Union Budget 2023: Expectations and Suggestions for Indian Automotive Sector

Indian Economy is on a recovery path after pandemic led disruptions. The Automotive/Mobility Industry is no different. Various stakeholders in the ecosystem starting from consumers to OEMs to suppliers will be keen to have a supportive budget. The Consumer will look for affordability given the high inflationary burden, and safety. OEMs & suppliers will be seeking support to aid their volume and profitability plans. The Government will be keen to focus on job creation through committed investments, sustainability, clean mobility, through alternate fuels.

The Indian auto industry currently contributes a little over 7% to the GDP, valued at $220-230 Bn. It is one of the biggest contributors to the manufacturing sector in the country and employs to 34-37 Mn people (direct and indirect). The industry is going through a technology transformation requiring significant investment, consistent and supportive policies.

In the current financial year, the Indian economy scores high on growth. Even though the outlook is uncertain, the good news is that high GST and direct tax collections give the government ammunition to spend and cushion the impact of the impending global slowdown. The bad news is that inflation is expected to persist. Higher import costs due to global inflation and elevated oil prices, rising service prices, and improved pricing power amongst producers are expected to translate into higher consumer prices.

The biggest focal point of the industry currently is Electric vehicle which is on the rise in terms of adoption and awareness. It is imperative to continue to aid this growth story of EVs. While the FAME-II policy is valid till Mar 2024, a continuation plan beyond this timeframe would be helpful. The total cost of ownership remains on the higher side for EVs due to high initial cost, battery replacement cost and low resale value.

FAME subsidy is a mid-term solution to solve the affordability issue and will help in adoption by bridging the price gap between ICE and EVs. Favorable tax benefits can help the industry in the long term. EVs currently attract a 5% GST, but the EV components are at 18% or 28%. Lowering GST for components for a few more years will boost sales as it reduces the overall costs, along with maintenance and aftersales cost for end users.  

On the charging infrastructure, FAME II provides a subsidy for EV chargers, but the utilization has been very low. Till July 2022, ~50 chargers were operationalized, while the outlay was for 2700+ chargers. Overall, between FAME 1 and FAME II, only 532 chargers have been operationalized thus far. The main roadblock is high cost of allied infrastructure like power supply and land cost. Hence the subsidy should be revamped to cater to these needs as well as to encourage the set up of public charging since it’s crucial for the next phase of EV growth.

On EV infrastructure and ecosystem, promotion of battery refurbishment, reuse (2nd life) and recycling of batteries can tackle the issue of the high battery replacement value and cater to the increasing demand for Battery energy storage system (BESS). The policy around battery swapping has been in the draft stage. Apart from the technical aspect, there is a need to support the commercial aspect of such capital-intensive business models. Tax breaks rather than direct short-term subsidy, carbon credits/green credit for reusing or recycling EV batteries, subsidy on power supply for battery swapping setups, and low-rate leasing options for land are a few areas government can focus on.

Apart from Electric vehicles there is a need to support other alternate fuels in form of Ethanol blending, CNG, hydrogen etc. Ethanol blending can help mitigate the rising import bills and the government has already set target a of 20% Ethanol blend by 2025. India primarily produces Ethanol from 1G which is edible biomass-based but needs to scale up. Initiatives at a district level should be incentivized to maximise the production of 1G ethanol.

Government should also encourage next generation Ethanol as well, which is non-food based like wood, straw, waste, algae etc. Hydrogen as a fuel for the auto industry has been in discussions for a while, however, mass adoption is still years away. We have heard plans for dedicated EV corridors, maybe the government should also look at setting up a dedicated freight corridor with CVs operating on H2 inviting the right investments. These types of solutions must be recognized and supported.

There has been increased focus and awareness about safety, while the government has announced 6 airbags as a mandate, the cost involved in development and procurement will add up to the ever-growing concerns of OEMs. If we add up all the costs, each car sold in the small to mid-level segment would get a minimum price hike of approximately Rs 25,000 to over Rs 35000. PLI type of scheme is needed to mitigate the cost escalations.  

While there are multiple policies and subsidies for the adoption of newer technology and manufacturing, it is time to address the R&D capability and investments. Mapping of the industry with an educational institution is the need of the hour to ensure that the workforce is constantly being upskilled.  With vehicles becoming smarter and more connected, the future of jobs will also evolve rapidly. It is important to identify the right skills and invest in the required educational infrastructure.

The Government should continue to think future back and at the same time be consistent. Effective design, implementation and utilization of schemes / policies coupled with technological advancements will make products affordable, attract investments and create jobs and will help achieve the country’s vision of being a $5 trillion economy.

This article is authored by Rajat Mahajan, Partner, Deloitte India and Vishwas Kashyap, Associate Director, Deloitte India. Views expressed are personal.