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Auto parts firms to benefit from export incentives

The supplement to the foreign trade policy that seeks to incentivize and boost exports will benefit India’s $44 billion (Rs.2.4 trillion) auto components industry.

The addition of more auto parts in the so-called market-linked focused product scheme last week will incentivize their exports to Brazil, Iran, Russia, China and South Africa.

The exports incentive has come as auto parts makers, small and medium ones in particular, are grappling with volatile foreign exchange levels and appreciating raw material costs, said Vinnie Mehta, executive director at Automotive Component Manufacturers Association of India, or Acma.

The supplement to the trade policy added 46 products, including 23 auto parts, to the market-linked focused product scheme. These include locks, pistons, piston rings, oil filters, gearboxes and headlamps.

Auto components firms exported parts worth $6.7 billion in fiscal 2012, up from parts worth $5.2 billion in the previous year, according to Acma.

A.K. Taneja, managing director and chief executive of Delhi-based Shriram Pistons and Rings Ltd, said though provisions in the policy will help compensate auto parts makers for disadvantages such as an inverted duty structure and offer a growth impetus, the short tenure—until March 2013—will limit the effect.

“It takes time to get to a market, win business from an auto maker and make financial commitment,” he said. “It’s tough when the policy is so short term in nature.”

Shriram Pistons manufactures and supplies critical engine parts such as pistons and engine valves. It drew 18% of its turnover of Rs.1,000 crore in fiscal 2012 from exports, and envisages this going up to 20% by the turn of fiscal 2013.

Citing the spurt in investment in research and development (R&D) by several industries after the government in March extended the tenure for weighted tax deductions on R&D, Taneja said a similar long-term policy is required to give auto parts exports a thrust.

To promote investment in R&D, finance minister Pranab Mukherjee in his annual budget proposed to extend the weighted deduction of 200% for R&D expenditure in an in-house facility by another five years to 31 March 2017.

So, for every investment of Rs.100, a firm undertaking in-house R&D can claim an income tax deduction of Rs.200.

“The new incentives will make auto ancillary firms more competitive,” said F.R. Singhvi, joint managing director at Sansera Engineering Pvt. Ltd, which makes engine parts for auto firms.

Referring to the extension in the Export Promotion Capital Goods (EPCG) scheme, he said the 3% waiver on customs duty will help cut capital costs in the same proportion.

The scheme allows manufacturers and exporters to upgrade their machinery through import of capital goods at zero duty, though under the obligation that they will export eight times the value of the duty saved.

Any kind of incentive will give the industry a boost, especially since India is lagging behind peers in exports, said Abdul Majeed, auto practice leader at PricewaterhouseCoopers.

This is particularly applicable to smaller auto ancillary firms, most of which have been adding newer products and scouting for lesser known export destinations, he said. Besides shoring up export volumes, such initiatives will help overcome deficiencies including multiple taxation and poor infrastructure that Indian exporters face.