P. Chidambaram's excise duty cut 'may not rev up auto sales; neutral for cap goods'

Written by PTI | Mumbai | Updated: Feb 19 2014, 04:05am hrs
Excise dutyAlthough the duty cut is significant especially for small trucks. Reuters
FM P. Chidambaram's decision to slash excise duty on cars and SUVs in Interim Budget 2014 may not lead to a spike in sales, while the impact of the same on the capital goods sector would be neutral, a research report says.

The excise duty cut across major auto segments/ sub-segments, though would help reduce cost of ownership marginally, will not boost volume growth. Upside would continue to be constrained amid better affordability on account of the overall high cost of ownership and shrinking discretionary spending power, India Ratings said in a report.

Finance Minister P. Chidambaram in the interim budget yesterday proposed cutting excise duty on automobiles, mobile phones, electronic items, capital goods and soaps till June 30.

Excise duty was proposed to be cut on small cars and two-wheelers to 8 per cent from 12 per cent, on small SUVs to 24 per cent from 30 per cent and on mid-size cars to 20 per cent from 24 per cent.

Excise duty on commercial vehicles would be cut to 8 per cent from 12 per cent and for large and mid-segment cars to 20 per cent from 24 per cent.

On the impact of duty cuts on capital goods sector, the report said the 2 percentage point duty cut to 10 per cent on capital goods falling under chapter 84 and 85 of the Central Excise Act will not materially affect the industry at least in the first half of the next fiscal.

For the entry-level price-conscious auto models, the decision will continue to be largely influenced by the cost of ownership which remains high due to high finance cost. Also, diesel price deregulation has resulted in deferment of car purchases, the report said.

Although the duty cut is significant especially for small trucks, demand for trucks is influenced to a greater extent by the level of industrial activity, which remains weak leading to tepid freight rates. Therefore, a significant uptick in demand is unlikely in the near term, it said.

On the neutral impact of the duty cut on the capital goods sector, the report said this is due to depressed capex rates and project execution and given the tight margins in the sector, this nominal cut, even if its passed onto customers, is unlikely to boost demand for industrial goods.

Thus, arguably capital goods producers may decide not to pass on the full benefit so as to give a modicum of cushion to their falling margins, the report added.

Noting that demand for capital goods is driven by government-related infra spend and corporates, the report said capex level in BSE 500 companies fell in FY13 and is estimated at around 54 per cent of the FY12 levels only. Also, their debt levels increased in FY13, but lower than in FY12. FY14 capex is estimated to be even more muted and could aid liquidity profile of corporates in these challenging times.

As such, gross fixed capital formation growth is showing a low single-digit to outright negative growth rate in the past nine quarters, making it the weakest growth rate in the past 15 years, the report concluded.