Since September 2001, the automobile sector has been clocking impressive growth rates, in terms of number of units sold.

While huge pent-up demand, lower interest rates, replacement cycle and improved economic performance have led to this performance, in the next three years, the challenges are immense i.e. increased competition, fragmentation, new regulations and more importantly, significant capital expenditure commitments.

Key Positives Middle class story:  Increasing affluence of the Indian middle class and introduction of better quality cars has led to strong growth in the industry in terms of both market size and production capacities. Exports buoyancy:  On account of its low cost technical manpower and ever increasing focus on quality, the auto industry has emerged as an export hub, especially for the compact car segment. Exports of passenger cars from the country have increased at a healthy CAGR of nearly 38% during the past five years and increasingly more and more auto majors are lining up to set up their production bases in the country. Infrastructure thrust:  Improvement in road infrastructure has led to increased movement of goods through roadways. Close to 65% of all the goods movement in the country takes place by roads as opposed to 55% a decade ago. Also, owing to the fact that an estimated 39% of CVs plying on the roads are 10 years old, demand for HCVs is expected to grow by a robust rate in the long term. Low interest rate regime:  Close to 80% of the new cars being purchased in the country are financed, thus underlying the importance of a low interest rate regime to the fortunes of the industry. Given that interest rates are unlikely to rise at a rapid rate in the future, we expect the buoyancy in auto sales to continue over the medium to long term. Environment led benefits:  Any implementation of pollution norms in metros, whereby vehicles beyond certain age need to be phased out could further translate into higher volume growth for all vehicles, courtesy the replacement demand.		Key Negatives Concerning income growth:  The per capita income in the country has been growing at a slow rate. Since the auto industry growth has a strong correlation with the same, the momentum has to continue to ensure robust automobiles demand. Reforms need to be accelerated. Competition from imports:  With India coming under the WTO purview, competition is expected to rise multifold. Indian companies also have to contend with imports in the future. Already a number of companies are introducing vehicles in the CKD route. Taxation anomalies:  Duties on some select and key raw materials including steel and components are still pretty high and are thus hurting profit margins of the companies. Also, multiple tax rules that exist in different states are eroding the comparative advantage of a large domestic market thus making it important to implement VAT (Value Added Tax) as soon as possible.

Budget 2005-06: Complete Coverage

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