Budget Series 2017-18-#2 Impact on Auto Sector

Roshan Raghuram & Jananee R Chandran

A look at the Union budget

Transform, Energise and Clean: the three-point agenda of the Union budget has very well reflected in its focus on job creation, rural spending, digitization, and GST. Some of the highlights are:

  • Total allocation to agriculture up by 24%, to double the farm income in five years
  • Infrastructure spending up by 11%, against the sluggish private sector investment
  • Housing for all by 2022-being the main job creator to help in demand revival
  • Disincentives on cash transactions to help in the retention of bank deposits, which will bring down market interest rates further
  • Widening of tax base and compliance, a significant medium-term positive to support quality spending

Auto sector: An introduction

Indian automobile sector is one of the largest and most dynamic in the world, resisting and growing positively through economic changes. India has emerged to be the 2nd largest two-wheeler maker, 6th largest car manufacturer and the 8th largest commercial vehicle manufacturer in the world. The 92 billion dollar industry contributes 7.1 % of the country’s GDP and is responsible for the employment of 19 million people in the country.

Recent news in the industry

  1. A shift in paradigm in the industry: IT and e-commerce industries have reshaped the way the industry operates.
  2. Fuel emission norms and safety norms: In the era of global standards, we see India getting in line with the Euro emission norms. This translates into shorter product life cycle for the vehicles and an increase in the frequency of new models. The compulsory air bags regulation coming in the year 2017 would increase the demand for the auto ancillaries in the country.
  3. The impact of GST: There are broadly two kinds of prices in front of a car buyer: showroom price and on-road price. Prior to GST, excise duty levied on showroom price was 20% and a sales tax of 12.5 % (average of all states) was levied on on-road price. With the advent of GST, the common tax rate would bring down the effective tax rates for automobile companies which will improve their operational efficiency. This would mean reduced consumer prices as there is no cascading tax effect.

Effect of demonetization on Auto sector

Sales are reported on a monthly basis in the Auto sector. Post demonetisation it was seen that the sale volume of the auto companies dipped by around 5.48%. The rural demand for the sector would be affected in the coming quarter or two, mainly because a lot of NBFCs and banks refrain from giving auto loans to the rural population. This means most of the payment for the purchase of automobiles is made by cash, and this cash crunch would have an impact on the top lines of the companies for a shorter term but this is expected to improve once the effect of demonetization subsides.

Impact of Budget on Auto sector

The budget overall has been consumption positive. Reduction in income tax rate for a taxpayer with income INR 250000-500000 translates into increased disposable income. The spending on agriculture and crop insurance scheme will benefit the tractor and the 2-wheeler segment. Increased spending on infrastructure, on the other hand, will benefit the commercial vehicle segment. However, the decrease in the total outlay of AMRUT will lower demand for buses and would adversely affect urban players.

Proposal Impact Major players
Spending on agriculture and crop insurance Positive for tractor and 2W Hero
Decrease of  6% outlay on AMRUT Negative for urban players Eicher Motors
Ashok Leyland
Tata Motors

Market reactions of companies to Budget

Company Pre-budget price Post-budget price Change % change
M&M 1255 1260 0.40%
Eicher Motors 23174 23385.9 0.91%
Ashok Leyland 92.32 94.5 2.36%
Escort 362 379.5 4.83%
Bajaj Auto 2819 2808 -0.39%

Market reactions have been positive for four out of the above five companies. The Auto sector is likely to be positively impacted both by value and volume. And the Union budget is expected to be a helping hand to the demonetization affected Auto players.


Expectations from Union Budget 2017-18

Union Budget 2017 is the most looked forward issue for everybody associating with the Indian economy. This year budget will be announced one month earlier compared to the traditional practice of declaring it on the last day of February, because, Government wants to complete the spending and tax proposal before starting of new financial year.

Here are the major expectations from NDA’s budget:

  • Change in Tax Administration:

Data shows that only 1% of the Indian population pays income tax, whereas only around 2% filed income tax return. So, to take more people into taxpayers’ net, Government might increase the tax level from Rs. 2.5 lakh per annum to Rs. 4 lakh per annum. Along with that corporate tax may get reduced to boost economy. Also, according to the CEO of Mindtree, Rostow Ravanan, Government needs to streamline and update the process of incentives given to individual taxpayers to have more inclusion. GST’s implementation schedule may also be announced in this budget.

  • Encouraging Digital Payments and Proper Implementation:

In the process of creating a supposedly cash-less economy, this budget is expected to incentivize digital payments via plastic money. In a country of 1300 million, banking penetration is only 55% (although 19% of them are dormant), which translates to people having 700 million debit cards but only 24.5 million credit cards. So, the budget is expected to address the huge opportunity. To promote cashless transaction, applications are expected to be part of this budget. Benefits of banking through payment banks are also expected. Infrastructures are expected to be more developed to incorporate SMEs in digital India.

  • Real Estate:

Due to demonetisation and Real Estate Regulatory Act, 2016 was not smooth for major GDP contributors of India’s real estate sector, because, cash crunch made problem for buying material, construction etc. Relaxation in income tax rate, hike in HRA deduction is expected from this budget.

  • Revival of Private Investment:

The government is expected to take major steps to address the issue to decreasing private investment. Demonetisation may not affect the private investment directly, but it has kept the investment in abeyance, which will delay the recovery in private investment. So, domestic consumption, purchasing power and cash-driven transaction in the rural economy need to be boosted by the policies taken by the Government in this budget.

  • Agriculture:

Farmers were not able to sell their khariff crops due to unavailability of notes after demonetisation. So, they are expected to get some benefit from this budget under Pradhan Mantri Fasal Bima Yojana. It is also expected to provide a measure for cashless transactions and digital payments in the farming sector so that seeds, fertilizers, and other necessary equipment can be easily be purchased by farmers. Also, import duty on vegetable oil needs to be increased to help domestic refining industry, which is currently facing a crisis of under-utilization. The government can also think of introducing FDI in the agriculture sector to boost the investments and technical expertise. The budget is expected to introduce a framework for more transparent procurement of grains by official agencies. It may include the system of direct procurement from farmer to prevent exploitation by placing suitable safeguards.

  • Housing Loan:

The government announced Pradhan Mantri Awas Yojna (PMAY) aiming for housing for all. Then, it is expected that government would increase the tax deduction on the interest paid on housing loan. An extra benefit is expected beyond the interest payment of Rs. 2 lakhs per annum.

  • Social Sector:

Gross enrolment ratio in India is only 23%, which is well below the world average. So, to address that, the government is expected to have more allocation (more than 3% of GDP) in the education sector. Increasing the internet coverage would be an effective step to address this gap to educate the students of rural India. Along with that, the learning gap between academic curriculum and practical arena needs to be addressed by imparting more technology and collaboration in between educational institutes and industries.

This budget may announce a new cess for social security of around 20000 railway coolies. It is expected that every railway ticket would cost 10 paise more to generate around Rs. 4.4 Crores per year to provide the basic minimum facilities like PF, pension etc. for the coolies.

  • Railway:

Ending the 92 years-old tradition, the Government decided to merge railway budget with the union budget. Railways is expected to get around . 1.3-1.4 Trillion rupees this year to spend in building over-bridges, under-bridges, track renewal, freight corridors etc.

At last, the share of India in global GDP has increased from 4.8% in 2001-07 to 7.0% in 2014-15 according to the Economic Survey 2016. So, it is very critical for the finance ministry to make a roadmap to achieve the country’s goal – to be a global economic power with sustainable growth rate.

rooptejaRoopteja Tamatam, a student of Shailesh J. Mehta School of Management, IIT Bombay, is a finance enthusiast and an avid follower of western classical music and is looking to carve a unique career path amalgamating both of his passions.

sayanSayan Poria, a student of Shailesh J. Mehta School of Management, IIT Bombay, is a finance enthusiast, opinionated and avid follower of recent political and socio-economical affairs.

#Fincabulary 8- January effect

Meaning: A seasonal  increase in stock prices during the month of January

Explanation: It refers to a pattern exhibited by stocks, particularly small-cap stocks, in which they’ve shown a tendency to rise during the last several trading days in December and then continue to rally throughout the first week of January. Analysts generally attribute this rally to an increase in buying, which follows the drop in price that typically happens in December when investors, engaging in tax-loss harvesting to offset realized capital gains, prompt a sell-off. Another possible explanation is that investors use year-end cash bonuses to purchase investments the following month.


Ashwath Narayana B Sanket

Tuhina Kumar


The aim of this research paper is to critically examine how important it is to have the appropriate rate of GST and how this rate will affect government revenue. This is done by analyzing the various factors that affect the appropriation of the GST rate. We will also examine the impact of GST on inflation and the effects of having a high or low RNR rate. We conclude by examining the long-term effects of implementing GST.

Need for GST

In developing countries like India, the government plays an important role in augmenting the growth and development, given the paucity of private capital and initiative. The government is also responsible for supporting the economically backward classes, maintaining law and order and security of the country (9). To carry out these responsibilities, the government needs sufficient revenue. Revenue collection is done through various means like taxes, fines, fees and charges, and foreign grants of which taxes form a major chunk.

Row Labels Sum of Revised 2014-15 Sum of Budget 2015-16
Direct 705628.0 797995.0
Corporation tax 426079.0 470628.0
Income tax 278599.0 327367.0
Wealth tax 950.0
Indirect 545763.2 651495.6
Customs 188713.0 208336.0
Service tax 168132.0 209774.0
Taxes of union territories 3437.8 3577.0
Union excise duties 185480.4 229808.5
Grand Total 1251391.2 1449490.6

Table 1: Revenue from taxes, Source: (8)

The government earns 14,49,490 crores from taxes, the breakup of which is given in Table 1. Indirect taxes contribute a significant 44.95% to the total tax revenue. Hence, it is important to streamline this tax base. Introduction of GST will remove the multiplicity of taxes and simplify the tax structure.

Revenue Neutral Rate (RNR)

Since GST is a value added tax that provides tax credits for the taxes charged on the preceding stage of production, it will eliminate the cascading effects of taxes. This, in turn, might reduce the total government revenue from indirect taxes. To avoid this loss in revenue, the government will have to raise its taxes. This increased tax rate that ensures the government earns consistent revenue is called the revenue neutral rate (RNR). The committee headed by the Chief Economic Advisor of India, Arvind Subramanian, submitted a report that suggested an RNR of 15-15.5%. The principle behind calculating this RNR is defined by the following basic equation:


where ‘t’ is the RNR, ‘R’ is equal to the revenue generated from the current sales tax (12.5%) and the exercise tax (14%). This revenue which will be replaced by the GST is estimated to be 3.28 lakh crore from the center and 3.69 lakh crore from the state, which sums up to 6.97 lakh crores (Excluding revenues from petroleum and tobacco for the Centre, and from petroleum and alcohol for the States) or 6.1 per cent of GDP. Now the total potential tax base ‘B’ should be determined to calculate the RNR(1).

The committee has used three methods to determine the total potential tax base; the macro approach, the indirect tax turnover (ITT) approach, and the direct tax turnover (DTT) approach. This paper will explain the macro approach. In this approach, the tax base is calculated using the data from national income accounts. As per the Arvind Subramanian report, the base ranges from 59 per cent to 67 per cent of the GDP. This calculated base excludes the basic food items, petroleum, and electricity(1).

As stated earlier, the total revenue to be replaced by the GST is 6.1 per cent of the GDP. By using the basic formula t=R/B, the GST RNR ranges from 9.1 (0.061/0.67) to 11.1 per cent (0.061/0.55). For OECD (Organization for Economic Co-operation and Development) countries, there is commonly a loss of 10 to 20 per cent in revenue (1). Taking this loss into account the RNR ranges from 9-11 per cent to 11-14 per cent(1).

The aforementioned approaches have their own merits and demerits because of the underlying assumptions and data used. The Subramanian committee evaluated these and made suitable adjustments to arrive at an RNR rate of 15-15.5%

Standard Rate of GST

The standard rate is calculated using the below mentioned formula (1):

R=αLG +βSG +γSS +μDG

Where ‘R’ is the RNR, ‘LG’ is the lower rate on goods, ‘SG’ is the standard rate on goods, ‘SS’ the standard rate on services, and ‘DG’ the demerit rate on goods; α, β, γ, and μ are the respective shares of these four rates in the underlying tax base, and together add up to 1(1). Hence the whole rate structure depends on policy choices about exemptions, what commodities to charge at a lower rate, and what to charge at a higher rate. Figure 1 shows the standard rate of GST in some emerging economies.

pic1Figure 1: Standard rate of GST in high income and emerging markets economies, Source: (1)

The average standard rate in emerging market economies (EME’s) is 14.1% and the highest standard rate is 19% while for high income countries, the average standard rate is 16.8%. As India is an emerging market economy, an RNR of more than 15-15.5% will lead to a standard rate of 19-21%(1).

It should be kept in mind that GST is a regressive tax, which means that an increase in price due to increase in tax rates will extract a higher proportion of income from a consumer belonging to a lower income group. Developed countries can effectively offset the impact of regressive taxation by increasing their government spending and introducing many social security schemes. But India, being an emerging economy, will be unable to do so in their already limited budget. Hence India needs to be cautious of very high interest rates.

Learnings from other countries

As observed in countries like Australia, New Zealand and Canada, the implementation of GST will lead to a one-time price increase in the short-run but this inflationary effect will be stabilized in the long-run.

Canada follows a dual-rate GST system like the proposed GST system in India. Its initial GST rate of 7% lasted for 15 years after which it was reduced twice by 1% in 2006 and 2008. Canada has been decreasing its dependence on the consumption tax, which is contrary to the world trend. Many studies have proved that consumption tax is the most efficient way of taxation(5). This means that a reduction in consumption tax leads to a very small change in the economic well-being of people as it causes a very small distortion effect on an individual’s decisions and does not change their investment decisions or the type of economic activity they practice. So the cut in the tax rate would only lead to a minimal increase in the consumption expenditure in the short run and might not lead to an increase in savings or investment to have any long term effect. Hence, Canadian government’s decision to reduce the GST rate may not be in the best interest of the economy at large.

Also, the GST system has become increasingly complex over time like the sales tax on manufacturing goods(5). This is mainly due to the complexity of Canadian tax legislation, the number of taxes companies are subject to, and the multi-jurisdictional tax system. Furthermore, as more people came under the purview of the taxation system (because GST is a broad based tax), more people had to deal with this complex tax structure increasing their adjustment costs. A useful learning from Canada’s example is that a country should keep the taxation structure fairly simple to comply with. Also, as consumption tax is the most effective way of taxation, India should increase its dependence on indirect taxes.

Another useful learning can be taken from the example of Malaysia that faced a lot of opposition from its businesses even after providing 1.5 years to prepare for the change in the tax regime(6). Since India plans to implement GST from 1st April 2017, it may be very challenging for the businesses to adjust to this change in less than nine months.

Using Malaysia’s strategy, India could also release a probable tax structure for each segment to aid this transition.

Inflationary impact

 It is essential to understand the inflationary impact of GST on different goods and services. Some necessary goods will be exempted from taxes as the poor may not be able to afford them at high prices. For example, if we consider the pharmaceutical sector, it expects to gain from the overall increase in efficiency due to costs saved on the supply chain. However, if the rate is more than 12%, it will have a negative effect as healthcare is a necessity and it should be charged at a low rate with input credit funds available so that the end cost does not increase considerably(2). It will be interesting to see how existing indirect tax exemptions and inverted tax structures are modified to ensure that the overall costs of pharmaceutical products do not increase on account of GST.


Figure 2: Weightage of different categories in CPI, Source: (1)

Moreover, a major part of the Consumer Price Index (CPI) basket (as shown in exhibit 3) which includes categories like food and beverages, clothing and rent, are either exempted or taxed at low rates as these are essentials for the lower income group. The effective tax rate on CPI is 10.4%. However, this includes goods outside the purview of GST like petrol, diesel, and alcohol. If we exclude these items, only 46% (approx.) of the CPI will be taxed. Out of this, 32% is taxed at a low rate and only 15% is taxed at a normal rate. This builds up to an effective tax rate of 7% on CPI because these excluded goods are charged at very high rates (1).

However, if a good is exempted from taxes, it does not necessarily mean that the net tax charged on that good is zero. This is primarily because the embedded taxes on inputs, like the taxes paid on fuel during the transportation of these goods, are carried forward to the final product. Also, if food, fuel, and light are exempted from taxes and the Public Distribution System (PDS) continues to subsidize, the net price impact on the consumption of these goods for the poor will be minimal.

The proposed GST structure is a dual-rate tax structure and its inflationary impact will depend on the RNR rate and the standard rate. An RNR of 15% with a lower rate of 12% and a standard rate of 17-18% will have no inflationary impact(3). This is so because the revenue received by the government remains the same. Moreover, while the prices of some goods will go up, the prices of some other goods will go down negating the inflationary pressure. A higher RNR of 17-18% with a lower rate of 12%, a standard rate of 22% will have an inflationary impact of 0.3% if only the headline tax rate is considered. Furthermore, when the change in price is adjusted to the cascading input taxes, the net inflationary impact will be around 0.7% (1).

Effect of different rates of RNR

Since we don’t know the RNR rate, we can only speculate the effects of a high and low RNR rate. If a low rate of RNR is set, it will lead to a fall in revenue. As the center has promised to compensate the states for any loss of revenue over a five-year period, it will have a huge negative impact on the center as it has to support the states while it faces fall in its own revenue. Also, if this compensation is delayed, then it will lead to a loss of trust between the center and the state. The loss in revenue can also lead to a reduction in the growth rate of the country and this will further reduce the revenue(4).

We need to keep in mind that India is a developing country with diverse needs. Economic and social disparities have to be addressed while we simultaneously invest in education, healthcare, transport, energy, infrastructure etc. to boost development. This requires huge capital investments. GST rate will be set in order to meet these investment demands and any loss of revenue due to a reduction in rate will defeat the purpose of this taxation system.


In the long-run, GST is expected to benefit the economy in many ways. It provides credits on input taxes paid at the previous stage of production, decreasing the burden of tax on the end consumer. It also fosters greater compliance due to its multi-point collection system and an invoice trail that minimizes tax evasion because one needs to issue and obtain invoices in order to set-off the taxes from the previous stage of production. It increases the efficiency of the supply chain by saving travel time due to a reduction in hindrances and better warehousing and distribution of goods, leading to more cost-efficient decision making. On the whole, it will induce growth in the economy by creating an integrated economy with a common market while increasing the ease of doing business by streamlining the tax structure.


  1. Report on the Revenue Neutral Rate and Structure of Rates for the Goods and Services Tax (GST). (2015, December 4). Retrieved August 14, 2016, from Ministry of Finance, Government of India: http://finmin.nic.in/the_ministry/dept_revenue/Report_Revenue_Neutral_Rate.pdf
  1. Mukherjee, R. (2016, August 4). Impact from GST to be negative on pharma if rate exceeds 12%: Industry. Retrieved August 14, 2016, from The Times of India: http://timesofindia.indiatimes.com/business/india-business/Impact-from-GST-to-be-negative-on-pharma-if-rate-exceeds-12-Industry/articleshow/53547103.cms
  1. GST expected at 22%: Will it upset April 1 rollout plans? (2016, August 18). Retrieved August 18, 2016, from Money Control: http://www.moneycontrol.com/news/economy/gst-expected-at-22-will-it-upset-april-1-rollout-plans_7295561.html
  1. Keep GSTbelow 20% for inflation to be in check: Arvind Subramanian to NDTV. (2016, August 4). Retrieved August 14, 2016, from NDTV: http://www.ndtv.com/video/exclusive/the-buck-stops-here/keep-gst-below-20-for-inflation-to-be-in-check-arvind-subramanian-to-ndtv-426265
  1. Lefebvre, E. S. Is Cutting the GST the Best Approach? Retrieved July 25, 2016, from Certified General Accounts Association of Canada: http://www.cga-canada.org/en-ca/ResearchReports/ca_rep_2008-03_gst.pdf
  1. Pachisia, V. (2016, July 28). GST: Lessons from countries that have implemented the Goods and Services Tax. Retrieved Augsut 25, 2016, from Financial Express: http://www.financialexpress.com/economy/gst-lessons-from-countries-that-have-implemented-the-goods-and-services-tax/331289/
  1. CEA REPORT: RNR AT 15%-15.5%; 5 KEY RECOMMENDATIONS. (2015, December 4). Retrieved August 20, 2016, from GST INDIA UPDATES: http://gstindiaupdates.com/cea-report-rnr-at-15-15-5-5-key-recommendations/
  1. Receipt Budget, 2015-2016. (2016). Retrieved August 10, 2016, from National Informatics Centre: http://indiabudget.nic.in/ub2015-16/rec/tr.pdf
  1. Akrani, G. (2010, December 12). Role of Taxation in Developing Countries Like India. Retrieved September 24, 2016, from Kalyani City Life: http://kalyan-city.blogspot.in/2010/12/role-of-taxation-in-developing.html

About the authors:


The author is currently a student of the PGDM batch of 2016-18. His areas of interests are micro and macroeconomics. He is also a Committee member of TAPMI Toastmasters Club. You can contact him at:  ashwath.18@tapmi.edu.in


The author has done economics and is currently a student of finance in the PGDM batch of 2016-18. Her areas of interest are Economics and Finance. The author also has a keen interest in the financial news of around the world. You can contact her at: tuhina.18@tapmi.edu.in



Love gone bad! No I am not referring to any Bollywood couple’s breakup but Britain’s exit from the European Union (EU). On 23rd June 2016, the people of Britain voted for the most important decision of their life which will impact not only them but also the future generations of Great Britain and EU. BREXIT will surely transform the economic, political and social landscape of EU.

ECONOMIC – Official trade statistics show that EU is the destination for half of British exports. But Britain’s share of intra-EU exports and imports is only 10.1% and 6.0% respectively. This number is also inflated because goods exported by Britain out of Europe are transited through Rotterdam port in The Netherlands. This phenomenon is termed as ROTTERDAM EFFECT.

Britain’s Total Export to EU 402.3 Billion Euro Britain’s share in total intra – EU exports Britain’s share in total intra – EU imports
Britain’s Total Import to EU 344.2 Billion Euro 10.1% 6.0%

Foreign investments in EU might dry up as companies use Britain as gateway to Europe because of Zero–tariff environment and free movement of labour and capital. Britain with 28% has the highest foreign investment in EU.

EU will have to find a replacement for London which has long served as the financial nerve centre of EU. Many investment banks having headquarters in London will have to move out of London so as to serve the European market. Germany which imports 14% of financial services will be the biggest loser in EU because of increase in cost of financial services.

POLITICAL – For starters, EU would lose an influential member which would have helped them to crack trade deals and have a say in World politics and economics. There will certainly be a shift in the power of decision-making in EU. Germany and France will want the decision-making power to shift towards them which might create further political frictions.

SOCIAL – Another pressing issue is immigration. The free movement of labour might be restricted in Britain due to BREXIT. This will result in the surge of low-wage migrant labourers from Africa and Middle East to EU. This might add fuel to the existing anti-immigration movements in EU and may lead to further political differences amongst EU members.

SECURITY – With the growing threat of ISIS, security is a key issue for EU. Britain is home to world-class intelligence agencies like MI5 and MI6. BREXIT will put EU at the back foot in counter terrorism and intelligence operations. The plans for building a unified European army will also be hit.

The EU after BREXIT will be an impaired regional and a geopolitical union as compared to the current EU, which already punches far below its economic weight in regards with  the global and regional diplomatic and strategic matters.