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.
-Abir Pal
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.
-Shailesh Dobhal
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.
-Roshni Jayakar
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.
-Debojyoti Chatterjee
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.
-Swati Prasad
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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