MARCH 17, 2002
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BT-ANDERSEN
Sectoral Analysis
A big bang may be missing in Sinha's fifth budget, but put the fine print under the lens and you'll find plenty of proposals tucked away. We look at how Budget 2002 impacts 18 of the most important sectors.

Banking & Insurance: Positive Moves

  • A pilot Asset Reconstruction Company to be set up
  • Foreign banks allowed to set up subsidiaries
  • Life insurance brought under service tax net

LOWER credit offtake and rising non-performing assets have been the bane of the banking sector. Foreclosure related banking reforms, a pilot Asset Reconstruction Company, provisioning related fiscal relief, are measures aimed at addressing asset quality. Launch of the Mortgage Credit Guarantee Scheme could boost housing credit and mortgage securitisation. Allowing foreign banks to open subsidiaries could help them expand, but a lot will depend on RBI's operational guidelines. The introduction of service tax on life insurance premia and rationalisation of rebate under Section 88 could lower returns to policyholders and pose challenges for life insurance penetration. But health insurance schemes for weaker sections should help.

Textiles: Patching Up

  • Excise on fabrics and garments lowered by 4 per cent to 12 per cent
  • Customs duty on some textile machines cut to 10 per cent from 25 per cent
  • Excise duty exemption extended to handloom garments
  • Hank yarn brought under excise net of 8 per cent it was a special package that the finance minister unveiled for the textile industry, which is the second-largest employer in the country. ''At first glance it seems positive, and special care has been taken to plug a lot of loopholes being used by some to evade tax,'' says Pramod Gothi, MD, Morarjee Gokuldas Spinning & Weaving. Garment manufacturers were hoping for a bigger cut in excise (to 8 per cent) but nonetheless are quite content with the 4 per cent reduction. Excise exemption and lower custom duties on textile machinery should also help mills upgrade technology.

Agriculture: Introducing The ''Third Revolution''

  • Farmers allowed to sell directly to processors; exports decanalised
  • Restrictions on milk-processing removed; agriculture insurance beefed up
  • Forward trading extended to all agro-commodities
  • Interest rate on agri-loans lowered to 8.5 per cent from 10.5 per cent

AGRICULTURE is easily the biggest beneficiary of Budget 2002. Sinha has sought to unleash a ''third revolution'' by encouraging agricultural diversification and food processing. The moot question, however, is how far and how fast will he be able to implement them. Since agriculture is a state-subject, there will be implementation bottlenecks at the state level. The lack of complementary public investment in rural roads and electrification make a mockery of cold-storage and warehousing plans. ''The most important aspect of agriculture insurance post-WTO is price variations, and the budget is mute on whether the new scheme will cover this or only be yield-oriented,'' points out Brajesh Jha, Reader, IEG.

Oil & Gas: Uncapping It, Finally

  • Administered Price Mechanism (APM) and Oil Pool Account to be dismantled
  • Prices of diesel and petroleum slashed by 50 paise and Re 1 per litre respectively

THE FM has announced comprehensive measures to dismantle APM on schedule. Policy announcements include free market pricing for all petro-products from April 1, 2002, establishment of a Petroleum Regulatory Board, and conditional access to marketing rights. Customs and excise levies have been rationalised across the board to fund reduced subsidies on LPG and Kerosene (PDS). Doubling the rate of cess to Rs 1,800 per metric tonne is significant for the upstream sector.

Non-resident exploration and production companies should emerge the gainers, with an effective 6 percentage point cut in the corporate tax rate for foreign companies. The impact for select off-shore service providers may be dampened, as the service tax legislation is extended to designated areas upto 200 nautical miles.

Tourism: Hesitant Smile

  • Expenditure tax made applicable only to room charges
  • Tax deductions on forex earnings enhanced
  • Convention centres offered rebate on profits for five years

THE budget seeks to give an impetus to the tourism sector by proposing six tourism circuits for focused development, and a 50 per cent increase in the budgetary outlay for tourism development. Further, it proposes to equate tax deduction for hotels and tour operators with that available to exporters and introduces significant incentives for convention centres. Expenditure tax rationalisation combined with the one year extension of service tax exemption should provide a boost to this industry. However, the budget proposes to include services of rail travel agents under the service tax net; the sector's expectations of abolition of service tax on tour operators were not fulfilled.

Housing: Brick In The Wall

  • An Urban Reform Incentive Fund of Rs 500 crore set up
  • National Housing Bank bonds exempt from capital gains tax

WHILE the Finance Minister has recognised the needs of the housing sector by offering some strategic direction, he has offered little by way of immediate fiscal concessions. But the Urban Reform Incentive Fund, which seeks to provide reform-linked assistance to states, should incentivise states to undertake reforms in the areas of rent control laws, ULCRA and stamp duty. A Mortgage Credit Guarantee Scheme is proposed, under the NHB, to hedge lenders' risk against defaults and reduce the cost of finance to borrowers. Sops to NHB bonds could channelise investments into it. Significantly, the abolishment of the requirement to obtain prior tax clearance for registration of immovable properties, is expected to ease transfers and bring some buoyancy to this sector. The new stamp duty-based valuation for capital gains is a dampener though.

Infrastructure: A Step In The Right Direction

  • An Infrastructure Equity Fund of Rs 1,000 crore to be set up
  • Public investment in infrastructure raised to Rs 37,919 crore
  • An institutional mechanism to be set up to coordinate debt financing of projects larger than Rs 250 crore
  • Infrastructure facilities to be provided to encourage public-private partnerships.

THE road sector has been granted an enhanced allocation of 39 per cent in the budget. However, expectations like tax incentives on foreign currency borrowings, customs duty benefits on import of construction equipment, among others, have not been met. The budget proposes a phased corporatisation of ports to support their renewal process and to facilitate institutional funding. It also proposes concessional rates of customs duty on certain equipment for port development. The setting up of an Infrastructure Equity Fund is a positive step. But there are issues relating to user-charges that continue to stand in the way of private sector investment in infrastructure projects.

Capital Markets: Tightening The Screws

  • SEBI to be given greater powers to protect investors
  • Dividend to be taxed at the hands of recipients

THE budget seeks to re-build investor confidence through measures for institutional strengthening and capital market governance. But taxation of dividend and income in the hands of recipients is likely to affect attractiveness of equity shares and mutual funds. From a retail investor viewpoint, the interest rate reduction on small savings coupled with rationalisation of rebate under Section 88 could render small savings instruments unattractive for certain categories of investors. This may result in channelisation of savings into instruments based on investors' risk appetite. It however, remains to be seen how mutual funds leverage the avenue provided to diversify risk through investments in rated securities overseas. Overall, translation of intentions of institutional strengthening and risk-return re-orientation by investors will determine the impact on capital markets.

IT: Time To Pay Up

  • Tax on 10 per cent of profits of it companies imposed
  • Zero customs regime on hardware postponed to 2005
  • Import duty on several hardware inputs lowered to 5 per cent

ALTHOUGH the Indian it sector is reeling under the pressure of a global recession, the sector was not necessarily looking for a helping hand from the Finance Minister. However, the introduction of tax on 10 per cent of the profits (under Sections 10A and 10B), has shaken markets and may be interpreted as a policy shift. More importantly, it may affect investor sentiment in a sector that accounts for most of the market capitalisation.

Acceptance of the domestic hardware sector's demand to postpone implementation of the zero customs duty regime on it products upto 2005, would help it gear up to meet challenges of international competition. Liberalised international investment should provide an impetus to companies planning to grow inorganically. But non-acceptance of the sector's demand to do away with the clause linking ownership to the tax holiday status, will put a damper on mergers and acquisitions in the industry.

On the whole, the budget proposals for the Indian it sector are perhaps a reflection of the fiscal imperatives, as well as a belief that the sector has reached a maturity level where it no longer needs such sops. However, the nascent it-enabled services sector, which has far greater employment potential, has not received any special recognition. That surely will be a sore point with the industry, which has been looking forward to greater outsourcing of backoffice operations to India from relatively more expensive markets like the us.

Telecom: A World Of Joy

  • Cellphone and pagers exempted from CVD, but customs duty hiked from 5 per cent to 10 per cent the CVD exemption on import of cellular handsets has been partly offset by an increase in the basic customs duty. However, this still results in an effective duty reduction, and will help official handset sales. The benefit of carry forward and set-off of tax losses and unabsorbed tax depreciation to amalgamating telecom operators, is a significant initiative that would, going forward, remove a significant barrier to consolidation in the sector. Telecom equipment manufacturers would also benefit from a concessional rate of sales tax. This should positively impact inter-state sales of telecom equipment and lower costs to operators. While the budget does have an overall positive impact, sector expectations with regard to withdrawal of mat, reduction in duties on equipment imported by long distance operators and elimination of duty on telecom software have not been met.

Automotive: Slow Cruisin'

  • Auto components in small scale dereserved.
  • Special excise of 16 per cent on MUVs retained.

THERE is no immediate stimulus for the beleaguered auto sector, since key expectations such as fiscal incentives for R&D, specific reductions in excise duties and customs duties on components have not been addressed. Certain anomalies in duties, therefore, continue to exist. The dismantling of administered price mechanism (APM) and the subsequent reduction in the prices of petrol (by Re 1 per litre) and diesel (50 paise per litre) is also not significant enough to spur growth. On the contrary, a higher cenvat on CNG will add to the existing woes of CNG fueled cars and possibly dampen the move towards green fuel.

On the positive side, de-reservation of auto-components manufacture may encourage players to increase production scale, leading to improved quality and scale economies. In fact, one of the reasons why most ancillary units in India are uncompetitive is their small size. They simply are not able to invest in the kind of technology that is required today by most of the big players-Indian as well as foreign. Greater investment into plant and machinery and engineering is required to give them a fighting chance in the rapidly consolidating auto business world wide.

Reduction of customs duties on non-ferrous metals could benefit component manufacturers. Given the export potential of components, duty concessions given to SEZs can stimulate players to set up new component manufacturing units. Increased investment in roads and highways and reforms in agricultural sector could primarily stimulate growth in commercial vehicle and tractor segments over three to five years.

Entertainment: Sob Story

  • Import duty on certain earth-station and studio equipment cut from 35 per cent to 25 per cent.
  • Cable operators brought under the services tax net.

THE entertainment sector's desire was to bring the sector on par with the IT sector in terms of incentives offered. However, the budget proposals have not met with the sector's expectations. Although the rationale for extending service-tax to cable operators is understandable, the move could give a setback to the industry's expectations of transparency in subscription volumes and rise of organised players. Cheaper earth-station and studio equipment could provide some benefit to uplinking stations and content producers. Similarly, growth of multiplexes can be expected from the proposed deduction of 50 per cent of the profits for multiplex theatres in non-metropolitan towns for the next five years.

Cement: Hard Knock

  • Customs duty on cement and clinker reduced to 20 per cent from 25 per cent.

GREY. That's how Budget 2002 has left the cement industry feeling. ''There's no impetus for the industry,'' laments Anil Singhvi, Director, Gujarat Ambuja Cement. The industry is upset that Sinha thinks cement prices in India are high. D.D. Rathi, chief financial officer, Grasim Industries, points out that Indian cement at Rs 900 per tonne (minus distribution cost) is the second-cheapest in the world after Indonesia's. There is some cheer due to Yashwant Sinha enhancing the Golden Jubilee Housing Scheme target from 1.7 lakh houses last year to 2.25 lakh houses. The 50 paise reduction in diesel prices should also benefit, since 45 per cent of cement dispatches from non-coastal plants is by rail. On the whole, though, the industry doesn't gain much from Budget 2002.

Power: Still In The Dark

  • Plan allocation for the sector hiked by 22 per cent.
  • Focus of reform shifts from generation to distribution.

THE Economic Survey 2001-2002 estimates a combined fund requirement of Rs 566,000 crore over the next five years. The budget, while acknowledging the criticality of reforms to achieve financial viability in the sector and to bridge the funding gap, addresses the issue only in a limited way. The plan outlay for this sector has been hiked by 22 per cent. Further, 2002-03 plan allocation for the Accelerated Power Development and Reform Programme has been enhanced to Rs 3,500 crore, up from Rs 1,500 crore. The success of this programme would, however, depend upon the Government's ability to bring in transparency, objectivity and compliance in the programme implementation and evaluation process. To achieve this, the fm proposes to incentivise states to embark on reforms, essentially transmission and distribution related, by linking availability of funds to agreed time-bound reform programmes.

Pharmaceuticals: No Shot In The Arm

  • Specified anti-aids drug exempted from excise duty
  • Eight more cancer drugs allowed duty-free import
  • Import duty on some drugs raised to 5 per cent
  • Customs duty on Glucometers and test strips reduced from 25 per cent to 10 per cent

THE Budget meets a few expectations of the pharmaceutical sector. It exempts drugs used for treatment of cancer and other critical diseases from customs duty and also reduces the customs duty on Glucometers and test strips for diabetes. On certain drugs, currently exempted from customs duty, a basic customs duty of 5 per cent has been levied. Further, certain specified anti-aids drugs have been exempted from excise duty. However, sector expectation for fiscal incentives to encourage research and development has not been met. Greater investment into R&D is important for the industry's survival post the patent-regime. But it is obvious that the players would have to look beyond sops to grow.

Steel: Hard Times Continue

  • Customs duty on refractories lowered to 15 per cent from 25 per cent
  • Customs duty on ships for breaking hiked from 5 per cent to 15 per cent
  • Basic customs duty on seconds and defectives raised to 40 per cent

THE industry had plenty of reasons to be expecting a lot from Budget 2002. Steel prices globally are sagging, and local demand isn't going up significantly either. Still, there are a few things to thank about. By raising the customs duty on steel seconds and defectives, and on ships that are bought for breaking, the budget makes an attempt to help the industry. This will help reduce the disparity between prices of rolled steel and that produced by the ship breaking industry. ''There is no relief in customs duty on imported coal and no measure to counter dumping,'' points out Arvind Pande, Chairman, sail. Therefore, in the short-term, the industry has to just grit its teeth and fight on.

Small Scale: Open, Sesame

  • Exemption limit for collateral security increased from Rs 25,000 to Rs 5 lakh
  • 50 items, including auto components and chemicals, dereserved
  • Capital gains exemption extended to bonds issued by SIDBI.

FIRST the good news: the reduction in customs duty on aluminium (from 25 per cent to 15 per cent) and copper (35 per cent to 25 per cent) will help, since more than 2,000 items produced by SSIs use mainly three raw materials: copper, aluminium, and plastic. While the finance minister has made it easier for small enterprises to borrow money, he hasn't done anything to lower their interest cost. ''The sector borrows funds at 14 to 16 per cent, making it uncompetitive in the world market,'' says J.M. Pawar, SSI Association President. The sector is also distressed by the dereservation of 50 items, including knitwear and auto-components. But SSI is another sector where the protectionist party is ending.

Consumer Goods: ''Cosmetic'' Changes

  • Special Excise of 16 per cent on cosmetics and toiletries removed
  • Excise on tea lowered by Re 1 per kg

THE budget brings no cheer to the consumer goods sector except for cosmetics and toiletries, where SED of 16 per cent has been abolished; liquor, where basic customs duty has been reduced by 28 per cent and CVD reduced to two slab rates of 50 per cent and 75 per cent; and tea, where excise duty has been reduced by Re 1 per kg. The benefit on cosmetics and toiletries has, though, been partially offset by the reduction in abatement on MRP from 50 per cent to 40 per cent. Reduction in peak customs rate from 35 per cent to 30 per cent could increase pressure on the industry. There is no change in abatement on MRP for excise duty calculation, which is likely to keep costs under pressure. Extending service tax to cargo handling and storage will impact adversely.


The sectoral analysis has been prepared by BT and Arthur Andersen India Pvt Ltd

 

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