The industry has also gained hugely from government push to local manufacturing through initiatives such as Aatmanirbhar Bharat and Production Linked Incentives (PLI) Scheme (outlay ₹25,938 crore). The scheme offers financial incentives of up to 18% of production to encourage local manufacturing of automobile parts. In March 2022, government announced that the PLI Scheme for automobile and auto component industry has attracted investment proposals worth ₹74,850 crore as against the target of ₹42,500 crore over five years; ₹29,834 crore is from approved applicants under the Component Champion Incentive Scheme. "Benign policy measures for auto component industry are inclined towards latest technologies," says Mehta. Dewan of ICRA concurs. "The self-reliance initiative through Aatmanirbhar Bharat and PLI Scheme will drive localisation. This means auto component makers will gain a higher share of spending by OEMs."

A slew of regulatory changes such as mandatory six airbags in cars from October have also benefited the industry. "With every regulatory change, value per component is going up. This means component manufacturers will gain. This will lead to good momentum in coming years," says Thakkar of CRISIL. Premiumisation, for example addition of telematics or 'connected car' features, has also increased realisations. "Component manufacturers have had a great run, and it will continue in future. The larger picture is positive," he adds.

Budget 2023 & Beyond

Industry observers, though, warn that demand for passenger vehicles may taper a bit. On February 9, Reserve Bank of India increased repo rate for the sixth time since May 2022, making auto loans more expensive. "This will have a detrimental effect on price-sensitive entry-level passenger car segment and entry-level two-wheeler segment which are already under pressure due to regular price hikes," says Manish Raj Singhania, president, Federation of Automobile Dealers Association.

But the Budget brought some good news for the sector in the form of income tax rate cuts. Among other things, it increased the personal income tax rebate limit to ₹7 lakh. "Personal tax rate cuts shall push demand," says Dewan of ICRA. Thakkar of CRISIL agrees. "Rebates under the new income tax regime and steps to boost farm profitability will bring the mojo back for commuter two-wheelers," he says. However, companies in the premium segment remain unfazed. "Yes, there are headwinds, they are real and they will impact the industry. But with the kind of product mix we have, and the segments we are in, we are positioned well today," says Shah of M&M. Thakkar says the Budget was neutral for passenger vehicles.

However, Dewan says demand will start softening even in premium segment in next five-six months. "We see an increase in cost of vehicles. Demand in last few years has been driven by high salary growth and job opportunities in the start-up world. Many of these trends are reversing. Access to capital is not as easy as it used to be," he says. Multiple carmakers have acknowledged that a big chunk of demand is coming from younger generation and those employed in start-ups.

For auto component companies, good news has come in the form of Budget's thrust on skilling and creation of centres of excellence & research labs in hi-tech areas, which will help them become future-ready. "We are delighted by steps for skilling and research in hi-tech areas such as AI, robotics, 5G, mechatronics and 3D printing, among others. Increase in telematics and software content in vehicles will ensure that our industry continues to remain relevant and globally competitive," says Kapur. "We are now competing against companies which were never involved in our business, for instance, software companies," he says. The Budget also announced steps to reduce challenges being faced by MSMEs due to failure to execute contractual obligations during the pandemic. Apart from this, continuation of reduced duties on copper scrap and inputs for steel will increase availability of raw materials for the automotive sector.

However, the auto component industry was hoping that the government would use the Budget to discuss the need for a uniform rate of goods and services tax (GST) on auto components. "We are an intermediary industry, and if we have a uniform rate, the biggest beneficiary will be the aftermarket segment, where we have a large presence. A GST of 28% on aftermarket products is, in some sense, a motivation to evade taxes. If taxes are benign, compliance becomes easy, and it’s a win-win situation," says Mehta. However, Thakkar says uniform GST can be taken up outside the Budget.

While there are near-term challenges on both supply and demand side, the shift in fundamentals has made industry doyens confident. "Economy is stacking well. Demand has been strong across sectors. The industry is reasonably buoyant. We will see some impact of global recession. We are not going to be immune. Inflation has not gone away yet but India is better positioned than others. Commodity prices are going to be impacted once global inflation kicks in but India will fare better than others," says Shah of M&M.

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