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Impact 2000



Budget 2000 throws a spanner in the auto industry's global plans. The specifics:

  • It rationalises the Excise duty at 16 per cent instead of 8, 16, and 24 per cent earlier.
  • It introduces special Excise duty rates of 8, 16, and 24 per cent.
  • It increases the Excise duty on car air-conditioners by 2 per cent, to 32 per cent.
  • It withdraws the MODVAT facility on High-Speed Diesel (HSD).
  • It reduces export income exemption from 100 to 80 per cent.

The levelling of the Excise duty rates at 16 per cent will not hurt the industry since 95 per cent of its items were previously taxed at the same rate. Neither will the prices of completely-knocked down and semi-knocked down imports be impacted. But taxing export-incomes will hurt component-manufacturers since 10-12 per cent of production is sold overseas. Besides, dearer HSD will squeeze margins as this raw material's cost can be as high as 2 per cent of the component-makers' turnover. And tyre-manufacturers will find the replacement market battle getting hotter because of the Excise duty hike. But the industry's recovery will be hitched to its OEMs.

-R. Sridharan


On Cruise Control. That's how Budget: 2000 will drive the auto industry, which is just pulling out of a 2-year long recession. The recommendations:

  • An increase in the Excise duty on Multi-Utility Vehicles (MUV) from 30 to 32 per cent.
  • A rationalisation of the Excise duty on components at 16 per cent against 8, 16, and 24 per cent earlier although 3 equivalent special rates have been retained.
  • The removal of the MODVAT benefit on high-speed diesel.
  • The reduction in the Excise duty on tyres to car-makers from 30 to 16 per cent, but a 2 per cent increase in the Excise duty on replacement market tyres to 32 per cent.

The auto industry has grown at a Compounded Annual Growth Rate (CAGR) of 5 per cent over the last 3 years, with cars accounting for an impressive 13.20 per cent, and 2-wheelers, 6.10 per cent. But commercial vehicle sales have been negative at almost 15 per cent, and MUVS at 7 per cent CAGR. The rise in the Excise duty on MUVS will affect sales, as will the 7 per cent hike in rail freight rate for cars. But with the market in overdrive, the industry should be able to negotiate the roadblocks.

-R. Sridharan


Call it a half-step banking TOODLE-OO. In what can only be construed as a tentative opening gambit towards privatisation, the Finance Minister announced that the government would reduce its holding in nationalised banks to 33 per cent. Which means it needs to offload 67 per cent in 10 banks and between 33 and 43 per cent in 9 others. While the government will remain the single largest shareholder in these banks, the fact that they will be otherwise 'widely-held' is expected to contribute to their efficiency.

The other Budget-initiatives targeting the banking and financial services sector are:

  • The establishment of 10 new debt-recovery tribunals to help banks recover loans.
  • The removal of the 2 per cent interest tax.
  • The introduction of a new NBFC Bill that will give the RBI powers to initiate quick action against defaulting NBFCs.
  • And the grant of Rs 300 crore to the National Housing Board, which will enable it to enlarge the quantum of its business through the multiplier effect.

However, with the decision not to close down weak banks but recapitalise them-and to retain all jobs-it is unlikely that the government (or the customer) will go laughing to the bank any time soon.

-Dilip Maitra


Budget 2000 has few benefits for the beleaguered capital goods industry. Ergo, its growth will stay snail-paced in the near term. To be specific, the budget:

  • Slaps a non-Cenvatable Excise duty of 16 per cent over the rationalised flat Excise duty of 16 per cent on all capital goods.
  • Cuts the Customs duty on general machinery and components by 5 per cent.
  • Increases the countervailing duty on fertiliser and petroleum machinery imports from 10 to 16 per cent.
  • Spreads the Cenvat on capital goods over 2 years with effect from April 1, 2000.

Besides the direct impact, Budget 2000 could slow down the pace of private sector investment due to the lowering of export income exemption from 100 to 80 per cent, and doubling the tax on dividend payouts to 20 per cent. A lone silver lining: the extension of the 4 per cent sad to trade importers will put them on a level field with manufacturers. And the extension of Cenvatable credit from 1 to 2 years will allow companies to get the most out of this facility. But in the absence of any big infrastructure investments, the industry's gains will only be incremental. Not capital.

-Jaya Basu


Will trickle-down economics come to the rescue of a sector that has largely been ignored by the Budget? Perhaps. But cement-manufacturers reeling under the pronouncements of the Union Railway Minister Mamata Banerjee-she announced a re-classification of cement for estimating railway freight-rates, which could result in a 2 per cent increase in freight costs-cannot be blamed for not cheering her coalition colleague Yashwant Sinha's indirect munificence. Almost all cement-manufacturers transport their products through the railway network.

The initiatives that could spur growth in the sector:

  • Budget:2000's focus on the housing sector including the emphasis on housing finance.
  • The thrust on infrastructure projects.

With the housing sector accounting for 60 per cent of the demand for cement in the country, the sector should achieve significant growth if the Budget achieves its objective of creating a vibrant housing sector. Coming in the wake of a 11 per cent increase in productivity, this could cement growth-if the increase in the corporate- and dividend-tax does not rubble it.

Roshni Jayakar


There's no catalyst for the chemicals industry in Budget:2000. The industry had lined up a long list of demands which the Budget has almost completely overlooked. Instead, the Budget:

  • Reduces tax-exempt export income from 100 to 80 per cent.
  • Doubles the tax on dividends from 10 to 20 per cent.

Both these measures are likely to adversely impact the ailing industry. Here's why: to move up the value-added ladder, chemicals-manufacturers are moving to make speciality chemicals, with a focus on exports. Typically, margins are 10-15 per cent higher in speciality chemicals. But taxing income from overseas sales will partly depress earnings, and leave companies with lesser money to plough back. Although few companies in the industry are in a position to pay out dividends, those who do, like Tata Chemicals, will be hurt by the doubling of the dividend-tax. In addition, the Railway Budget hiked the freight rate of non-essential commodities by 5 per cent. With the markets depressed, manufacturers will not be able to pass on the increase in cost to buyers. Reaction: redder bottomlines.

-E.K. Sharma


Budget 2000 has a neutral-to-negative impact on consumer-durable companies. The provisions:

  • Customs duties on all domestic appliances, which attracted a peak rate of 40 per cent, will go down to 35 per cent.
  • Customs duties on several electronic components, including microprocessors, ICS, and washer components, have been reduced from 5 per cent to 0 per cent.
  • The Excise duty on TV sets remains unchanged, though air-conditioners and washing machines have been moved to the MRP-based system, attracting a 2 per cent hike in Excise duties.
  • Export income will now be taxed albeit in a phased manner.
  • The dividend-tax has been doubled, from 10 to 20 per cent.

The lower Customs duty on consumer durables will worry domestic manufacturers, but imports have accounted for a small part of the market so far. The CTV segment has reason to be upbeat about Budget 2000 as raw material costs have come down. The Budget also entails lower input costs for air-conditioner-and washing machine-makers, but they may have to swallow the higher Excise liability. It's going to be a tough summer.



Budget 2000 has left the personal care products industry looking decidedly the worse for wear. The major provisions are:

  • Excise duty on cosmetics and toilet preparations has gone up by 2 per cent: from 30 to 32 per cent. However, the Excise duty on toothpowder and laundry-soap has been retained at 8 per cent. Feminine hygiene products and baby napkins have been exempted.
  • Dividend tax has been upped from 10 to 20 per cent.
  • A 5-year phased tax has been imposed on export profits.

Everything has gone wrong for the personal-care products industry. Soaps, detergents, and toilet preparations are mass consumption items. But the market for such products is highly price-elastic. The consumer non-durables sector has been growing at 5 to 6 per cent in the current year as consumer spending has become directed towards cool-financing consumer durables. The hike in the Excise duty will squeeze growth. Also, the increased dividend-tax will whack transnationals. And companies using India as a global sourcing-base will suffer from the imposition of the tax on export-earnings.



It doesn't completely weed it out, but the Budget:2000 does take a small step in curbing fertiliser subsidies. To sum up, it:

  • Increases urea prices by 15 per cent.
  • Marks up by 7 and 15 per cent, respectively, the prices of Di-Ammonium Phosphate (DAP) and Murate Of Potash (MOP).
  • Caps capacity-utilisation of fertiliser companies with respect to subsidies.
  • Increases the countervailing duty on plant and machinery for fertiliser-projects from 10 to 16 per cent.
  • Increases the annual fertiliser subsidy from Rs 10,000 crore in 1998-99 to Rs 12,651 crore in 2000-01.

The price-increases, coupled with the limit on capacity-utilisation for subsidy calculation, are expected to reduce Rs 3,000 crore from the subsidies bill, which, experts say, could have been higher at Rs 15,000 crore instead of Rs 12,651 crore. Of the savings, Rs 1,200 crore are due to the price increase on urea, and Rs 600 crore from the dearer dap and mop. The capping of capacity utilisation-linked subsidy-payment is likely to depress the profit-margins of the big players. The private sector should welcome the subsidy-cut: it's long-term seeding for profits.

-Ranju Sarkar


Leaner. That's what this industry's profits should be thanks to Budget 2000, which:

  • Hikes the Excise duty on processed foods from 8 to 16 per cent.
  • Reduces the Customs duty on dietary soya fibre from 35 to 15 per cent.
  • Increases the Customs duty on agri-goods (except cereals), dairy products, processed foods, and marine products to 35 per cent.
  • Lowers the Excise duty on soft-drink concentrates for bottlers from 40 to 16 per cent, but keeps the 40 per cent rate on soft drinks.
  • Includes 10 new items including chewing-gums, noodles, wafers, and cocoa-powder under the MRP assessment.
  • Fixes the basic Customs duty on wheat at 100 per cent, rice (60-80 per cent), sugar (100 per cent), and edible oils (45-100 per cent) without changing the effective rate.

According to industry estimates, the doubling of the Excise duty on processed foods could push end-product prices up by 10-15 per cent. With stiff competition, the unbranded foods-makers will have to sacrifice profit-margins while the branded players will pass on the hike to consumers. In any case, this year's budget will be hard to digest.

-Nita Jatar Kulkarni


Like its predecessor, Budget:2000 has been inhospitable to the hospitality sector. If there was so much that wasn't done in Budget 99, this time, the Finance Minister has attacked the earnings of the top-bracket hotel industry. The provisions are:

  • Export profits will be taxed in a phased manner, from 20 per cent in 2000-01 to 100 per cent in 2004-05 per cent.
  • The dividend-tax of 10 per cent has been doubled to 20 per cent.

While it was inevitable that export-earnings would be taxed sooner than later, the industry-in particular, hotels which have a high percentage of foreign guests-has reason to be upset. Most large hotel chains-Indian Hotels, EIH, and ITC Hotels, among others-earn 60 to 70 per cent of their revenues in foreign exchange. The new export- and dividend-tax will put a brake on their expansion and renovation plans. In the face of lacklustre occupancy-rates, the hospitality industry is in need of reforms. The threshold level of expenditure-tax is still at Rs 2,000, depriving 3- and 4-star hotels the chance to raise room-tariffs without attracting tax. This service industry is waiting to be serviced.

-Sunit Arora


It's a budget with a view. At least for the housing sector. The Vajpayee Administration's key recommendations include:

  • The extension of infrastructure status for housing projects by another 2 years up to March, 2003.
  • The extension of Section 54 (Capital Gains) of the Income Tax Act on investment in second and subsequent houses, thus granting exemption from capital gains tax.
  • A hike in the tax-rebate limit on housing-loans from Rs 10,000 to Rs 20,000.

The Budget also makes more room for infrastructure development, with major investments on the part of both the National Highways Development Project (NHDP) and the National Highways Authority Of India (NHAI). NHDP will seek venture capital financing, and NHAI will raise bonds to finance operations. The amount of litigation, which is endemic in the construction sector, will be reduced following the new stipulation that all show-cause notices over Rs 1 crore will need the prior permission of the Commissioner Of Central Excise. The rationalisation of Excise duties at 16 per cent will make some items dearer. Still, it's a solid foundation to build on.

-R. Chandrasekhar


Unlike last year, the Budget has been more partial to hardware manufacturers than to software guys. The provisions:

  • Phased withdrawal of export incentives for new units, which were 100 per cent tax-exempt, over a period of 5 years at the rate of 20 per cent per year.
  • Lower Customs duty on various hardware components, mostly by 5 per cent.
  • Increase in FII investment limits in Indian listed companies, from 30 to 40 per cent.
  • New norms for Venture Capital; SEBI has been made a single-point regulatory authority for venture capital funds; tax-norms for VCS under a new tax-regime.
  • ISPs to be charged a concessional rate of Customs duty of 5 per cent.
  • Removal of withholding tax on software.

The software industry has slipped into the tax net. The decision to phase out the tax-free regime for software EOUs will not impact the established players, but new players will be taxed. Established companies also stand to gain from the increased FII caps. But their demand to raise the $100 million cap on automatic overseas acquisition has not been met. Net-net, a techy budget.

-Sanjiv Rana


Budget 2000 does not directly impact the non-ferrous metals industry. Indirectly, however, the Finance Minister has:

  • Introduced a phased income-tax on export earnings.
  • Doubled the dividend tax to 20 per cent.

Buoyed by strong global prices, the aluminum sector has picked up, and is currently growing at the rate of 7-8 per cent per annum. However, it surely wasn't expecting zilch from Budget 2000. And that's what it's got. No lowering of Customs duty on aluminum scrap, leaving little to cheer for companies like Indal, which are mainly into the manufacture of secondary products by importing scrap. And, as aluminium- producers-particularly NALCO- export significantly, they will be hit by the new tax on 20 per cent of a company's export profits. Moreover, the 2 per cent hike in railway freight-charges will raise costs for companies, as the increase can't be passed on to its customers. With the Customs duty on copper concentrate remaining at 35 per cent, Budget 2000 does not impact the copper industry. Thus, metals aren't hot.

-Rakhi Mazumdar


Budget 2000 had nothing to write home about for the paper industry, which is barely out of the woods after a 2-year-long recession. By and large, the rationalisation of Excise and Customs duties has no impact on the paper industry. There are, however, a few provisions that are relevant:

  • The Excise duty on paper using more than 75 per cent of non-conventional raw material has been increased from 8 to 16 per cent.
  • Profits from export-earnings will now be taxed, albeit in a phased manner.

While the excise rationalisation on non-conventional raw materials will affect only a few small players, the increased tax doesn't fit in with the fact that future capacities will have to be based on imported pulp, non-conventional raw materials, and waste paper. The tax on exports will affect a few companies; in particular, ITC Bhadrachalam Paperboards. In the short term, there will be volume growth in the writing and printing paper as well as industrial paper segments. Newsprint producers, however, continue to remain under pressure from low-priced imports.

-Arijit De


The new crisis in the petrochemical industry is, well, man-made. By complying with the Indo-US and the Indo-UK agreements signed on December 31, 1994, Budget 2000 upsets the applecart of the beleaguered sector. The changes:

  • A reduction in the import duty on PSF and PFY from 35 to 20 per cent.
  • An increase in the Excise duty on PFY from 30 to 32 per cent.
  • A cut in the Excise duty on nylon filament yarn from 24 to 16 per cent.
  • A lowering of the Excise duty on polymers from 24 to 16 per cent.

The agreements create imbalance in the sector in that while the import duty on raw material PTA remains at 25 per cent, the 15 per cent reduction on PSF and pfy has put all converters at a disadvantage. Although the country's largest petrochem producer, Reliance Industries, will not be affected by the Customs duty reduction because of its global scale and vertical integration, other petrochem manufacturers-including Indo Rama, JCT, and Sanghi Polyester-will be badly hit by the move. Budget 2000 looks like one of the last straws on this camel's back.

-Rajeev Dubey


It's no gas. Budget 2000 doles out riches to the petroleum sector. The provisions:

  • A cut in the Customs duty on crude oil from 20 to 15 per cent, and on petroleum products from 30 to 25 per cent.
  • An increase in the effective weighted average duty protection to refiners from 2.5 to 5 per cent.
  • A doubling of dividend-tax to 20 per cent.
  • Continuation of the special additional duty (sad) exemption to crude oil and petroleum products.

The Rs 150,000-crore sector's refining margins-which go up by $1.50 for every 1 per cent cut in Customs duty-will surge, giving relief to refiners reeling under an all-time crude oil price high of $29 in February, 2000. Hindustan Petroleum estimates annual net savings of Rs 100 crore to its bottomline. For Indian Oil, the figure could be higher. The move to hike prices of diesel, kerosene, and LPG has been scuttled. But the cut in Customs duty will provide a relief of Rs 1,200 crore this year to the Oil Pool Account, whose deficit continues to strain the cash-flows of the oil companies. In the short run, that should keep the refiners gushing.

-Ranju Sarkar


Is software the only knowledge-based industry?, queried a troubled-by-Budget-2000 pharma industry. The specifics:

  • An increase in the Excise duty on Ayurvedic medicines and generic formulations, from 8 to 16 per cent.
  • A phased income-tax on export-earnings.
  • The 10 per cent hike in the dividend tax.
  • An allocation of Rs 75 crore for the modernisation of the Patent Office.

The rationalisation of the Excise duty on Ayurvedic medicines and generic formulations will lead to higher prices, at least among drugs covered by the DPCO. But when it comes to non-DPCO formulations, multinationals, who will continue to import bulk drugs at a 38.5 per cent Customs duty, may find it difficult to underprice smaller domestic players. On the other hand, the phased tax on export-earnings will hurt companies' profits as will the hike in the dividend-tax. For instance, as much as 40 per cent of Ranbaxy's sales comes from exports. Finally, there were no sops in the area of R&D, prompting the industry to dub Budget 2000 as a placebo for the pharmaceuticals business.

-Bharati M.


Budget 2000 has tripped over the power sector reforms. This, after announcing several fiscal incentives to transmission and distribution companies last year. The specifics of Budget 2000:

  • The Central Government will finalise a scheme to securitise large overdues to Central power and coal utilities from SEBs.
  • An additional Central fund of Rs 1,000 crore will be provided to the state utilities.
  • Project imports firms could earlier claim 75 per cent MODVAT in the first year. Now they will have to claim 100 per cent in 2 years.
  • Export income comes into the tax net, in a phased manner.

The power industry feels the absence of big-ticket policy measures doesn't make sense at a critical juncture for the power industry. In any case, regulation has a limited affect as most cost-changes are passed on to the consumer in this regulated industry. For instance, the hike in the dividend-tax will not affect the bottomline of listed distributors, like TEC, BSEs, and CESC, who now come into the mat net. But power equipment producers-like ABB, Siemens, and BHEL-will be negatively affected by the phased tax on export-earnings as they export some part of their output.

-R. Chandrasekhar


Small Scale Industry (SSI) accounts for 95 per cent of industrial units, 40 per cent of industrial output, more than 80 per cent of industrial employment, and over 34 per cent of the country's total exports. Budget:2000's provisions for it:

  • The setting up of specialised SSI bank- branches with an increase in the composite loan-limit from Rs 5 lakh to Rs 10 lakh.
  • The limit for dispensing with the collateral requirement for loans has been increased from Rs 1 lakh to loans up to Rs 5 lakh.
  • A Rs 100-crore credit guarantee scheme, which is to be implemented through sidbi.
  • A 3-year extension of the Technology Development Modernisation Fund Scheme for SSI units.

By and large, the sector is unhappy with the provisions. It feels the budget has done little in terms of stimulating growth, particularly in the face of falling Customs duties and dereservation. The enhanced credit-limits and measures to boost venture capital have been welcomed, though the finance minister has not stated exactly how the banks will train and deploy staff. As the small sector knows only too well, the devil lies in the details.

-E.K. Sharma


After almost 7 years, the steel industry has something to cheer about:

  • Integrated plants will now pay Excise duty on the ex-factory price of steel sold through stockyards.
  • A 10 per cent Customs duty cut on nickel oxide intermediates and charged nickel.
  • Ad valorem Excise duty restored for steel re-rollers and steel manufacture through the induction furnace route.

Coming on the heels of the restructuring proposal for sail, Budget 2000 has doled out major sops for the steel industry. Integrated steel manufacturers, for one, will be happy with the new Excise duty provisions. By doing away with the capacity-based Compound Levy System, the budget has upset re-rollers and induction-furnace manufacturers, who feel that this will bring back the harassment of the inspector-raj days. The tax on 20 per cent of export-incomes will hurt exporters like JISCO, ISPAT, and JVSL. Finally, the feast on the furnace: bringing traders under the net of Special Additional Duty, which will discourage importers. Can these measures steel the industry's margins from falling further?

-Ranju Sarkar


Budget 2000 has rung in a happy note for the telecom industry. The provisions:

  • A Customs duty cut on cellular phones from 25 to 5 per cent. And the duty on parts of cellular phones and battery-packs have been reduced too.
  • A Customs duty cut on specified raw materials for optical fibre from 15 to 5 per cent.
  • A Customs duty cut on specific items for ISPs to 5 per cent.
  • A Concessional Customs duty of 5 per cent on telecom equipment has been extended by one year.

By reducing tariffs on cellular phones, the Finance Minister will raise the industry's penetration. This is expected to be revenue-neutral because of increased usage, and will attack the grey market too. While telecom-equipment-manufacturers-and companies with stakes in cellular circles-will gain from the concessional duties, optic-fibre manufacturers will benefit from lower raw material costs. There is no direct impact of Budget 2000 on VSNL and MTNL, but the stage has been set for the latter to launch its own mobile service. All in all, everyone's now ringing with joy.

-Sunit Arora


Tearing into profits. Sadly, that's what Budget 2000 does to the embattled textiles industry. The key changes:

  • A 4 per cent increase in the Excise duty on polyester filament yarn (PFY).
  • A 1.5 per cent cut in the effective Customs duty on fibre, yarn, and finished cloth.
  • A composite rate of tariff has been introduced in place of the ad valorem rates to comply with the Indo-US and the Indo-EU trade agreement.
  • A new tax has been imposed on 20 per cent of its export income.

The industry is sore over the export tax, especially since other Asian countries have become more competitive because of currency devaluations. Indian cotton-spinning mills, and fabric- and garment-makers export as much as 40 per cent of their output. The increase in the Excise duty on PFY will hike the input cost of texturises. But that will benefit the composite mills-like Raymond, Madura Coats, and Vardhman-who do their own spinning, weaving, processing and finishing. The hike in dividend-tax is another issue that will entangle some of the bigger players. A tangled skein.

-Roop Karnani


As usual, the cigarette and tobacco companies attracted the attention of the Union Finance Minister, Yashwant Sinha. He has:

  • Raised the Excise duty on all categories of cigarettes by an average of 5 per cent.
  • Extended the MODVAT benefit to cigarette companies, which have also been given a 15-day tax credit.
  • Raised the tax on export earnings and increased dividend-tax.

While many believe that cigarette sales are price inelastic, it's not entirely true. Sales have been falling over the years; in 1999 they plummeted by 4.60 per cent over 1998. Volumes in the micro segment have been shrinking at an alarming rate, and many players may not be able to pass on the hike to consumers. For other segments, the 5 per cent Excise duty hike is a marginal one, and will be offset by 1 per cent thanks to the extension of the MODVAT benefit-a significant concession for an industry that does not get many. So, although market-leader ITC will pass on the burden to consumers, it will be hit by the export tax as well as the increased dividend-tax burden.

-Rakhi Mazumdar


Budget 2000 blunts the edge traders had over manufacturers. Its specific recommendations include:

  • Extension of the 4 per cent Special Additional Duty (sad) on traders.
  • A new tax on 20 per cent of export profits.
  • Rationalisation of Excise duties at 16 per cent, with 3 special duty bonds of 8, 16, and 24 per cent.
  • A reduction in the peak Customs duty from 40 to 35 per cent, and rationalisation of ad valorem rates at 5, 15, 25, and 35 per cent.

The restoration of the sad, hitherto confined to manufacturer-exporters, and the 10 per cent surcharge on the Customs duty first introduced in UB 99, will affect the profitability of traders. But the biggest blow will come from the export tax. The impact gets cushioned to an extent, because the removal of tax-benefits is spread over 5 years in equal instalments of 20 per cent. The hike in the dividend-tax to 20 per cent from 10 per cent will further dampen the retained earnings of the trading-houses. And the absence, unlike last year, of any initiative to ensure access to finance at global rates will adversely affect India's sagging exports.

-R. Chandrasekhar


India Today Group Online


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