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Run-up to the Budget: Automobiles and Auto
Ancillaries sector

Passenger cars and utility vehicles: State of the industry(2000-01)

During the April-December 2000 period,

• Demand for passenger cars and utility vehicles declined by 5.6 per cent, due to an increase in prices as a result of sales tax rationalisation, lack of new model launches in the economy segment, a slow-down in the economy, and an increase in interest rates.
• On an average, production of cars increased by around 2 per cent, due to an expected increase in demand. However, production slowed down by 20-22 per cent in the second and third quarters of 2000-01.
• Prices in nearly all segments increased by around 0.5-3.5 per cent, due to an increase in the cost for making the vehicles Euro compliant.
• Operating profit margins of car manufacturers declined as compared with those during the corresponding period in 1999, due to a decline in sales and an increase in costs.

Commercial vehicles

During the April-December 2000 period,

• Demand for M&HCVs declined by 24.6 per cent, due to an economic slow-down. During the April-November 2000 period, IIP increased by 5.9 per cent, as compared with 6.2 per cent during the corresponding period in 1999. In 2000-01, agricultural production is estimated to increase by 0.4 per cent, as compared with a decline of 1.9 per cent in 1999-2000.
• Demand for LCVs increased by 7.3 per cent, due to an increase in the production of manufactured food products, consumer durables and non-durables.
• Production of M&HCVs declined by 26.6 per cent, while that of LCVs increased by 4.9 per cent
• Operating profit margins of commercial vehicle manufacturers declined as compared with those during the corresponding period in 1999, due to a decline in sales.

Two wheelers

I. During the April-December 2000 period,

• Demand for two wheelers increased by 3.4 per cent. Motorcycle sales increased by 26 per cent, due to high fuel efficiency (especially of models with 4 stroke engines), increasing affordability due to the availability of finance, high load carrying capacity, increased number of new models in the market, and increased purchasing power of the youth. However, scooter sales declined by 25.9 per cent.
• Production of two wheelers increased by 6.1 per cent. Production of motorcycles increased by 28.9 per cent. Production of scooters declined by 22.3 per cent.

Tractors

• In the first half of 2000-01, demand for tractors declined by around 12 per cent, due to low growth in the agricultural sector. (In 2000-01, agricultural production is estimated to increase by 0.6 per cent. as compared with a decline of 1.9 per cent in 1999-2000.)
• There is a continuing preference towards high horse power tractors, due to the marginal price differential between tractors in these segments.
• During the April-September 2000 period, operating profit margins declined to around 10 per cent, as compared with 12.2 per cent during the corresponding period in 1999.

Automobiles: Industry Expectations from the Union Budget

• A reduction in the excise duty: The Society of Indian Automobile Manufacturers (SIAM) has asked for a reduction in the excise duty on passenger cars, from 40 per cent to 32 per cent. For utility vehicles, a reduction in the excise duty, from 32 per cent to 24 per cent, has also been proposed. There has been no demand for a change in the excise duties for other vehicle categories. In addition, SIAM has suggested a uniform central excise duty rate on all vehicles by 2003.
• High levels of customs duty: Given the opening up of all automotive imports from April 1, 2001, SIAM has asked that the applicable rate of customs duty be maintained at very high levels. (India has not agreed to a bound rate of customs duty for automobiles, except for commercial vehicles). For commercial vehicles, SIAM has asked that the customs duty be kept at the bound rate of 40 per cent. At present, the basic customs duty for all vehicles is 35 per cent.
• Research and development: SIAM has asked for an increase in tax deduction based on increased weightage to R&D expenditure, and the linking of the excise duty rebate with the percentage of R&D on gross turnover, in order to encourage R&D activities. In addition, the setting up of a separate fund for promoting R&D has been proposed.

Automobiles: Duty Structure

	Excise	(per cent)	Customs	(per cent)
	1999-2000	2000-2001	1999-2000	2000-2001
Petrol LCVs/HCVs	16	16	40	44.04
HCVs	16	16	40	44.04
Tractors (<1800 cc)	8	16	40	44.04
Tractors (>1800 cc)	16	16	40	44.04
Two wheelers (<75 cc)	16	16	40	44.04
Two wheelers (>75 cc)	24	24	40	44.04
Cars	40	40	40	44.04
Passenger transport
7 to 12 seater, excluding the driver	30	32	40	44.04
13 seater and above	16	16	40	44.04

Notes
1) For 2000-01, customs duty include SACD of 4 per cent, effective since 1999-2000. In 1999-2000, the SACD was applicable only for non-traders, and hence, has not been included in the customs duty.
2) In the Union Budget 1999-2000, MODVAT credit was enhanced from 95 per cent of the excise duty paid on inputs, to 100 per cent.

Source: Central Excise and Customs Tariff

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Rediff-CRISIL Budget Impact Analysis

Budget 2001

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