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Friday, December 22, 2006
India's Auto sector waits for Union Budget 2007
The Union Budget is round the corner. As always, the automobile sector players too are waiting with bated breath to know what the FM’s briefcase has in store for them.

The government is likely to pay heed to the demands of the automobile industry and reduce the excise tax on cars to 16%. This move will bring all automobiles under a uniform excise duty rate, something which the industry had been campaigning for. In the prevous budget the excise tax had been reduced from 24% to 16% only for small cars which measure less than 4 metres in length and with an under-1,200 cc (petrol) engine capacity or 1,500 cc (diesel). The excise cut is going to be a part of the government's long-term strategy to make India one of the largest carmakers in the world (India is currently 11th largest) and attract more foreign investment in the sector. Consumers can expect cars to get cheaper although how much of the savings are passed on to the buyer will depend on the manufacturer.

This excise cut will be a crucial factor for global auto majors like Suzuki, GM, Volkswagen etc who are in the process of setting up or upgrading manufacturing facilities in India to cater to future local demand and the export market. Last year’s Budget had also reduced the duty on raw material, which is now between 5 per cent and 7.5 per cent compared with 10 per cent earlier. The Indian automotive industry is currently worth about $32 billion and is projected to grow to over $145 billion by 2016. It is expected to double its contribution to the GDP from the current 5 per cent to 10 per cent. The industry has so far attracted investments worth over $12 billion, with about $8 billion in the pipeline, according to government estimates.

Ever since the Indian Government reduced excise duty on small cars in the Union Budget 2006, most auto majors have been crying foul. Excise duty on small cars was reduced from 24% to 16% as a part of the broader auto policy and in a bid to make India the small car manufacturing hub of the world. Small cars have been defined by the Government as petrol cars with an engine capacity not exceeding 1,200 cc and not exceeding 4,000 mm in length, and diesel cars of engine capacity not exceeding 1,500 cc and not exceeding 4,000 mm in length.

Maruti seems to be the happiest with the excise cut on small cars since it's the leader in the segment and is planning to launch the New Zen -Estilo (1100 cc petrol) and the diesel Swift (1300cc diesel) both of which will benefit from the lower excise duty. The excise duty cut has already resulted in global auto firms — like Suzuki, Nissan and Hyundai — lining up over $6-billion investment plans to build small car bases in India. And some in the government feel removing this sop now might go against the FDI flow.

However most auto majors including Hyundai, Honda, Toyota and General Motors are piling on the pressure on the Government to cut cuty to 16% for all cars in the upcoming Union Budget 2007. This seems obvious since their priduct portfolio relies majorly on larger cars which are still taxed at 24%. Also it seem right to have a uniform duty structure for all cars and not to disriminate on the lines the Government has drawn.

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posted by a correspondent @ 10:39 AM    
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