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Feb 22, 2013, 04.35 PM IST | Source: Moneycontrol.com

Budget 2013-14: Need sops for auto ind, says Roland Berger

The coming budget should provide a significant boost to an ailing automotive industry. Despite best efforts, we are quite likely falling short of the goals set in the AMP 2016 by several tens of billions in terms of contribution to GDP and several millions in terms of jobs.

Wilfried Aulbur
Managing Partner, Roland Berger Strategy Consultants India

The coming budget should provide a significant boost to an ailing automotive industry. Despite best efforts, we are quite likely falling short of the goals set in the AMP 2016 by several tens of billions in terms of contribution to GDP and several millions in terms of jobs.

It is important that government focuses on areas which it should support and regulate rather than areas where its value addition is minimal. Take excise duties on diesel vehicles as an example. While there is significant agitation against diesel, the fact of the matter is that diesel engines today can meet the most stringent of emission norms. It is also beyond doubt that diesel engines are 20-30 percent more fuel efficient than petrol engines. Hence a larger diesel penetration has the potential to reduce the country's trade imbalance by reducing fuel imports.

The government should focus on defining emission norms rather than on imposing increased excise duties on diesel vehicles and trying to influence the technology with which emission norms are achieved. Emission norms have an impact on the health of our citizens, how they are achieved and which technology is employed is up to industry to decide. Government's capability to define the right technology path is questionable at the very least.

A case in point is the support for electric vehicles in India. Due to the high cost of batteries large scale adoption of electric vehicles in India is unlikely for four-wheelers. In addition, since energy generation in India is mostly coal-based, the overall positive ecological impact of e-mobility in India is also questionable. Fuel efficiency criteria regardless of technology employed would have a better effect as far as environment and balance of payment are concerned.

Another area of government intervention, that may not serve the needs of the consumer, is the long-standing discrepancy between the excise duty on large and small cars. Separation of large and small cars is arbitrarily defined as sub-4m for small and larger than 4m for large cars.

Rather than simplifying the operating environment for car companies interested in developing their business in India, we complicate the regulatory environment and increase development and production costs for serving the Indian market.

As most global companies in India are currently under severe financial stress due to the dramatically depreciating rupee, flat markets and increasing input costs, these types of regulations have a negative effect when discussions for further foreign direct investment come up at corporate headquarters abroad.

Positive steps to support cost reduction and demand creation that the government should undertake are several. All of which have been discussed in the past, but seem to be stuck up in government deliberation.  Key initiatives include a defined roadmap for GST introduction that will be executed swiftly. The latter is not only important for logistics optimisation across India, a swift and disciplined introduction of GST would also go a long way in recreating trust in the capability of government to take necessary actions in the support of industry.

Beyond this, government needs to push for recycling and end-of-life directives for motor vehicles. Not only would the replacement of old, road unworthy vehicles help guarantee employment, it would also have a very significant impact on the environment and safety of Indian citizens. Unfortunately, safety norms in India are significantly behind standards in other nations compared to emission norms, where India is following the West with an acceptable time delay.

Last but not least, demand creation activities such as tax deductibility of depreciation on personal cars for salaried employees should be considered to support the revival of an Indian automotive industry struggling with the uncertainties of doing business in India.

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