Motown’s Moment of Aatmanirbharta

IN DECEMBER 2022, after three years of subdued demand, the Indian automobile industry achieved a landmark. It pipped Japan to become the third-largest automobile market in the world. India sold 4.4 million light vehicles, against Japan's 4.2 million, according to S&P Global Mobility. In the recently concluded Auto Expo, Toshihiro Suzuki, representative director and president, Suzuki Motor Corporation (SMC), said India has the potential to become the largest automobile market in the world.

These developments — in tow with auto sector’s contribution of 7.1% to GDP and 49% to manufacturing GDP, and tech-related disruptions — were a harbinger to a bevy of announcements made by finance minister Nirmala Sitharaman in her Budget speech. Sitharaman introduced measures to further India’s transition to green mobility, and spur demand for personal and commercial vehicles.

“This is a growth-oriented Budget with a positive impact on the auto sector,” says Vinod Aggarwal, president, Society of Indian Automobile Manufacturers (SIAM). Industry bodies also lauded the measures for the sector. “Focus on exports, manufacturing, local value addition, and encouraging green energy and mobility are indeed steps in the right direction,” says Sunjay Kapur, president, Automotive Component Manufacturers Association of India. According to Sohinder Gill, director-general, Society of Manufacturers of Electric Vehicles, the Budget will incentivise local suppliers in the EV supply chain. “After passing through a difficult period of lack of good quality ‘Made in India’ EV components for the last two years, the local supply chains are beginning to take shape, and this Budget will further incentivise local suppliers because of the relative price advantage,” says Gill.

Capex, Infra Push to Boost CV Demand

The government has set a capital expenditure target of ₹10 lakh crore for FY24, 3.3% of GDP. It also announced moves to revive additional airports, heliports, water aerodromes and advance landing grounds to improve regional air connectivity.

This increase in capital expenditure is expected to spur demand for the commercial vehicles segment. “The higher allocation of ₹10 lakh crore towards capital investment and ₹79,000 crore towards affordable housing augurs well for commercial vehicle demand — especially the heavier multi-axle vehicles and tippers. The light commercial vehicle segment would also benefit from the outlay of ₹75,000 crore towards improving first and last-mile connectivity for select sectors,” says Shamsher Dewan, senior vice president and group head, corporate ratings, ICRA.

Hemal Thakkar, director, Crisil, agrees. “The capital expenditure outlay, including investments in railways and state capital outlay, will boost investments in infrastructure. An outlay of ₹79,000 crore under PMAY will boost demand for cement and steel, thereby providing a fillip to multi-axle vehicles, tractor trailers, and tippers in the commercial vehicle segment as well as tractors used for commercial activities,” adds Thakkar.

The demand sentiment of the commercial vehicle industry was already healthy — augured by replacement demand, pick-up in infrastructure, mining and construction activities, improvement in the overall macroeconomic environment, and healthy fleet utilisation levels — with a 16% growth year on year in wholesale dispatches in Q3 FY23. “The stepped-up investments have a direct bearing and are a significant positive for Tata Motors’ commercial vehicle business,” says P.B. Balaji, group CFO, Tata Motors, the largest maker of commercial vehicles in the country.

Green Mobility Gets a Supercharge

Arguably the most crucial big-ticket announcement for the automobile and its ancillary sectors in the Budget was fast-tracking the transition towards green mobility. Customs duty exemption for specified capital goods or machinery for the manufacture of lithium-ion cell for use in batteries of EVs until the end of March 2024 is also expected to give a boost to the sector. “There are still many parts of EV components such as lithium cells, permanent magnets for electric motors, semiconductors, etc that will need to be imported and we expected rationalisation of customs duty on such essential imports to help keep EV prices in check. The continuation of the customs duty free status for machinery used to produce lithium-ion batteries could result in some stabilisation in battery pricing,” explains Gill.

This essentially implies that for the end consumer, the price of electric vehicles will go down, creating an immediate impact in the burgeoning sector. “Customs duty exemption on import of capital assets for manufacturing lithium-ion cells for batteries used in electric vehicles will facilitate the development of the EV ecosystem and aid faster penetration,” says Dewan of ICRA. The impact is expected the most in the electric two-wheeler space, where the rate of electrification has outpaced every other segment.

“Fronting the ‘net zero emission’ mission, the Budget focuses on the promotion of battery energy storage systems to aid the electric mobility revolution,” adds Naveen Munjal, managing director, Hero Electric.

The move will also give an impetus to large manufacturing facilities for advanced chemistry cells. “Customs duty exemption on import of capital goods and machinery required for the manufacture of lithium-ion cells for batteries used in electric vehicles are welcome moves. Given Tata Motors’ commitment to green mobility, these interventions augur well for our business,” adds Balaji. The Tata Group envisages a global-scale plant for battery manufacturing, and has formed a company under Tata Sons for the same. “Our aspiration is not only for making batteries for Tata companies, but also for the global market,” N Chandrasekaran, chairman, Tata Sons, told Fortune India.

India currently imports everything from raw materials required to manufacture lithium-ion cells, to readymade cells. According to a report by RedSeer Strategy Consulting, close to 90% of the supply of lithium-ion battery and technology is between China, South Korea, and Japan. Start-ups, including Ola Electric and Log9 Materials, are setting up plants to locally manufacture lithium-ion cells. “The customs duty exemptions on import of capital goods and machinery for manufacturing lithium-ion batteries bring in a new lease of life for all battery manufacturers since it will help accelerate the country’s production capacity and also give the much-needed momentum to the country’s vision to become self-sufficient in EV needs,” says Pankaj Sharma, co-founder and director, Log9 Materials.

The viability gap funding proposed for battery energy storage systems with a capacity of 4,000 MWh has also come as a welcome move. “The government has continued its thrust on green energy with viability gap funding for battery storage solutions,” says Dewan. Rahul Bharti, executive director, corporate affairs, Maruti Suzuki India Ltd. echoes this sentiment. “In electrification, though the finer details are awaited, the Budget has made a targeted intervention by facilitating machinery/capital equipment import to encourage local manufacturing of lithium-ion cells and batteries.” According to estimates from Crisil, by FY27, sales of EVs will lead to an annual demand of over 25 GWh of batteries.

In the extremely dynamic business environment in the automobile sector — where sweeping changes are taking place both in technological disruptions and geopolitical dynamics — the disruptions in supply chains post pandemic, and dependence on China in new-age technologies have epitomised the need for ‘aatmanirbharta’ more than ever before. Budget 2023 takes India closer on that path.

In a coordinated action, the government also raised import duties on completely-built units (CBUs) and semi-knocked down units (SKUs) of vehicles. The relief for the country’s micro, small, and medium enterprises (MSMEs) — including measures to allow a deduction for expenditure incurred on payments made to them only when payment is actually made — could particularly boost the automotive components industry.

The automobile industry is transitioning to a more sustainable, self-reliant, and technologically advanced future, and the proposals in the Budget are a blueprint of that future.