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'Power' packed mini budget - Views on News from Equitymaster
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  • Jan 19, 2004

    'Power' packed mini budget

    India Inc has never had it so good. Apart from a robust stock market, Mr. Jaswant Singh, the Finance Minister, doled out a range of tax concessions in the 'mini-budget' that has enthused markets further. Against this backdrop, we conducted a poll on our website asking the investors the following question 'In your view, which sector is likely to benefit the most from the mini-budget announcements'. The three options were tourism, power and information technology (IT).

    Among the ones who took part in the poll, 38% were of the opinion that the power sector would be the foremost beneficiary of the recent 'mini-budget' announcements. 34% felt that the major beneficiary would be the IT sector while 28% felt that the tourism industry would receive the biggest boost. Let us have a look at what the concessions really are and how would it impact the respective sectors:

    Power: With the government planning to add 1 lakh mega-watt generation in the current 5 year plan, it is leaving no stone unturned in trying to attract investments in the transmission and distribution side of the power sector. It has therefore announced a reduction in customs duty on power transmission and distribution equipment from 25% to 10%. Customs duty on electricity meters has also been cut from 25% to 15%. However, it is being felt that the duty cut on distribution equipment is unlikely to have a major impact as most of the transmission and distribution equipment is being indigenously manufactured.

    On the positive side, the generation projects, which will now benefit from the duty cut on project imports is likely to result into tariff reduction of 8 paise to 10 paise per unit and would ensure a more rational tariff regime for the consumers. Also, considering the need for electricity meters, the reduction in customs duty on the same would encourage installation of tamper proof meters, thus minimizing power theft. Despite these positives, investors have to bear in mind that expansion of power capacities is a long-term process because of complexities in funding and local government intervention. The immediate benefits for generation and distribution majors are likely to be limited.

    IT: With the concessions being doled out by the Finance Minister, the IT hardware-manufacturing sector has received a shot in the arm. The PC penetration in the country is expected to receive a boost following the government's decision to reduce excise duty from 16% to 8%. The hardware manufacturing companies will be able to provide computers at cheaper rates to the consumers. It is also likely to eliminate the grey market since the price differentials is likely to come down substantially following the duty cut. The effect is likely to have a trickle down effect on the software and the BPO and ITES industry as well since it would lower the cost of setting up an IT infrastructure. Local companies like HCL Infosystems and Wipro are assumed to be the major beneficiaries of the move.

    Tourism: The government halved the excise duty on aviation turbine fuel (ATF) from 16% to 8% and has also abolished inland air travel tax (IATT) of Rs 250 per ticket and foreign travel tax of Rs 500 per ticket. The move is likely to give a big boost to the travel and tourism industry in the country. The domestic air travel, which saw a double-digit growth last year, is likely to witness even higher growth and spur tourism. This would in turn help the domestic hotel and hospitality industry as they would witness a rise in occupancy rates on account of increased air travel both domestic as well as international. In a recent analyst meet, Indian Hotels opined that this move would benefit both domestic tourist and foreigners wanting to travel hinterland. As a result, occupancy, over a period of time, will not be concentrated only in metros, which has been the case in the past. Having said that, visa regulations and inadequate airport infrastructure continues to have a impact on the industry long-term prospects

    In light of the above facts, while it is being felt that the mini budget will have a direct impact on the power sector companies, IT companies and hotels will have an indirect impact and therefore the polling public seemed to have favored the power sector more than the other two. However, one thing that can be said with certainty is the fact that the mini budget is a win-win situation for both the consumers as well as the industry.



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