Our automobile sector needs a hearty dose of tax relief

Synopsis: Due to a demand slump and reluctance shown by entrepreneurs to invest in the auto industry, it is going through a rough phase. This sector can be a key driver for the future economic growth of India.

Introduction

Indian auto industry suffered yet another setback when the renowned automaker, Ford Motors, decided to exit India a few weeks ago.

Faced with declining demand for vehicles and often also rising inventory levels, most auto production facilities in the country have been running below their capacities. The covid pandemic and its associated lockdowns have only worsened the industry’s problems.

As the outlook remains uncertain despite signs of recovery in the market for passenger vehicles, most players are reluctant to make fresh investments. Moreover, the private consumption demand has also not picked up.

Falling consumption and a lack of investment by entrepreneurs has been responsible for a steady decline in overall growth since 2016-17.

What is the present scenario of India’s auto industry?

The auto industry also reflects the above-mentioned trends, as it contributes 7.5% to GDP, but certain sectors within the industry show improvement:

– Motor cars registrations have smartly recovered, showing robust growth

– Two-wheeler volumes remain down

If motor car and two-wheeler sales are considered indicators for consumption by upper and lower-income households, respectively, their divergent trends suggest a K-shaped recovery.

Why is auto industry significant for India?

It accounts for 49% of the manufacturing sector’s output and employs around 35 million people directly and indirectly.

Globally, India is the fifth-largest passenger-car manufacturer with 2.9 million vehicles produced in 2020, according to the International Organization for Motor Vehicle Manufacturers.

It is also the world’s largest market for two-wheelers and the largest maker of tractors.

The industry thus can be a critical driver of overall growth. It is a bright spot now that vehicle-manufacturing in most advanced countries has reached maturity.

What are some concerns for auto industry?

Auto industry is driven by consumption demand and the outlook on demand is still worrisome.

– Urban consumers are postponing purchases as new mobility solutions emerge that are disrupting the global auto industry. Electric mobility, digitally connected and autonomously driven vehicles have the potential to drive consumers away from the traditional combustion-based vehicles.

– The value of car ownership itself is being called into question, with ride-hailing options provided by apps like Uber and Ola.

What is the way forward?

As an engine of growth, the auto industry needs policy attention.

– Lowering the cost of ownership will help generate demand. For instance: We can lower the GST component of the purchase wherein even two-wheelers attract a Goods and Services Tax of 28%.

– Electric mobility: The government is pushing electric mobility and has announced a package to incentivize electric and hydrogen fuel cell vehicles. But, if electric vehicles fail to turn affordable, they too will face the demand constraints faced by other carmakers. Perhaps India could learn from the example of Norway, which facilitated electric mobility through truly generous tax subsidies.

Source: This post is based on the article “Our automobile sector needs a hearty dose of tax relief” published in Livemint on 8th Oct 2021.