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Mini Budget: Feel-good factor...just got better! - Views on News from Equitymaster
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  • Jan 9, 2004

    Mini Budget: Feel-good factor...just got better!

    India's GDP to grow at 7%, the burgeoning forex reserves now well over US$ 100 bn, various reforms initiatives taken by the government in sectors like telecom, power and banking, etc. are all examples of the feel-good factor linked to the Indian economy. However, these feel-good factors…just got better with the Finance Minister announcing a series of excise and custom duty changes across categories in the 'mini budget' announced yesterday, the impact of which is largely going to be positive for the Indian consumers and the economy at large. In this article, we list down in brief as to what impact these announcements could have on certain sectors.

    • Power: The reduction in customs duty on power project imports (above Rs 50 m) from 25% to 10% would aid the current ongoing power reforms. With the power ministry having already announced its intentions of adding about 40,000 MW of power capacity in the current plan, this process would get a further fillip. It must be noted that while the customs duty on machinery for larger projects is at 10%, on projects of size lesser than Rs 50 m the same is at 20%. The reduction in duties would not only bring down the power project costs but could also entice smaller power projects to shift their focus towards larger projects. Also, the reduction in custom duty on coal from 25% to 15% would further aid in rationalising costs for the power sector, as coal is an important input in the generation of power. The cumulative benefit of all this would be reflected in lower electricity costs being passed on to the final consumer. According to early estimates, the cost of electricity could fall in the region of about 6-7 paise per unit.

    • Aviation: The abolition of the 15% Inland Air Travel Tax (IATT) would have a direct positive impact on the costs of domestic air travel. It must be noted that post this announcement, the 15% IATT collected by the aviation industry on behalf of the government from air travellers will not be collected, which would reduce the prices of domestic air tickets to almost a similar extent. Infact, according to the Civil Aviation Ministry, the 15% refund on airline fares has been made applicable with immediate effect (January 9, 2004). Reduction in air travel costs would increase affordability of consumers, which could provide a further boost to the travel and tourism industry that is currently in an upswing. Further, the axing of the Rs 500 Foreign Travel Tax (FTT) would reduce the costs of foreign travel to that extent.

    • Infotech: The reduction of excise and customs duty on computers from 16% to 8% and from 10% to 5% respectively will have a significant positive impact on the hardware industry, as this would effectively translate into a fall in prices of computers and make them more affordable to consumers. According to some early estimates, computer prices could witness a fall in the region of 5%-6%. Another apparent advantage of this reduction in computer prices would be the bridging of the gap in prices of computers in the organised market and the grey market. This could lead to a shift in consumer preference to the former. Further, all this would percolate down to higher growth of PC sales in the country. Just to put things in perspective, the PC growth target, which is currently being pegged at 25%-30%, could be revised upwards in the region of about 5%-10%. However, the benefit of this is not restricted to the hardware industry alone, as increase in PC sales would have an indirect positive effect on the software industry as well. Exemption of recorded VCDs and DVDs from excise duty is also a positive for the industry, as they would become more affordable.

    • Pharma: A slew of measures were announced for the pharma industry, which would go a long way in aiding industry growth. Custom duty on life saving bulk drugs, formulations and medical equipment has been cut to 5%. Also, customs duty on artificial limbs and specified rehabilitation aids has been reduced to 5%. These items will also have excise duty exemptions. Excise duty on medical, surgical, dental and veterinary furniture is reduced from 16% to 8%. The bottomline derived from all these measures would be a reduction in costs and greater affordability of healthcare services for the consumers.

    • Telecom: The reduction in customs duty on mobile phones having been slashed from 10% to 5% would make the cost of owning a mobile phone cheaper. Apart from increasing the affordability of a mobile phone, the exemption of telecom equipments from custom tax could result in lowering of tariffs for consumers. All these measures would lead to acceleration in the growth of the telecom sector, especially the mobile telephony market.

    • Steel/Cement: The one big positive for both these industries (Steel /Cement) is the reduction of duty on import of coal from 25% to 15%. It must be noted that coal forms an important ingredient in the manufacturing process steel and cement and reduction in customs duty would reduce the cost of this input to that extent. This would in turn lead to lower cost of manufacturing of these commodities, which is a positive for the operating margins of these industries. However, there was another announcement in the mini-budget, which could lead to pressure on margins for the steel industry. With the reduction in the peak customs duty on certain steel products from 25% to 20% coupled with the abolition of the 4% special additional duty (SAD) could force Indian steel manufacturers to hold the increase in steel prices, if not reduce them. This is because, in recent times, the price of domestic steel has been maintained at just under the prices of landed (imported) steel. Infact, yesterday's announcement could also lead to a reduction in steel prices, if the gap between landed steel and domestic steel is not significant enough in certain steel products.

    • Direct Tax: Apart from the sectoral benefits doled out by the Finance Minister, various direct tax initiatives were also announced, which promises the common man a hassle-free and paperless income-tax filing experience. Click here for the same.

    While some may term these announcements as populist in nature to please the middle class and to ensure a much healthier vote bank with elections round the corner (early indications are that the elections could be as early as in April-May 2004), it would be unfair to take the credit away from the ruling government for the bold reform measures taken. The crux of all these measures is that it would aid India's elevation into a competitive global environment and towards free trade, which are all important for the sustenance of the current growth rate being witnessed in the economy. While the benefits of these announcements could take sometime to filter down in some cases to the final consumer, this move by the government is certainly in the right direction.



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