The Hindu Business Line : Shifting gears

LAUDING the overall encouraging stance vis-à-vis the automobile industry, Mr Jagdish Khattar, President, Society of Indian Automobile Manufacturers (SIAM), and Managing Director of Maruti Udyog, said the steps announced in the Budget today would increase demand for automobiles. However, the increase in excise duty on steel by four per cent and the 2 per cent cess is likely to result in a slight increase in prices of automobiles.

According to Mr Khattar, the Finance Minister's announcement to continue with the soft interest rate regime also spells good news for the automobile industry.

Mr R. Seshsayee, Managing Director, Ashok Leyland, said that the increased allocation to Defence would help the auto industry.

Mr K. V. Shetty, President, Automotive Component Manufacturers Association of India (ACMA), hailed the deduction in expenditure on in-house R&D, a long-standing demand. This would enhance India's attractiveness as a highly competitive, low-cost base.

Toyota-Kirloskar Motor and General Motors have said there could be an impact on automobile prices because of the 2 per cent education cess levied on all sectors while auto components major Mico said tax sops on R&D activities will boost the industry.

The Toyota-Kirloskar Motor deputy managing director, Mr K. K. Swamy, said though the industry did not have any expectations about reduction of excise duty to 16 per cent from 24 per cent, any reduction would have propelled the industry further.

He, however, said implementation of VAT (value-added tax) should give some relief to the automobile industry. The General Motors India president and managing director, Mr Aditya Vij, said the 4 per cent excise duty on steel and 2 per cent education cess will put additional cost pressure on the manufacturers.

The Mico joint managing director, Mr V. K. Viswanathan, said the "Income tax concessions on R&D expenditure in the auto industry is definitely a welcome step that will help boost the R&D competence of the Indian auto industry."

Mr David Friedman, MD and President, Ford India Ltd, said it is heartening that the Finance Minister has recognised the industry as a key contributor to economic growth.

"The other thing that I was pleased to hear was that he renewed the promise that the Government will address fiscal reforms like simplifying and rationalising customs duty and excise duty. He has reaffirmed that VAT (Value Added Tax) implementation is on schedule, which is good to hear."

Mr Pawan Munjal, Managing Director, Hero Honda Motors Ltd, said such steps as depreciation on investments for capacity expansion, tax exemption on R&D, excise concession on tractors and ambulances and duty reduction on steel, will further boost the booming auto industry.

Analysis

THE Union Budget's attempt at giving an impetus to research and development in the automotive industry is unlikely to lead to a spurt in investments in technology, design and primary automotive research in the short term.

However, if the measures to promote investments in R&D are sustained as part of the government's long-term focus for the automotive industry, it could potentially have a big impact on domestic automobile manufacturers' plans for upgrading process and product technology to global standards.

Further, in addition to the investments into the software side of R&D, such as in CAD/CAM, design prototyping and embedded software for control systems, which is already happening (for example at Bosch's software centre near Bangalore), fresh investments into testing and the hardware side of R&D could receive a boost.

The beneficial impact of the 150 per cent deduction of expenditure on in-house R&D facilities could be felt more by indigenous passenger car and two-wheeler manufacturers such as Mahindra & Mahindra (M&M), Tata Motors, Bajaj Auto and TVS Motors. Of course, the other automotive manufacturers amongst the wholly owned subsidiaries and Maruti Udyog, which is uniquely positioned in the joint sector, may also seriously consider investments in R&D. But the trigger for them to set up R&D facilities in India will not necessarily dependent so much on the availability of tax benefits.

Their investments into research will be more dependent on the availability of skilled research personnel, access to hi-tech scientific inputs and protection of intellectual property.

It is also a point to be noted that many of the overseas passenger vehicle manufacturers who have set up manufacturing subsidiaries in India have only been launching their international models here, with the exception of Ford Ikon.

The only investments into peripheral research by these companies would have been towards homologating the international models for Indian conditions.

However, where companies have drawn up long-terms plans for the domestic market, which include India-specific products (even if they are to be developed from an existing platform), the tax sops to R&D expenditure could boost the possibility of investments into in-house and local development centres.

Both M&M and Tata Motors have broken into the mass market for passenger vehicles in a big way and are attempting to benchmark their products to global quality and cost standards. Their efforts could receive a further boost from this tax sop. Similarly, Maruti's plans to develop and productionise a mass-market car completely in-house, and through indigenous inputs by 2007 will also get a leg up from the government's budgetary proposal.

S. Muralidhar