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Budget will propel growth... - Views on News from Equitymaster
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  • Mar 11, 2000

    Budget will propel growth...

    The presentation of the Union Budget is one of the most keenly awaited moments in corporate India. Given that the cement sector was the key beneficiary of the budget for FY2000, expectations ran high once again as the finance minister rose to present the budget for FY2001. However as we all know now, the budget was, as one hoarding put it - "A two hour speech that put India behind by one year". Well that may be the general view, but the cement sector still had something to crow about.

    But first a glance at the provisions of the budget for FY2000 that gave a much-needed boost to the domestic housing (and in turn cement) sectors. The finance minister had proposed that the interest on housing loans taken by individuals be exempt from tax upto a maximum of Rs 75,000 per annum as against the existing limit of Rs 30,000 per annum. This resulted in the effective rate of borrowing declining significantly, and as a logical consequence, the demand for new houses increased. The demand from the housing sector kick started the cement sector, which is expected to grow 15% during FY2000.

    The budget provisions for FY2001 are not as dramatic and significant as in the budget for FY2000. Nonetheless, they have the potential of sustaining demand at higher levels, if not propelling it further.

    "Housing for all" - that's the mantra of the new government. Last year it was largely urban housing, and this year, the focus has shifted to rural housing. The government has set a target of setting up 2.5 million dwelling units in rural areas. Coupled with this the government has decided to augment the equity capital of Housing and Urban Development Corporation (HUDCO) by Rs 1 billion. This will give the corporation elbowroom to raise more resources to step up its housing finance activities.

    The government has also proposed to extend the benefits given to the housing sector last year for another two years i.e. for houses or projects that are which are completed by 31st March 2003. Further to this the government has also proposed a 20% tax rebate for repayment of housing loans upto Rs 20,000 per year as compared to Rs 10,000 per year.

    Finally, the centre has permitted that gains from the sale of a capital asset can be invested in another house, irrespective of whether the person already own a house or not, and claim tax exemption.

    These measures should go a long way in stimulating and more importantly, sustaining, the growth in housing demand over the coming years. As a direct consequence of this, the demand for cement is also likely to benefit.

    The government has scrapped the tax benefits available under Section 54EA and 54EB and replaced them with a new provision. Under the new provisions tax exemption from capital gains would be available only if investment is made in the bonds to be issued by National Bank for Agricultural and Rural Development (NABARD) and the National Highways Authority of India (NHAI). This move will make funds available for financing investment in infrastructure translating into higher demand for cement.

    Further to this, the government has reaffirmed its commitment to the highway development project, which is likely to cost Rs 540 bn. Once the exercise takes off, the demand for cement should witness a considerable rise.

    However the government has reduced the import duty on cement by 5% to 35%. Although this is a cause for concern, the decline in duties is unlikely to adversely affect the domestic sector. This is mainly due the poor quality of import infrastructure and the fact that foreign companies lack a domestic marketing network.

    All in all the cement sector is a net beneficiary of the measures proposed in the budget. However, as compared to the expectations, the budget seems to have failed miserably. The cement sector was expecting more tax sops for the housing sector, higher infrastructure spending and an increase in import duties on cement. And this is more than evident from the sharp decline in market capitalisation of cement companies in the last few trading sessions.



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