The Indian automobile industry has always been a good indicator of the country’s economic health, as it contributes to both economic growth and technological development. The two-wheeler segment, in particular, keeps seeing strong growth due to the rising middle class and India’s young population. Additionally, the increasing interest from companies in rural markets has further supported the sector’s growth. With Union Budget 2025 around the corner, expectations are high for policies that will continue to support the automobile industry, encouraging innovation, infrastructure improvements, and sustainability. In this article, we look at what the upcoming budget might bring for the sector and how it could impact its growth.
Before getting into the expectations for Budget 2025, it is important to first understand the current scenario of India’s automobile sector.
India has emerged as the world’s 3rd largest automobile market, with a strong presence in heavy vehicles. However, the sector is undergoing a significant transformation, driven by changing consumer preferences, sustainable transportation needs, and evolving government policies.
A major shift in the market is the increasing preference for Electric Vehicles (EVs) over traditional internal combustion engine (ICE) vehicles. As consumers become more eco-conscious and cost-sensitive, EVs have gained traction. The government has been instrumental in this shift, providing subsidies for both demand and supply-side measures, while also reducing GST on EVs to just 5%, compared to the higher tax rates on ICE vehicles. These efforts have created a favourable environment for the growth of the EV sector.
As per IBEF, the global EV market was estimated at ~US$ 250 billion in 2021 and it is expected to grow to US$ 1,318 billion by 2028. The Centre has introduced the PM E-DRIVE scheme with a budget of ₹10,900 crore (US$ 1.30 billion), effective from October 1, 2024, to March 31, 2026. This initiative aims to boost the adoption of Electric Vehicles (EVs), set up charging infrastructure, and foster the growth of an EV manufacturing ecosystem in India.
In terms of manufacturing, India has made substantial progress in reducing its dependence on vehicle imports. With various government policies and incentives, there has been a push for indigenous production, especially in the high-end luxury vehicle segment. These efforts align with the government’s vision of a self-reliant automobile industry, as part of its Aatmanirbhar initiative.
Despite these positive developments, challenges remain. The sector still struggles with complex classifications, which hinder smooth operations. Additionally, the government could consider removing the compensation cess on vehicle sales to further boost industry growth.
As urbanisation continues and disposable incomes rise, the automobile sector is set to grow at a steady pace. However, to ensure sustained growth and attract global investments, it is essential for policymakers to create a conducive environment that promotes domestic manufacturing and innovation in the sector. With this backdrop, let’s explore what the upcoming Budget 2025 could bring for the industry.
As we approach Budget 2025, there are several key expectations from the automotive sector that could significantly impact the industry’s growth, sustainability, and overall development. Here are some of the anticipated measures:
As per Deloitte’s Budget Expectations 2025 analysis report, the major challenge faced by the automobile sector is the complexity in the classification of auto parts, components, and finished vehicles under the Harmonised System of Nomenclature (HSN). This complexity leads to confusion and inconsistent application, especially for companies dealing with auto components.
The expectation is for the government to introduce a more simplified and consistent classification structure. Grouping similar components or those with similar end uses under a unified category would reduce complexities, improve compliance, and eliminate the need for litigation. This simplification will make it easier for businesses to operate and boost the overall ease of doing business in India.
Hybrid vehicles are seen as an effective bridge between traditional internal combustion engine (ICE) vehicles and fully electric vehicles (EVs), especially in regions with underdeveloped EV infrastructure. Currently, hybrid vehicles are taxed at the highest GST rate of 28%, making them less attractive compared to EVs or conventional petrol/diesel vehicles.
The expectation is that a reduction in the GST rate for hybrid vehicles would make them more affordable for consumers, promoting their adoption. This would not only help reduce carbon emissions but also decrease import dependency on crude oil.
A significant concern for electric vehicle (EV) manufacturers is the inverted duty structure, where EVs are taxed at a lower GST rate than some major components like lithium-ion batteries. This results in an increase in production costs, as manufacturers are required to claim refunds for unused Input Tax Credit (ITC). However, the process for claiming these refunds is often complex and slow, which affects cash flow and working capital.
A simplified and faster refund procedure is an expectation as per the analysis report. It says that it would ease the burden on EV manufacturers, helping to improve their cash flow and reduce unnecessary costs. It would also encourage the local manufacturing of EVs by providing much-needed financial support to the industry, particularly to start-ups that are capital-intensive.
As India navigates the evolving landscape of the automobile sector, Budget 2025 holds the potential to address key challenges while fostering growth and innovation.
Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions.
Published on: Jan 8, 2025, 2:20 PM IST
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