Igniting R&D will help auto rebound

Planning Commission deputy chairman Montek Singh Ahluwalia has said that the forthcoming Budget would be a ‘popular’ one and not a ‘populist’ one.

This Budget comes in the midst of a global slowdown, when we are witnessing demand for vehicles reaching record lows, threat of massive layoffs, unprecedented turmoil involving players at the very top, such as General Motors, Ford, etc. Evidently, the key challenge before the FM would be to stimulate the market, help the industry and prepare for the future.

How can the FM provide a fillip to the automotive industry? Here are a few expectations and earnest hopes.

Research is very critical in ensuring competitiveness in today’s fast-changing industrial environment and for developing efficient technologies for the future. In an effort to promote domestic R&D in the auto sector, the government currently provides for 150% weighted deduction on in-house R&D facility expenditure (except in land and building).

It is hoped that this benefit could be raised to 200% and extended for a period of 10 years, which will help automobile manufacturers plan their investments, as the results do take time to show up.

Depreciation on motor vehicles — presently at 15% — envisages an inordinate high useful life of over 15 years. An increase in depreciation rate to say, 25% on motor cars would provide additional incentive for Indian consumers to replace their old cars. The government has extended accelerated depreciation benefits for new commercial vehicles till September 2009. To revive the badly-hit commercial vehicles segment, similar depreciation benefits could be extended to the end of the fiscal.

In order to stimulate the market through incentives, the FM could consider introduction of scrappage schemes similar to the ones successfully implemented by several European countries such as Germany (2,500 euros per car scrapped), France (1,000 euros per car scrapped), UK and so on.

Countries like Thailand have been providing tax exemptions of 8 years to their automobile manufacturers. The FM could consider providing such tax exemptions at least for 5 years on projects involving capital outlay of above Rs 500 crore in the automobile sector.

A major demand of corporate India for many years has been the reduction in corporate tax rate, which remains unattended. It is hoped that the FM would revisit the corporate tax rates in India and not only remove surcharge and cess, but also make work towards gradual reduction of tax rate closer to the global average of around 26-27%.

It is hoped that the FM will give a definite direction towards implementation of the all-India combined goods and service tax (GST) from April 1, 2010, with service sector taxation integrated into the VAT framework.

Growth in the automobile sector depends heavily on infrastructure development. This entails development of road and rail network, port connectivity, abundant availability of power and so on. If the FM is able to stimulate the infrastructural growth through means such as creation of industrial adjustment fund and/ or by providing subsidy/ tax breaks for new investments, etc, it will help the auto sector improve its fortunes.

The industry would expect expeditious implementation of the government’s ambitious automotive mission plan 2006-2016 (AMP), which aims to make the country a global automotive hub. Increased outlay to the National Automotive Testing and R&D Infrastructure Project, simplification of administrative procedures involved in FDI, removal of internal trade barriers such as octroi, long queues at check posts, harmonisation of fuel emission norms, setting up of Special Auto Component Parks and so on, will go a long way in assisting the Indian automobile industry to achieve its target of $75.3 billion in turnover and $8.97 billion of exports by the end of the 11th Plan period (2007-2012).

The writer is executive director, PricewaterhouseCoopers