India’s auto industry has slid back to the level of nearly a decade ago due to multiple regulatory changes, a slowing economy, liquidity issues, and the COVID-19 pandemic.
The auto industry has shown signs of recovery over the last couple of months; however, an additional demand push is required to generate sustainable growth. The government is evaluating a series of possible measures such as a revision in the goods and services tax (GST) rate and a production-linked incentive and scrapage policy.
GST Revision: The GST council is evaluating an industry 10% GST cut across categories of vehicles.
This GST revision will defiantly neutralize the impact of the price hike due to BS-VI upgradation. Further, this GST revision will give a strong thrust to auto sales during the coming festive seasons.
Further, the government is considering a plan to reduce the GST of batteries to 5% from 18% (on lithium-ion) to promote electric mobility, which will provide a massive stimulant for EVs. As the battery of an EV accounts for about 40% of the cost, GST revisions on the battery pack will bring down the overall cost significantly.
Production-linked incentive (PLI): Much work has already been done on the production-linked incentive (PLI) scheme for auto and component manufacturers. The PLI plan for auto ancillaries is aimed at reducing dependence on imports. This scheme envisages providing manufacturing and export incentives to companies. The industry is currently importing many low-tech components like gearboxes, tubes, and steering wheels, which can be developed in the country, further reducing the supply chain disruptions.
Scrappage Policy: The vehicle scrappage policy aims to scrap old vehicles in exchange for some incentives for consumers. The auto industry welcomes the scrappage policy with open arms. This policy was a boon for 18 countries, who implemented it in the aftermath of the 2008 crisis.
The policy is considered a savior for the plummeting auto industry, especially for medium and heavy commercial vehicles. However, we need a fact-check – India has more than 35 million vehicles older than 15 years. Hence, one critical task is to build a modern and compliant infrastructure that ensures that scrapped vehicles don’t find their way back to the roads.
Besides, downstream logistics – the movement of scrapped vehicles from customer to scrapyard, would be another hurdle. Furthermore, incentives from OEMs and the government need to be sizeable enough to attract the price-sensitive Indian customers (in case of the voluntary policy).
We believe scrappage policy alone will not be able to produce very high boost, but together with GST revision and PLI implementation, the Indian auto industry will witness a strong recovery in the coming quarters. PSR
Aditya Kondejkar is a Research Analyst, South Asia Operations, for Power Systems Research
