Budget 2010-2011 and Automobile Sector

Automobile Industry in India – Overview

 Indian automobile industry has metamorphosed into one of the growth drivers of Indian
economy since the first car ran on the streets of Bombay in 1898. Today, automobile sector in
India is one of the key sectors of the economy in terms of the employment. Directly and
indirectly it employs more than 10 million people and if we add the number of people
employed in the auto-component and auto ancillary industry then the number goes even
higher. 

De-licensing in 1991 has put the Indian automobile industry on a new growth trajectory,
attracting foreign auto giants to set up their production facilities in the country to take
advantage of various benefits it offers. This took the Indian automobile production from 5.3
Million Units in 2001-02 to 10.8 Million Units in 2007-08. The other reasons attracting global
auto manufacturers to India are the country’s large middle class population, growing earning
power, strong technological capability and availability of trained manpower at competitive
prices.

In 2006-07, the Indian automotive industry provided direct employment to more than 300,000
people, exported auto component worth around US$ 2.87 Billion, and contributed 5% to the
GDP. Due to this large contribution of the industry in the national economy, the Indian
government lifted the requirement of forging joint ventures for foreign companies, which
attracted global to the Indian market to establish their plants, resulting in heightened
automobile production.

The automobile industry in India happens to be the ninth largest in the world. Following Japan,
South Korea and Thailand, in 2009, India emerged as the fourth largest exporter of
automobiles. Several Indian automobile manufacturers have spread their operations globally as
well, asking for more investments in the Indian automobile sector by the MNCs.

The Indian automobile market is currently dominated by two-wheeler segment but in future,
the demand for passenger cars and commercial vehicles will increase with industrial
development. Also, as India has low vehicle presence (with passenger car stock of only around
11 per 1,000 population in 2008), it possesses substantial potential for growth.

Last year has been a great ride for the auto sector. The recent launch of Tata Nano has brought
about a new revolution in the country’s small car segment. Seeing the good initial response
from consumers, many other players in the industry are chalking out their plans to launch cars
in this segment in the next few years. All segments of the sector posted strong double-digit
numbers with total sales going up by 45% in January, against the same month last year. Total
sales of all auto-mobile companies are up 44.4% while two-wheeler sales grew by 43.43%.
Aggregate financials of 91 automobile companies were exceptional with a spectacular 356%
spike in net profit to Rs 3135 crore in the December 2009 quarter on robust operating
performance and low base effect in December 2008 quarter.

Few of the facts and figures of Indian automobile sector are given below:

Segment of Automobile Industry

Passenger Vehicles 15.96 %

Commercial Vehicles 3.95 %
Three – Wheeler Vehicles 3.6 %
Two – Wheeler Vehicles 76.49 %

The passenger vehicle market, which constitutes around 16% in volume makes up for 80% of
automobile sales, has immense growth potential. Anticipating the future market potential, the
production of passenger vehicle is forecasted to grow at a CAGR of around 11% from 2009-10
to 2012-13.

Two- Wheeler is still the most mature market with maximum sales in middle strata of society.

Automobile Production Trends

Category 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

Passenger 1,209,87 1,309,30
723,330 989,560 1,545,223 1,777,583 1,838,697
Vehicles 6 0
Commerci
203,697 275,040 353,703 391,803 519,982 549,006 417,126
al Vehicles
Three –
Wheeler 276,719 356,223 374,445 434,423 556,126 500,660 501,030
Vehicles
Two –
5,076,22 5,622,74 6,529,82 7,608,69
Wheeler 8,466,666 8,026,681 8,418,626
1 1 9 7
Vehicles
Grand 6,279,69 7,243,56 8,467,85 9,743,50 11,087,99 10,853,93 11,175,47
Total 7 4 3, 3 7 0 9
Automobile Domestic Sales Trends

Category 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

Passenger
707,198 902,096 1,061,572 1,143,076 1,379,979 1,549,882 1,551,880
Vehicles
Commercia
190,682 260,114 318,430 351,041 467,765 490,494 384,122
l Vehicles
Three –
Wheeler 231,529 284,078 307,862 359,920 403,910 364,781 349,719
Vehicles
Two –
Wheeler 4,812,126 5,364,249 6,209,765 7,052,391 7,872,334 7,249,278 7,437,670
Vehicles
Grand Total 5,941,535 6,810,537 7,897,629 8,906,428 10,123,988 9,654,435 9,723,391

Global Standing

 Fifth Largest commercial vehicle market in the world

 Fourth Largest passenger vehicle market in Asia
 Second Largest two-wheeler market in world
 Largest three-wheeler market in the world
 Fourth Largest tractor market in the world
 Scenario before 2010-2011 Budget

 The Union Budget 2009-10 failed to enthuse the slow-down-hit auto industry to a large
extent. The industry has, however, welcomed continuation of CENVAT cuts that were
announced in December last.

 The reduction of the additional levy on large cars and utility vehicles was also welcomed
and industry hoped that further rationalization of tax rate would take place and the
excise duty on utility vehicles and cars, other than small cars, would go down

 Thrust on infrastructure development in the Budget, by the increase in the outlays for
NHAI and JNNURM fueled growth in the automotive industry in the medium to long
term & the auto-component industry was an indirect beneficiary of this growth.

 Recognizing the challenging times being faced by the domestic industry during time of
recession previous budget did not further bring down the rates of Customs Duty last
year fulfilling demands of ACMA.

 Retaining the Excise Duty at 8%, last budget ensured that the stimulus pro-vided to the
industry earlier in the year 09 would be continued till the industry fully recovers from
the current recession which worked out very well for industry.

 Budget reduced on the basic customs duty on bio-diesel giving an upper hand for all
companies working on environment friendly technologies.

 Demand for incentives for promoting exports was ignored, also the opportunity to
rationalize excise duties on the passenger car segment was not been considered.
 Expectations from Budget 2010-2011

 Continuation of Stimulus Package for Commercial Vehicle Segment - The commercial

vehicle segment of the Indian auto industry has been worst affected. The continuation
of the stimulus package includes easier & softer loans, accelerated depreciation and
concessional duties would help the segment recover.

 Increased Export Promotion - The manufacturers & EOUs of auto industry expect
specific direct & indirect tax benefits for exports by SMEs and continuation of tax
holiday for themselves.

 Rapid Implementation of Goods & Services Tax (GST) - The entire Indian auto industry
is kept its fingers crossed for the transparent, easy and simple indirect tax regime of GST
which should be uniformly implemented across the states within this financial year. GST
aimed to bring in taxes like excise, VAT, CST and other taxes under one umbrella and
GST rate may be lower than the combined total of current taxes.

 Incentives to be provided to Specialized Service Companies Undertaking R&D – R&D

for auto industry is crucial and important and budget expectations include specific tax
breaks for R&D service providers.

 Reduction in interest on car loan and two-wheeler loan – lower interest rate would
attract more buyers.

 Due to rolling back of stimulus package, prices of big and small cars are expected to rise.

 Upward revision in service-tax – a hike of 1-2% of hike is anticipated

 2% hike in CENVAT – Price of smaller cars may further go up by Rs.2000 – Rs. 10,000

 Price of two wheeler was also expected to rise by Rs. 600 to Rs. 1500
 Indian Budget 2010-2011: Overview

The Union Budget this year has aimed to focus on inclusive growth and insuring food security.
These concerns for ‘aam aadami’ have gone hand in hand with credible measures for improving
investment climate, strengthening infrastructure and fiscal consolidation. As the country looks
to ‘quickly revert to high GDP growth path’ in the wake of ‘uncertain times’, concerns for
inclusive growth targeting the disadvantaged sections form the defining features of the Budget.
 
Many new initiatives have been introduced for sustained and inclusive growth. These include
setting up of Mahila Kisan Sashaktikaran Pariyojana, Financial Stability and Development
Council, Gold Regulatory Authority, Technical Advisory Group for Unique Projects, National
Mission for Delivery of Justice and Legal Reforms, Independent Evaluation Office  and National
Clean Energy Fund.
Three challenges were identified that would continue to engage Indian Policy Planners for next
few years. The first challenge is to quickly revert to the high GDP growth path of 9% and then
find the means to cross the double digit growth barrier. The second challenge is to consolidate
recent gains in making development more inclusive. The third challenge is to remove
weaknesses at different levels of governance and to improve public delivery mechanism. The
Budget, therefore, focuses on fiscal consolidation, making growth more broad-based and
ensuring that supply-demand imbalances are better managed.

Few of the Key features of Budget have been summed up below:

 Tax rates: Income up to Rs 1.6 lakh - nil Income above Rs 1.6 lakh and up to Rs 5 lakh -
10 per cent Income above Rs 5 lakh and up to Rs 8 lakh - 20 per cent 
Income above Rs 8 lakh - 30 per cent.
 Income Tax department ready with two-page Saral-2 return forms for individual salaried
assesses.
 New tax rates would offer relief to 60 per cent of tax-payers.
 Government's net borrowing to be Rs 3,45,010 crore for 2010-11.
 Additional deduction of Rs 20,000 allowed on long term infrastructure bonds for income
tax payers; this is above Rs one lakh on saving instruments allowed already.
 A unique identity symbol would be provided to the Indian Rupee in line with US Dollar,
British Pound Sterling, Euro and Japanese Yen.
 Fiscal deficit seen at 4.8 per cent and 4.1 per cent in 2011-12 and 2012-13 respectively.
 Total expenditure pegged at Rs 11.8 lakh crore, an increase of 8.6 per cent.
 Gross tax receipts pegged at Rs 7,46,656 crore for 2010-11, non-tax revenues at Rs
1,48,118 crore.
 Defense allocation pegged at Rs 1,47,344 crore in 2010-11 against Rs 1,41,703 crore in
the previous year. Of this, capital expenditure would account for Rs 60,000 crore.
 Fiscal deficit pegged at 6.9 per cent in 2009-10 as against 7.8 per cent in the previous
fiscal.
 Continuity in cash subsidy for fuel and fertilizer instead of previous practice of bonds.
 Non-plan expenditure pegged at Rs 37,392 crore and Plan expenditure at Rs 7,35,657
crore in budget estimates. 15 per cent increase in plan expenditure and six per cent in
non-plan expenditure.
 Rs 1,900 crore allocated for Unique Identification Authority of India.
 Rs 1,73,552 crore provided for infrastructure.
 Need to take firm view on opening up of the retail.
 Government committed to ensure continued growth of Special Economic Zones
development.
 Repayment of loan by farmers extended by six months to June 30, 2010 in view of
drought and floods in some part of the country.
 One-time grant of Rs 200 crore provided to Tirupur textile cluster in Tamil Nadu.
 Allocation for new and renewable energy ministry.
 Clean Energy Fund to be created for research in new energy sources.
 Rs 500 crore allocated for solar and hydro projects for Ladakh region.
 Alternative port to be developed at Sagar Island in West Bengal.
 Allocation for National Ganga River Basin Authority doubled to Rs 500 crore.
 Mega power plant policy modified to lower cost of generation; allocation to power
sector more than doubled to Rs 5,130 crore in 2010-11.
 Government proposes to set Coal Development Regulatory Authority.
 Propose to maintain thrust of upgrading infrastructure in rural and urban areas. IIFCL
authorized to refinance infrastructure projects.
 Interest subvention for timely repayment of crop loans rose from one per cent to two
per cent, bringing the effective rate of interest to five per cent.
 Rs 200 crore provided for climate resilient agriculture initiative.
 Government to provide Rs 16,500 crore to public sector banks to maintain tier-I capital.
Allocation for women and child development hiked by 80 per cent.
 Fund with initial allocation of Rs 1000 crore to provide social security to workers in
unorganised sector.
 Rs 1,270 crore provided for slum development programme, marking an increase of 700
per cent.
 Allocation for development of micro and small scale sector raised from Rs 1,794 crore to
Rs 2,400 crore.
 One per cent interest subvention loan for houses costing up to Rs 20 lakh extended to
March 31, 2011; Rs 700 crore provided.
 25 per cent of plan outlay earmarked for rural infrastructure development
 Road transport allocation raised by 13 per cent to Rs 19,894 crore.
 Allocation for urban development increased by 75 per cent to Rs 5,400 crore in 2010-11.
 Indira Awas Yojana scheme's unit cost raised to Rs 45,000 in plain area and Rs 48,500 in
hilly areas.
 Allocation for NREGA stepped up to Rs 40,100 crore in 2010-11.
 Allocated Rs 66,100 crore for rural development.
 Plan allocation for health and family welfare increased to Rs 22,300 crore from Rs
19,534 crore.
 Plan allocation for school education rose from Rs 26,800 crore to Rs 31,036 crore in
2010-11.
 Deficit in foodgrains storage capacity to be met by private sector participation.
 Exclusive skill development programme to be launched for textile and garment sector
employees.
 Plan allocation for Ministry of Minority Affairs rose from Rs 1,740 crore to Rs 2,600
crore.
 Plan outlay for Ministry of Social Justice raised by 80 per cent to Rs 4,500 crore.
 Government to contribute Rs 1,000 per year to each account holder
 Nutrient based fertiliser subsidy scheme to come into force from April 1, 2010.
 Earnest endeavour to implement General Sales Tax in April 2011.
 Status paper on public debt within six months.
 Government will raise Rs 25,000 crore from disinvestment of its stake in state-owned
firms.
 Government to provide Rs 300 crore to organise 60,000 pulse and oilseed villages and
provide integrated intervention of watershed and related programme.
 Government to continue interest subvention of 2 per cent for one more year for exports
covering handicrafts, carpets, handlooms and small and medium enterprises.
 Government to raise Rs 25,000 crore this year to meet cap expenditure requirements
 GST and DTC can be introduced in April 2011
 Direct tax code will be implemented April 1, 2011
 Final figure may be higher if earnings in last quarters are strong
 Concerned over emergence of double digit food inflation
 Export figures encouraging; private investments can be expected
 Need to review stimulus, move to fiscal consolidation
  Signs of food inflation going to non-food items

Indian Budget 2010-2011 and Automobile Sector

Though the Union Budget 2010 did not satisfy all the expectations of the sector, but it is
anticipated to have a positive impact on the automobiles sector in the coming years as well as
on the Indian economy as a whole. 

The Finance Minister in his Union Budget 2010 speech announced implementation of new
tariffs on cars and other vehicles. Below is the list of Union Budget 2010 Automobiles sector
proposals: 

I) Two-wheeler / Passenger Cars

 10% tariff imposed on small cars and two wheelers which until now benefited from
the 8% excise tariff - The industry was hoping for a reduction in the large gap in excise
duties between smaller personal vehicles and CVs and the high excise levy on larger
personal vehicles, but that did not happen. But experts point out that 2% hike in Excise
duty was expected and should not have adverse impact on the market. The result of the
Budget proposals is that the basic Excise Duty rate and Service Tax rates have converged
to 10%, indicating a move to enable GST implementation from Apr 2011. This increase in
excise duty is expected to be passed on to the consumers along with rise in operating
costs (hike in fuel prices) resulting in hike in price of two-wheelers (Rs. 600-1500), three-
wheelers (Rs. 1700 – 5000) and small cars (Rs. 3000-15000). This may cause a marginal
negative impact on sales

 Tax on big cars will be charged at 22% against the previous 20% in addition to Rs 15,
000 - Excise duty on big cars, Sports Utility Vehicles (SUVs) and Multi Utility Vehicles
(MUVs) increased to 22% from 20%. The additional duty component retained at Rs.
15,000 for passenger vehicles with 1,500-1,999cc engine capacity and Rs. 20,000 for
passenger vehicles having engine capacity of greater than 2,000cc

 Excise tariff to be charged on Diesel and Petrol at Re 1 on the every liter - This can also
be translated as an increase in price of Rs 2.58 per liter and Rs 2.67 per liter on diesel
and petrol respectively. This would lead to rise in vehicle running expenditure.
 Hike in car prices due to higher input price and increase in excise tariff on steel –Steel
prices have already started to rise and a further pass on due to a rise in excise duties can
pressurize margin of auto and ancillary companies.
 Change in Income Tax Slab - government broadening the tax slabs would boost the
disposable income in the hands of the middle class and is a positive sign creating a larger
customer base for auto sector. 

 4% of excise tariff on electric cars against the previous 8%; Critical parts and
assemblies of such vehicles exempted from basic customs duty and special additional
duty with CVD of 4% being imposed - This clause came as an optimistic note to the
electric vehicle makers. Although a concessional countervailing duty will be levied at
four per cent, this import duty reduction is believed to be hugely beneficial for the
industry in the long-term. This is because it will enable companies to avail of the
MODVAT benefits, like subtracting the excise duties paid on the indigenous components
from the total excise on the vehicle.
EV movement in India has been given a push by encouraging domestic manufacturing.
This is the first small step. Also, the reduction in import duties from around 24 per cent
to about four per cent is very encouraging. This can result in a fall in prices maybe in
next 6-7 months. In a case where the total excise levied on individual components add
up to Rs 1,000 and the four per cent excise on the complete vehicle is also Rs 1,000, the
companies will only end up paying zero excise on the finished product after availing the
MODVAT benefit. The increase in the excise duty for all vehicles running on fossil fuels,
which will lead to a price hike and also the increase in the price of fuel itself, will both
have a positive effect on the popularity of EVs.

 Full exemption from custom tax on electric automobiles and on its components.

 Concessional tax on Solar power rickshaws due to removal of excise tariff on solar
panels.

 Allocation for road development increased by 13% to Rs. 198.94 billion

 Weighted deduction on in-house R&D expenditure increased from 150% to 200%;

Weighted deduction on out-sourced R&D to National Laboratories, Research
Associations, Colleges, Universities and other institutions for Scientific Research has
been enhanced from 125 per cent to 175 per cent; Payment made to an approved
association engaged in research in Social Sciences or Statistical Research will be allowed
as a weighted deduction of 125 per cent. The income of such approved research
association shall be exempted from tax - This would spur industry focus on innovation,
R&D and product development that would increase the competiveness of the industry
longer term.
Overall Impact – Marginally Negative
The increase in excise duty rates by 2%, is likely to be passed on in the form of increase in
prices and is partially negative. This however is likely to be compensated by exemptions on
personal income tax rates, leading to higher disposable income for two-wheeler and
passenger vehicle buyers. The government’s thrust on rural and infrastructural
development remains a key positive. The increased weighted deduction rate for in-house
R&D would encourage higher R&D allocations and thus technical capacity in India that has
become a critical automotive market.

II) Commercial Vehicles

 Hike in excise duty to 10% from 8%

 Excise duty of Re 1 per liter imposed on diesel and increase in customs duty by 5% that
has resulted in diesel price increase

 Allocation for road development increased by 13% to Rs. 198.94 billion

 Weighted deduction on in-house R&D expenditure increased from 150% to 200%

Overall Impact – Marginally Negative

While CV prices have been increased by 3.5-4% in 2009-10 by all manufacturers, the current
increase in excise duty is expected to result in further price hikes. While the demand has
been strong during October 2009 - January 2010 partly driven by pre-buying in anticipation
of price hikes post implementation of Euro III and IV emission norms from April 2010, the
continued increase in commodity prices and cost increases post implementation of emission
norms may further result in increased prices of CVs dampening the demand in 2010-11.
Additionally, the diesel price increase may adversely impact the profitability of transport
operators and thus the demand for CVs in the short term. However, the government’s
thrust on rural and infrastructural development remains a key positive. The increased
weighted deduction rate for in-house R&D would encourage higher investments.
III) Tractors

 Increased focus on agriculture through four pronged approach

I. Rs 9 billion allocations directed at agricultural production,
II. Reduction in wastage of produce,
III. Credit support to farmers by increase in agricultural credit target to Rs 3,750
billion for 2010-11, extension of loan repayment deadline from December 2009
to June 2010 and increased subvention in interest rates from 1% to 2% resulting
in effective tax rates of 5%

 Increase in peak rate of excise duty from 8% to 10% may impact cost of production

 Excise duty exemption to trailers and semi-trailers used in agriculture

Overall Impact – Marginally Positive

The increase in agricultural credit target augurs well for the industry as financing availability
remains one of the most critical factors. Additionally, the 2% subvention (earlier 1%) and
extension in repayment deadline is expected to increase financial flexibility of the farmers.
The Government’s thrust on rural development continues with increased allocations to rural
development and NREGA scheme which is likely to stimulate demand in medium term.

IV) Auto Ancillaries

 Weighted deduction on in-house R&D expenditure increased to 200% from 150%

 2% Interest subvention to Small and Medium (SME) exporters extended by a year

Overall Impact – Neutral

Increase in weighted deduction on in-house R&D expenditure would encourage companies
to invest in technology development. The interest subvention scheme extended for a period
of one year could be a positive for some SME exporters. Increase in MAT rates will have a
negative impact on some ancillaries currently paying lower taxes. The positives on the
demand side for the automobile industry, through cuts in personal income taxes, would
support growth for the industry.
 Indian Budget 2010-2011 Vs Stock Market

Buoyed by the positive announcement by Finance Minister in union Budget 2010-11, the
Indian equity market responded positively and started trading over 100 points snapping
earlier losses.

The National Stock Exchange Nifty was also trading higher after the minister announced cut
in fertilizer subsidy and four-pronged strategy for agriculture sector.

Both Sensex and Nifty were trading above 1-month high. By mid-day the Sensex was trading
up 253.43 points or 1.56% at 16,507.63 with 26 components gaining. Meanwhile, the Nifty
was trading higher by 72.70 points or 1.50% at 4,932.45 with 44 components gaining.
The 30-share benchmark index, BSE Sensex opened flat with a rise of 1.13 points or 0.01%
at 16,255.33, while the broad based NSE Nifty started with a fall of 0.75 points or 0.02%, at
4,859.00.

NTPC, Reliance Power and Adani Power stocks were trading high after the Finance Minister
announced to double the allocation for power sector.

The stocks of Punj, Gammon India and Nagarjuna witnessed jump after the announcement
of 13 percent hike in road transportation.

The Auto index was at 6,991.56, up by 144.90 points or by 2.12%. The major gainers were
Maruti Suzuki, Ashok Leyland, Bharat Forge, Bajaj Auto, Escorts and Amtek Auto

Effect on few Top Automobile Companies of India

Current Price Previous

Company Group Change % Change
(Rs.) Close
Maruti Suzuki BUY 1,463.55 1,401.05 +62.50 +4.46
Bajaj Auto
BUY 1,817.50 1,714.60 +102.80 +6.00
Ltd
Mahindra &
BUY 1,007.35 958.85 +48.50 +5.06
Mahindra
Ashok
BUY 49.75 46.80 +2.95 +6.30
Leyland
Tata Motors
HOLD 711.05 668.70 +42.35 +6.33
Ltd
 Latest Happenings – 1st March 2010

 Auto manufacturers announced a hike in prices of their products upto Rs. 70,000
due to rise in excise duty
 Announced another round of price hike due in April 2010 when auto companies will
pass on the cost to customers to upgrade their vehicles according to new emission
norms
 Maruti hiked prices of its various models in range of Rs. 3,000 – Rs. 13,000
 Hyundai cars also made costlier by Rs. 6,500 – Rs. 25,000
 Prices of Tata Heavy Vehicles have gone up by Rs. 60,000 – Rs. 70,000 while prices of
Tata Passenger Vehicles have gone up by Rs. 5,000 – Rs. 6,000
 References

1. http://machinist.in/index.php?option=com_content&task=view&id=2605&Itemid=2
2. http://www.motoroids.com/news/735-union-budget-2010-impact-on-the-automobile-industry.html
3. http://www.carwale.com/news/4280-industry-welcomes-union-budget-2010-11.html
4. http://timesofindia.indiatimes.com/union-budget-2010/Budget-2010-What-it-means-for-you-as-an-
investor/articleshow/5622547.cms
5. http://www.domain-b.com/economy/budget/union_budget_2010/sectors/20100227_automobile.html
6. http://www.carwale.com/news/4387-fuel-hike-and-rise-in-duties-will-not-deter-growth-in-india.html
7. http://auto.indiamart.com/blog/expectations-auto-industry-budget-2010.html