Negative on manmade fibre, positive on cotton yarn

The government uses the budget exercise to progressively fine-tune and rationalise its indirect and direct tax policies to create long-term stability in the tax system. This complex macro exercise, however, impacts different sectors and companies operating in these sectors in different ways. Here follows an ET-ICRA analyses of how budget 2004-05 has affected various sectors and companies: Textiles Impact: Negative on man-made fibre/yarn producers Positive on cotton yarn/fabric manufacturers The main consideration behind levy of Cenvat on all stages of textile value chain in Union Budget 2003-04 is to improve competitiveness of large scale players as these exemptions had impacted their performance negatively. The Indian weaving and garment manufacturing industry, being decentralised, consisting of small-sized firms and being amongst the least modernised in the world, needed to reform itself. Left unchecked, these factors would result in substantial under-performance of Indian textile industry post-2005, when the quota-based textile trade gets phased out globally. The Union Budget 2005 improves upon the excise structure provided by previous yearsâ€™ budget in a way that it allows the companies/powerloom/handloom entities to optionally pay the excise duty. Also, under the Budget 2004-05, excise duty on a number of items has been proposed to be reduced. However, in case of manmade fibre items, in comparison to existing duty structure, either the duty has been increased or left unchanged (apart from abolition of textile duty of 15% on the net excise duty payable). Thus, overall, the fabric and blended yarn manufacturers at various levels are likely to reduce the consumption of man-made fibres (as it would involve claiming refund from the excise department or coming under the excise bracket). Tractors Impact: Positive Exemption from excise duty is likely to translate into increased volumes due to expected decline in prices. After four consecutive years of degrowth, the tractor sales witnessed a positive growth in volumes during 2004, which was on a reduced base. A reduction in excise, coupled with improved rural incomes following a good monsoon augurs well for the industry as it may lead to improved sales volumes. Moreover, a focus on agriculture may be beneficial for the industry. Petro marketing Impact: Negative The implicit message that is derived from the governmentâ€™s decision to reduce government subsidy is that the downstream refining and marketing companies like IOCL, HPCL and BPCL along with other players like ONGC and GAIL are expected to bear a large portion of the under-recoveries in LPG and SKO on their own. As there has also been no clear cut indication of the governmentâ€™s stand on the flexibility of these oil companies to revise retail prices of automotive fuel, it is expected that the marketing margins of these oil companies may come under pressure. Shipping Impact: Positive Introduction of tonnage tax is expected to benefit the industry by reducing the tax outgo, thus enabling the industry to reduce costs. While details on the issue are awaited, the initiative is expected to bring the industry at a par, in taxation, with some other major countries such as Norway and United Kingdom among others. Other issues, however, remain unaddressed. Steel Impact: Negative Reduction in custom duties on steel is likely to negatively impact the operating margins of the steel companies. While increase in excise duties suggests rise in steel prices, the same may not materialise due to reduction in custom duties, as domestic prices are marked to landed prices. On the positive side, maintaining status quo on railway freight is likely to have a positive impact on the operating costs. Durables Impact: Negative The imposition of education cess of 2% may have the effect of decreasing disposable income with consumers. Total cess collection can be construed to be decline in disposable income. Combined with the 2% cess on customs and excise duties, the demand conditions for the sector as a whole may deteriorate. Increase in effective customs duty on finished items of consumer durables is unlikely to affect the domestic industry in a major way because a substantial chunk of the industryâ€™s products is manufactured in India. The key price hikes are likely to occur in high-end models that are primarily imported. In the largest sub-segment of the consumer durables market, colour televisions (CTVs), the increase in effective customs duty on colour picture tubes (CPT) is likely to result in price increases by domestic CPT manufacturers (who usually benchmark their prices against landed costs of imports). Prices of CTVs are expected to increase as a result of increase in raw materials costs and increase in excise duties. The increase in excise duty on black & white TVs is likely to cause an increase in B&W TV prices. FMCG Impact: Marginally Positive While the Budget may not be the instrument for addressing the key issue plaguing the sector (lack of demand and therefore growth) select initiatives taken in the Union Budget 2004-2005 are expected to benefit the sectors they are aimed at. Coffee processors and packers will benefit from the extension of concessional customs duty on additional equipment. Milk and dairy industry, which is already in the growth phase, is expected to get a further boost by lower cost of machinery. The focus on the horticulture sector may help reduce the wastage.The overall impact of initiatives is marginally positive. Telecom Impact: Positive In view of the low telephone penetration in India (7 telephone connections per 100 inhabitants at end-March 2004), reductions in customs duties on imports of MSCs by UASPs is likely to reduce per-line capital costs, make telecom services more affordable, and improve telephone penetration. It is also expected to reduce the capital costs of setting up cellular code division multiple access (CDMA) networks, thus reduce the capital costs of major CDMA operators such as Reliance Infocomm and Tata Group, and increase their competitiveness vis-Ã -vis CMSPs providing cellular global system of mobile communications (GSM) services. However, the increase in service tax will increase the prices of all telecom services on both fixed and cellular networks. Private sector service providers are unlikely to be impacted by the imposition of cess on income taxes since nearly all of them continue to incur losses. However, the cess on income taxes is likely to have a marginally negative impact on profitable service providers such as Bharti Televentures Ltd, Mahanagar Telephone Nigam Ltd. and Videsh Sanchar Nigam Ltd. (VSNL). The hike in FDI limit from 49% to 74% is likely to encourage increased foreign stake in some companies. It is also likely to improve the environment for foreign investments in the telecom sector. The Budget has extended the tax benefits for setting up telecom projects, from the previous cut-off date of March 31, 2004 to telecom projects coming up before March 31, 2005. The tax holiday will benefit service providers who set up projects before March 31, 2005. Petrochemicals Impact: Positive Focus on agriculture with increased investments on irrigation is likely to result in increase in demand for PVC resin for pipe use. Additionally demand for other polymers may also rise as increased investments in agriculture sector would result in higher applications of other polymers as well. Further, SSI reservation has hitherto restricted growth in demand for plastic applications on account of limited ability of SSIs to upgrade and expand. The demand for plastic products may increase. The impact of Budget 2004-05 on the petrochemical industry can be considered to be positive. Focus on agriculture with increased investments on irrigation would result in increase in demand for PVC resin for pipe use. Decline in customs duties on catalysts would reduce the cost of petrochemical manufacturers. However, increase in bias against manmade fibres would result in lower cost competitiveness of manmade fibre consumers resulting in reduction in growth potential for the same. Manmade fibres have a small share of the companyâ€™s business mix and thus, the overall impact of Budget 2004-05 is likely to be positive. Healthcare Impact: Positive Concentrated effort towards delivery of safe drinking water with the pooling of all water and sanitation programs under one umbrella is likely to emerge as a major step towards controlling water borne diseases that constitutes a major bulk of the communicable diseases. The augmentation of Health Insurance Scheme to all below poverty line and members of self-help group will not only be able to pool risk but also lead to the emergence of a large pool of insured. The five years of tax exemption for the healthcare providers venturing to deliver health care in rural India among other factors is likely to see the emergence of private players widening their horizons to deliver â€˜no frillâ€™, functionally comprehensive and cost effective healthcare to the masses in the long term. The tax and excise duty exemptions on the handicap aids for the physically challenged persons is likely to see the delivery of cost effective rehabilitative care with emphasis on occupational therapy (currently remains under served), thus improving the Healthy Adjusted Life Expectancy of India in the long term. Increased allocation to handle HIV and AIDS has been rightly timed to address theconcern in these two areas. Overall impact of the budget would be positive. Information tech Impact: Marginally positive The reduction in duties imposed on many input facilities and goods will help in reduction of costs of IT services. The exemption of computers from excise duty will lower the facility costs whereas other sops provided in field of telecom will lower infrastructure costs. Moreover, enabling Cenvat and service tax credit will further lower the input costs. This may be negated to some extent by increase in the rate of service tax by 2%. Also, removal of service tax exemption available on maintenance or repairs of computers under a maintenance contract or by the manufacturer may effect the customer care and ITES segment of the IT Industry but as the cost can be passed on to the customers the impact may not be substantial Small industries Impact: Marginally positive While the proposal to remove 85 items from the SSI segment is likely to restrict the number of items reserved for the SSI sector, the budget proposals otherwise are likely to stimulate healthy growth of the SSI sector. The proposed credit rating is not only expected to help the players benchmark themselves, it would also enable facilitation of credit flow into the sector along with the possibility of expansion in the market for their services. Traditional industries (such as coir, handloom, handicrafts, sericulture, leather, pottery and other cottage industries) are expected to benefit from the setting up of the Fund for the Regeneration of Traditional Industries.

Negative on manmade fibre, positive on cotton yarn

The government uses the budget exercise to progressively fine-tune and rationalise its indirect and direct tax policies to create long-term stability in the tax system.

More from our Partners

Popular Categories

Hot on Web

In Case you missed it

Top Searched Companies

Latest News

Download ET APP

Follow us on

become a member