JUNE 19, 2020

By Atul Gupta and Bhavesh Ahuja

THE world is currently grappling with the Corona virus that has infected a vast majority of population and is becoming one of the biggest global pandemics of the modern age. To counter its spread, governments across the globe have been resorting to blanket lockdowns bringing entire economies to a standstill. Overall, Covid-19, as the pandemic is known, is the perfect economic storm that has disrupted demand, along with supply and the distribution chain. The situation is no different in India and one of the most important questions that need immediate attention is to how to restore things back to normal.

In India, the automobile sector is one of the major contributors towards economic growth. Its share of the GDP is 7.1% and it accounts for about 49% of manufacturing GDP, employing about 3.5 crore people. The auto sector is currently in a transformation phase with significant investment being made in electric vehicles (EVs) or upgradation to BS VI norms. Therefore, with so much in store, the auto sector can certainly be the harbinger to kick start India's recovery, post Covid-19.

It is imperative to note that the auto sector in India has been impacted severely due to the pandemic. Following are the key factors:

- Shutdown of manufacturing operations

- Cash flow challenges

- Supply chain interruptions as significant imports are made from Asian countries (primarily China and Thailand)

- Weak consumer demand

- Decline in exports

As is evident from the above, the auto sector plays a pivotal role in India's manufacturing and for the economy as a whole. Therefore, it is critical that the government lays special focus on it. One of the key government policy tools is taxation, which can be effectively used to bolster the auto sector. Some key tax incentive measures that may be employed are:

- Downward revision of GST rate to preferably 18%, which can enhance demand in the domestic market

- Reduction in customs duties applicable on imported raw materials, along with a mechanism of deferred payment of such import duties for better cash flows in the short run

- Extension of benefit of accelerated depreciation under income tax law on new capital investments in auto sector manufacturing

- Complete waiver of stamp duty and other registration fees for any investment made to set up or expand manufacturing operations

- Government had recently reduced income tax rates to 15% to attract fresh investments in manufacturing sector. Same be further reduced to 10% for new companies in automotive manufacturing sector

- Government may also consider providing special dispensation to auto sector, via a reduction in income (tax?) rate for generating additional employment, for instance a reduction of 1% be granted for every 1000 additional employees

- Increase in Merchandise Exports from India Scheme (MEIS) rates for export of automobiles and parts

- Waiver of electricity duty for next 5 years for original equipment manufacturers (OEMs)

India's share of global R&D is ~40%, which demonstrates India's capabilities and the ability to have greater dominance in the global arena. To keep up with the same, it is crucial that additional incentives are offered for R&D in auto sector, by way of duty exemptions on procurement of goods and services for R&D. Additionally, special incentives and tax concessions should be provided on the capital invested on R&D activities to encourage investment.

Special manufacturing corridors may be set up for auto sector with following benefits to enable India to become a manufacturing hub for auto and auto ancillary industries.

- Nil income tax for first 5 years of operations

- 100% depreciation on capital investment made for a period of 10 years

- Capital subsidy of 25% for units set up in special manufacturing corridors

- Refund of GST paid on supply in cash

- Deemed export benefits against supplies made to units located in such corridors

- Government to ensure that infrastructure in such areas is adequate and conducive to attract auto companies

- 100% exemption from stamp duty

- 100% waiver on long term lease for land

Further, as a short-term measure, the government should reduce rate of interest on loans for retail customers, which would certainly push up demand in local markets. At the same time, in order to supplement cash flows of manufacturers, interest rates on loans to should be subsidised by at least 50% of prevailing Prime Lending Rate.

Economic pundits predict a global economic crisis once the dust on the Corona pandemic settles and India shall not remain completely insulated. Therefore, in order to ensure that the manufacturing set-up in India revives expeditiously, it is of paramount importance that special emphasis be given to the auto sector.

The above measures with appropriate and swift implementation shall not only act as a much needed shot in the arm for this sector in the short run, but also enable India to become a focal point for global automotive manufacturing in the future.

[Atul Gupta is a Senior Director with Deloitte India and Sells LLP and Bhavesh Ahuja is a Senior Manager with Deloitte Haskins and Sells LLP. The views expressed are strictly personal.]