It is going to be a tough balancing act for Finance Minister Pranab Mukherjee as he gets ready to present the Budget. He has not only to come up with policies to kickstart the demand, but also to make sure that the fiscal deficit of 6% of GDP does not increase further.
For Corporate India, the forthcoming Budget raises higher expectations than the previous budgets. The government?s three stimulus packages have resulted in only a partial recovery of the economy in sectors such as automobiles, cement and steel. But most of the sectors continue to feel the pinch of the slowdown. And to top it all, fears of a below normal south-west monsoon have spelt grief for the economy trying to recover from the fallout of the slowdown.
With the Left out of the coalition matrix, Corporate India wants big ticket reforms and it has all the reasons to expect one in this Budget. Expectations are that the finance minister will place an emphasis on infrastructure growth, which would boost demand and consequently consumption of steel and cement. Therefore, the sector anticipates further duty cuts as was done in the previous stimulus packages. Export-driven textiles sector expects labour reforms to improve productivity and the real estate sector wants the reintroduction of the tax relief under Section 80IB of the Income Tax Act.
* Steel
Steel consumption and production, according to the Ministry of Steel, increased by 6% and 2.4% in the first two months of the current financial year over the same period last year. This has been on the back of increased demand from sectors such as automobiles and even construction. With the thrust on infrastructure building, demand could go up. Says S K Roongta, chairman, Steel Authority of India, ?We hope to see infrastructure building given a push in the forthcoming Budget.?
But there are issues that concern steel players. Excise duty brought down as part of the government?s fiscal stimuli between December 2008 and February 2009 could be revised upwards in the forthcoming Budget impacting prices straightaway. Domestic hot rolled coil (HRC) prices are already about Rs 3,000-4,000 per tonne more than international HRC prices. An excise duty hike would further increase HRC prices here. Says Roongta, ?Even if revenue considerations weigh in favour of an upward revision in excise duty, the industry would like that the duty be retained at the present level for some more time. The government may however increase it in a phased manner over the next one year.? This is not all that is bogging the industry at the moment. The issue of levying a higher import duty on steel has been occupying the minds of steel players. Currently, the import duty on steel is 5%. Domestic companies obviously want the figure to go up.
* Cement
With production this year likely to be 200 million tonne ? up from 182 million tonne last year ? cement is another sector which is looking up. ?Capacity utilisation at the moment in the industry is almost 90-91%,? says H M Bangur, managing director, Shree Cement, who is also the president of the Cement Manufacturers Association (CMA). But the danger is that as new capacities come up this year, this advantage could be lost. Capacity utilisation could come down to about 85-87%, but Bangur isn?t worried.
Says Bangur, ?Traditionally, the cement industry has had a tendency to create capacity before demand picks up. Production capacity will be in excess, but I don?t view it as a problem. The Budget is likely to place an emphasis on infrastructure growth. This will boost demand and consequently consumption of cement.? The first two months of the current financial year, for the record, saw demand for cement increase by 12% year-on-year coming mostly from the housing sector in Tier II and III cities. He adds, ?We do hope that a uniform excise duty structure is put into place in the forthcoming Budget. The duty structure at the moment is quite complicated. We hope it is streamlined.?
* Oil & gas
For the oil & gas industry, the key expectation from the Budget is that gas production should be boosted. Says M R Pasrija, former chairman & managing director of OIL India, who is now MD of Prize Petroleum, the upstream company of Hindustan Petroleum Corporation of India (HPCL), ?There are incentives in place for oil production. If they are applied to gas production as well, it would be great. The definition of mineral oil includes gas but somehow gas production hasn?t been incentivised much. If the Budget can look into this, it would really boost the production of gas.?
But for all the incentives provided for oil production, India still imports almost 70% of its crude requirement. By some accounts this can be minimised if the refining business is streamlined. If the focus can shift to building world-class refineries, it would help in reducing the import of crude. Incentivising gas production is fine. But the point is there have to be enough consumers of gas. There are not enough right now. So, the Budget needs to address the issue of incentivising downstream players somehow. The Petroleum Ministry has spoken about a partial deregulation of oil prices. It would help. But more needs to be done.
* Textiles
Being largely export-driven, the textiles sector has suffered badly on account of the recession in developed markets. Key markets such as the US and the UK have been hit hard. It is not surprising then that a stimulus package for the industry apart from proposals such as a national fibre policy are likely to be formalised in the forthcoming Budget, according to indications given by textile minister Dayanidhi Maran recently.
India caters to just about 3% of the world?s total textile exports. ?That is about $20 billion in comparison to China?s $125 billion,? says Nitin Kasliwal, vice-chairman & managing director, S Kumars Nationwide Limited. ?Labour reforms in the textile industry are a must to improve overall productivity. The Budget needs to address this pressing issue in some way.?
In fact, the need for labour reforms coupled with the need for better infrastructure and facilities is something that has been articulated by Maran as well in various fora in the past. Observers opine that for the industry to achieve global standards, the outlook of big textile players needs to undergo a transformation.
* Banking & insurance
The banking sector, in particular, has been the focus of attention since the credit crisis raised its ugly head in September 2008. So far, the Reserve Bank of India has brought the cash reserve ratio down by 400 basis points, while repo and reverse repo ? rates used to determine lending ? have been cut by 425 and 275 basis points, respectively. Despite all this, bank credit isn?t robust enough. For the fortnight ending June 5, 2009, for instance, bank credit grew by 15.68% ? lower than the growth registered in the previous fortnight ending May 22, 2009 when it was 15.86%. On an average, the prime lending rate (PLR) of banks is in the region of about 11-12%. Allen C A Pereira, chairman & managing director, Bank of Maharashtra, says, ?Further lowering of lending rates is being examined. We have to satisfy all stakeholders. It becomes difficult to lower lending rates when fixed deposits are maturing after a while. It creates pressure on margins.? He however maintains that a tax rebate on interest earned on infrastructure finance coupled with incentives to investors on long-term deposits will actually help infrastructure lending. ?The thrust of the Budget is likely to be on infrastructure growth. In the light of this, if these incentives are considered it would indeed help,? he says.
* Chemicals
The greatest hurdle for the chemical industry, according to Ajay Shriram, chairman & senior managing director, DCM Shriram Consolidated Ltd, is the lack of a level-playing field. ?Indian manufacturers should get a levelplaying field,? he says. ?I hope the Budget addresses this issue. The import duty on caustic soda and poly vinyl chloride (PVC) resins, for instance, should be raised to 10% from the current level of about 7.5%. If the duty on imports is not raised it skews the picture in favour of overseas manufacturers. Already the Indian market is seeing a surge of cheap imports from allied Asian and Middle-eastern countries, which traditionally focused on China instead. This has made the domestic industry very vulnerable. There is need to protect the industry,? concurs Shriram.
What is giving these overseas manufacturers a handle in the domestic market is the low cost of energy, which brings down their overall cost of production considerably. Indian producers, on the other hand, have had to grapple with high energy costs coupled with rigid duty structures that raise the price of the final product. ?This obviously is disadvantageous to us,? says Shriram. ?Customs duty on fuel oil and coal, which are key inputs in the manufacture of chemicals, should be reduced to zero,? he says.
* Automobiles
Despite the first two months of the current financial year seeing a growth of about 8.28% in production over the same period last year, automakers aren?t a very happy lot. The sector has seen a mild recovery, with sales in the passenger vehicles segment, for instance, growing marginally at 1.68%. Three-wheeler and two-wheeler sales clocked a better 3.53% and 13.06% sales growth, which implies that all isn?t lost for the industry. ?The commercial vehicles segment de-grew in terms of sales,? says R C Bhargava, chairman, Maruti Suzuki Ltd. ?The Budget should maintain the concession in excise duty. I know there has been the threat of the burgeoning fiscal deficit, but I hope excise duty is not rolled back to earlier levels. This is important because it will go a long way in improving overall sales,? he says. ?Another important point to be borne in mind by the finance ministers is the need to check interest rates. The automobile industry especially the commercial vehicles segment depends heavily on external financing, though there is liquidity in the system, I don?t think adequate loans are being disbursed. This is showing in the poor sales of commercial vehicles. There are a lot of things that need to be streamlined such as clear guidelines for lenders and borrowers. This is out of the purview of the Budget, but if this happens, it will help.?
* Real estate
This is another one of those sectors that has faced the heat on account of the slowdown in the economy. As prospective buyers continue to play a wait and watch game hoping that real estate developers will rein in prices even further on account of lower demand, developers are turning to the government in the run-up to the Budget for significant sops to revive the industry. Says Rohtas Goel, chairman & managing director, Omaxe Ltd, who is also the president of the National Real Estate Development Council , ?Affordable housing is the only area which is seeing growth at the moment. If it is given infrastructure status, I think it would really help.?
A long-standing demand however of the industry has been the reintroduction of the tax relief under Section 80IB of the Income Tax Act. This relief, provided for smaller segment housing, was revoked some time ago. Basically the profit generated by developers who sold smaller housing projects was not subjected to tax under Section 80IB of the Income Tax Act. Developers have been demanding that the relief be granted back again given that affordable housing is where the action is. Says Goel, ?Though demand for affordable houses is picking up, there isn?t enough land available where the projects can be undertaken. This is leading to a supply constraint.?
* Consumer durables
LCD TVs have been key growth drivers for consumer durables companies. Not surprising then that the demand of the industry in the run-up to the Budget is that customs duty of 10% on LCD panels should be abolished. ?LCD panels are not manufactured in India. If the peak rate of 10% on the product is brought down to zero that would help because it would fuel manufacturing of LCD TVs in the country. This in turn will drive affordability. That is imperative if growth has to pick up,? says R Zutshi, deputy managing director, Samsung India.
Another key issue bogging the industry is the differential levy of value-added tax (VAT). ?I hope the Budget can address this,? says Zutshi. ?That?s because a differential levy of VAT by states impacts the pricing of products. This in turn impacts consumer demand, which, invariably, has a bearing on the sales of manufacturers. I find the level of taxation on consumer durables very high. The incidence of indirect taxes alone is close to 30%. There is an urgent need to bring down the level of taxation to below 15%,? he adds.
* Pharmaceuticals
With incidence of tax on pharmaceutical products at about 34%, companies in the sector are expecting some rationalisation in the tax structure in the forthcoming Budget. ?We expect the Budget to take into account fundamental, long-term fiscal benefits that will allow for improvement in healthcare infrastructure and easy access to quality products at subsidised rates. This will go a long way in improving the health conditions of people, not to mention that the economy stands to gain as a result of this. It is imperative then for the government to invest in research & development. That is key for the long-term sustenance of the pharmaceutical industry. This can be done by incentivising pharma companies by way of tax sops,? says Kamal Sharma, managing director, Lupin Laboratories. ?This collaboration between private companies and the government will help in increased effort and investment in various areas of drug discovery, drug delivery and biotechnology.?
Sharma also points to the need for an acceleration in the rate of depreciation to boost capital formation. ?I think that is imperative,? he says. Reduction in customs duty, extension of the tax exemption available to export-oriented units beyond March 2010 are some of the allied demands of the industry, points Sharma.
* Fmcg
Being a defensive sector, FMCG has not felt the heat of the slowdown too much. Aditya Agarwal, director of Emami, however believes that the thrust of the government on rural areas should continue with employment guarantee schemes and supply of funds to these regions. ?There are certain commitments that the government has made in its election manifesto. It is likely that the finance minister could fulfil them in the forthcoming Budget. In a way it is good because boosting the rural sector will increase the propensity to spend of rural consumers.?
* IT & ITes
The Indian IT sector, which has been hard hit because of the global slowdown is taking all measures to keep its margins. Incentives for the infrastructure sector, alongside the government?s focus on public-private partnerships, will set the platform for growth in the long run.
?The extension of the tax holiday beyond 2010 for at least three more years would enable the Indian IT sector to compete with other countries globally. These incentives should especially help the small and medium businesses, a key growth sector that accounts for 40% of the exports from software technology parks,? says Naresh Wadhwa, president and country manager, Cisco India and SAARC.