The Indian automotive industry awaits some much-needed respite from the 2022 Union Budget, hoping for some crucial policy introductions that can pave the road to its recovery.
After coping with the after-effects of BS-VI regulations, followed by COVID’s relentless two-year-long assault, the need for support from the government remains at an all-time high, with the semiconductor shortage and existing commodity and fuel price hike having slowed down demand. Stable, consistent and long-term policies appear to be the buzzwords collectively emanating from the grapevine. Here are some of the need-of-the-hour exemptions and incentives that could turn things around for the Indian automotive industry.
The EV Sector
If there’s one sector that’s shown considerable promise over the last year, it’s the EV sector. However, EV infrastructure along with PLI scheme incentives for the 250 plus EV start-ups remain areas that need working on. Many EV players, including Hero Electric MD Naveen Munjal, have expressed skepticism in the ability of the multitude of EV startups to survive the decade without consolidating, and so the PLI scheme for EVs needs to take survivability into consideration in order to keep the ecosystem thriving. FAME II subsidies have gone a long way in creating demand for EVs, but it needs to be extended with price caps recalibrated for inflation and the increase in prices of parts and commodities. The Rs 15 lakh and Rs 1.5 lakh cut-off for EVs and electric two-wheelers respectively, will not suffice.
The renewed policy also needs to include subsidies for converting ICE vehicles to electric cars, along with offering schemes to promote battery swapping. Then there’s the fact that brands like Hero Electric, who are leading the “low-speed EV (under 25 kph) segment are also expecting to be a beneficiary of the FAME II scheme, although the likelihood is quite low, given that low-speed EVs operate under a low price bracket.
According to the Society of Manufacturers of Electric Vehicles (SMEV), India purchased more electric vehicles in 2021 than it did collectively in the past 15 years. And the FAME II scheme is in large part, responsible for that. The extension of the FAME II subsidy well-beyond 2024, will go a long way in boosting consumer and manufacturer confidence in the sector.
The scourge of the semiconductor
The government’s much-needed semiconductor PLI, introduced in December 2021, is the enema that potentially improves the outflow of cars, whose inventories have been severely affected by the shortage. However, it’s unlikely that our dependence on semiconductor imports will reduce given just how capital-intensive setting-up semiconductor facilities are. Fact remains that the automotive industry is affected more severely by the shortage than many others by comparison and the rapid transition to electric mobility has only exacerbated the situation. At present, what is necessary is for the PLI and subsequent policies to increase investor confidence in the viability and profitability of setting-up fab units in India. Then there’s the fact that import duties continue to remain high, even in the semiconductor space, primarily to boost local manufacturing. However, for the time being, a relaxation in import duties would enable joint product development, technology exchange and a healthier exchange of ideas. This in turn would help India set-up a thriving semiconductor ecosystem much faster.
FAME II subsidy to be extended to beyond 2024
R&D incentives for energy storage
GST reduction on lithium-ion, batteries, EV spare part imports
PLI benefits for electric two-wheeler startups and individuals looking to set-up public charging infrastructure
EV loans to be part of priority lending
Existing minimum investment and revenue criteria for availing PLI needs to be reduced
Commercial EV market in dire need of financing and incentives
PLI schemes of all manner, appear to be the way forward for the automotive industry. Be it semiconductors fab manufacturing, advanced automotive technology, advanced cell chemistry or charging infrastructure – the continuous growth of the EV ecosystem depends on the sort of PLI schemes that are offered.
While the PLI scheme introduced in September 2021, offering an incentive of Rs 26,058 crore is aimed at established companies, with global revenue of Rs 10,000 crore, the 2022 Union Budget is expected to extend the PLI scheme to include the rapidly growing e-bikes sector. Demand for EVs will however, remain contingent upon charging infrastructure growing alongside the manufacturing capacity of e-bike makers. Therefore, policies that’ll help incentivise infrastructure development and help set-up charging stations every 3x3km area are deemed essential.
The commercial vehicle market, earmarked for major growth in the coming years, does not benefit from financing or incentives at the moment. The sector is in dire need of subsidies, not only to meet its financial potential, but also help India attain net-zero status by 2070.
Another setback that the automotive sector is gearing-up to deal with is the government-mandated switch to biofuel and the conversion of ICE vehicles to become flex-fuel compatible. Given that the timeline for this change is a compressed one, the Confederation of Indian Industry has requested the government to provide a roadmap and a reduction of import duty on ethanol to 2.5% for the manufacture of “organic chemicals”. Companies are also awaiting policies that will help incentivise manufacturing second-generation biofuels.
With India set to become the third-largest market for ethanol in the next three years, the government has stated that by 2025, it will have mandated a 20% blend of ethanol in petrol and future policies are likely to reflect that in order to reduce our dependence on oil imports.
The Federation of Automobile Dealers (FADA) has requested the government to reduce the GST rate on two-wheelers to 18%. Most players in the automobile industry echo this sentiment, particularly the two-wheeler industry, which isn’t too chuffed about being put in the same GST bracket (28%) as luxury/sin goods. At present, the auto industry’s fairly wide range of components are slotted between GST bracket ranging from 18% to 28%. The classification of these components, along with the GST levied on them, has been a major source of contention for the automotive industry at large. A more consistent GST slab would go a long way in not only indirectly helping create demand, but also act as a gesture of goodwill towards the industry.
FADA’s statement essentially elucidates the idea that GST reduction is an essential form of countering the price hike that’s led to a drop in demand. The body has stated that the resulting growth in demand “and the ripple effects it will have on many dependent sectors will increase the tax collections”. The benefits of this will be long-term in nature.