Union Budget 2021 | Highway expansion, scrappage policy and other key highlights

Union Finance Minister Nirmala Sitharaman presented the Union Budget 2021 before the Lok Sabha, announcing a slew of measures to revive the automobile sector. The measures include a gargantuan push for improving the highway infrastructure in the country, a new vehicle scrappage policy and changes in the customs duty for certain automotive parts.

Vehicle Scrappage Policy

The vehicle scrappage policy has been in the works for several years now and the government has finally given a green signal for the same at the 2021 Union Budget. In a bid to eliminate old, unfit and polluting vehicles from our streets, personal vehicles that are 20 years old or more and commercial vehicles that are 15 years old or more will have to be scrapped. The scrappage policy is voluntary, however fitness tests of old vehicles, conducted at automated fitness centres will be mandatory. For clarity on the subject, further details will soon be revealed by the Ministry of Road Transport and Highways.

An array of highway projects

More fuel will be pumped into the government’s ambitious Bharatmala Project that aims to establish robust road connectivity to far-flung border towns and rural areas across the country. Out of the proposed 83,000km+ highway construction at over Rs 5 lakh crore, 3300km has already been constructed. In the new financial year, another 13000km will be constructed. In addition to that, a flagship highway construction project estimated at Rs 1.18 lakh crore has been tabled in the parliament. This includes a number of new highways:

• 600km highway connecting Mumbai and Kanyakumari

• New highway connecting Kolkata and Siliguri

• Madurai to Kollam trade corridor

• Expansion of highways in Kerala, Assam, West Bengal and Tamil Nadu

• Completion of 11,000km of highways across the country

Increase in customs duty

While the aforementioned developments are two positive shots in the arm, this one is an unexpected blow. Details are scarce as of this moment, but what's confirmed by the FinMin is a “15 per cent increase in customs duty for certain auto parts.” This might impact the import of CKD units and prices of vehicles that aren’t heavily localised (read luxury carmakers like Mercedes-Benz and Audi among others) are likely to increase when this bill takes effect. While this encourages domestic manufacturing, vehicle costs are likely to increase in the short term until a strong local manufacturing ecosystem is developed.

The Scrappage Policy is definitely a welcome move and it will help India get closer to its emissions targets. Transport minister Nitin Gadkari also stated that the policy will eliminate one crore polluting vehicles from the Indian roads, encouraging the sale of electric vehicles and cleaner mobility solutions in the future.

Although certain issues were left unaddressed, like reduction in GST rates and incentives for electric vehicles. The current import duties for CBUs (Completely Built Unit) is 110 per cent while cars attract a GST rate between 18-28 per cent depending on engine size and segment. Lithium-ion batteries, a core component of EVs, demand a hefty GST of 18 per cent.

The punitive and stringent tax regime is a major hurdle for the growth of the automotive sector in India and the government certainly needs to review the same. A friendlier tax policy will not only bring down manufacturing costs, but also attract foreign investors to set up local manufacturing plants, result in massive technology transfer and create lakhs of jobs.