure has been directly in these segments.

With the GST system already being in place, there were no expectations on indirect tax rates. Therefore, from the point of view of the auto industry what mattered was measures that related to the consumption power of buyers or structures that were to lead to enhanced demand for vehicles. It has been a mixed bag on the whole. The role of taxation was to be limited.

Household demand is driven by two factors: change in disposable income and access to credit. In terms of income, there has not been much done to increase spending power especially on discretionary goods. Benefits have been peripheral in general or realistic for senior citizens. Therefore, the demand from individuals would not be led by this factor. In terms of access to credit, it does look like that the era of declining rates is over and the direction will be northwards, if at all there is a rate change decision taken. Therefore, demand from this segment would be limited.

At the corporate end, there could be some increase in demand to the extent that companies do well. Also military demand could provide a positive push, but the two combined will have a limited effect on account of the budgetary measures.

Positive indirect benefits
The areas of the Budget which will have positive indirect effects pertain to the expenditure of the government. With a lot of focus on infrastructure where roads and urban development continue to be the main drivers besides railways, there could be an increased demand for vehicles - both two wheelers and passenger cars on these counts.

As towns evolve into cities and cities into ‘smart cities’ there would be a tendency for families to move up the consumer-chain and opt for vehicles depending on their spending power. The same holds for roads where households could pitch for vehicles if travel becomes easier. However, the overall impact again cannot be overstated and such demand would probably only ‘add’ and not drive purchase of vehicles.

An exception would be tractors which would benefit with agriculture doing better (MSP, irrigation etc). The same could hold for SUVs and jeeps used for transport purposes in rural India. However, this would be contingent of other factors working like monsoon and good harvest and hence the impact would be in the medium run and not immediate term.

What is needed to drive demand from a Budget is higher spending power, which has not been the priority this time and has been clearly stated that given the concessions made earlier in the budgets it was not felt necessary to do so this time. Income would rise only indirectly when more jobs are created through these allocations, though most of these expenditures would not be resulting in significant number of high-income jobs to really push demand forth.

On the supply side, the auto ancillary industry would be a gainer as most of these units would come under the MSME segment where the 5% cut in tax would help them immensely to also go in for expansion if required. Again it must be read with caution as several units have been buffeted by demonetization and GST and are still to reach the situation where there could be gains made from lower taxes on profits.

Therefore, on the whole the impact of the Budget on the auto sector would be limited, though positive to the extent that it is affected.







(Pictured above) Madan Sabnavis, Chief Economist, CARE Ratings. The views expressed by the author are personal.


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