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 2^nd largest two-wheeler maker, 6^th 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.

Market reactions of companies to Budget

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.