The announcements by the Government of India in Budget 2022 will revive consumption through employment generation, investment in infrastructure development, and rural economy. This augers well for the auto sector which has been passing through COVID-19-related headwinds for almost three years. The Budget proposals are also majorly favourable for the electric vehicle (EV) segment.
The auto sector was adversely impacted by the sudden and severe onset of the second wave of the pandemic in Q1 FY2022, which derailed the demand recovery momentum that had started gaining steam from H2 FY2021. While demand across certain segments was recovering subsequent to dip in infection rate, the industry prospects got impacted by factors such as consistent increase in cost of ownership as well as supply shortage owing to the semiconductor chips issue.
Consequently, these multiple headwinds led to decadal low levels of sales during the festive season of FY2022, especially for the two-wheeler segment. The rural demand too, despite healthy agri-cash flows was affected during the second wave leading to subdued festive offtake. This apart, untimely and excessive rainfall since September led to flooding in many regions and delayed kharif harvest/rabi sowing. Thus, rural demand sentiments have moderated over the past few months.
Rural/Agri Thrust
Under this backdrop, Budget 2022’s thrust on increased allocations towards various rural development schemes, earmarking funds for MSP, increased investments towards irrigation, and crop insurance scheme would help revive rural demand, directly benefiting the two-wheeler and the tractor segment. The enhanced allocation for road infrastructure projects is likely to lead to a spill over demand for commercial vehicles, and would be a positive for the segment. As part of the government’s thrust on rural development and farmer welfare, Rs 2,370 billion has been earmarked for MSP. Further, the Ken-Betwa link project of Rs 446 billion as also the inception of fund to finance startups for agriculture and rural enterprise could support rural sentiments. The schemes for supporting MSME liquidity, and accelerating employment generation through extension of ECLGS benefits by one year, besides the roll out of RAMP programme with proposed allocation of Rs 60 billion; and the proposed revamp of CGTMSE scheme, could support demand for two-wheelers. The healthy allocation of Rs 200 billion towards road and highway infrastructure development is likely to boost demand across segments, especially the M/HCV segment.
Electric Vehicle
The government has reiterated its thrust on EVs. Proposals in this regard related to infrastructure development and credit flow (classification of energy storage systems under harmonised infrastructure list), formulation of new interoperability standards and a battery swapping policy, creation of special mobility zones with zero-fossil fuel policy — are aimed at spurring EV adoption.
The government plans to bring out a battery swapping policy, and formulate inter-operability standards. The lack of adequate charging infrastructure and range anxiety is a key deterrent for EV penetration. Battery-swapping is likely to gain acceptability in commercial applications like e-two wheelers and e-three wheelers, and will help faster penetration in these segments, if implemented effectively.
Further, this move will also help battery manufacturers reduce cost through economies of scale. Initiatives have been proposed for EV penetration in public transport, and to create special mobility zones for EV. This is already prevalent in regions like China and Europe, to promote EVs. Back home, the proposal will aid in increased EV adoption, in addition to allocations under FAME II scheme. The inclusion of energy storage systems in the harmonised list of infrastructure will facilitate easier credit availability, and cheaper financing for EV segment.
On the benefits through customs duty, Budget 2022 has reduced customs duty for nickel ore and concentrates from 5 percent to nil, ferro nickel from 15 percent to 2.5 percent, and nickel oxide and hydroxide from 10 percent to nil. Nickel manganese cobalt is a key chemistry used in lithium-ion batteries, used in EVs. As nickel alloys are primarily imported, customs duty reduction will aid indigenous EV battery manufacturers in reducing production costs. In addition, customs duty has also been reduced for parts of electric motor or generators from 10 percent to 7.5 percent. These being critical EV components, have moderate levels of localisation currently. The duty reduction will, therefore, help reduce the cost of EVs. The government has committed contribution towards R&D collaborations in sunrise sectors, including semi-conductor and its ecosystem, green energy, and clean mobility systems. This will facilitate EV ecosystem development.
The positive outcome of these will be that despite the ongoing volatilities, the OEMs will continue to invest in new product development, with significant investments towards new technologies, such as EVs. Outside the Budget, the Centre has already announced significant financial incentives and the same are being offered under the FAME-II scheme, and EV policies of select states; and through to production linked incentives (PLIs).
One may expect similar announcements going forward which may not necessarily be through the Budget.
Shamsher Dewan is Vice President & Group Head – Corporate Ratings, ICRA Limited. Views are personal, and do not represent the stand of this publication.
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