An analysis by the CNBC research team of six important industry sectors and what Budget 2001 could have in store for them
On the world level, most majors—like Unilever, p&g, Colgate, Nestle—find home markets saturated and are banking on the Third World for growth. And a definite thrust area will be to acquire local brands.
CEMENT:
India’s cement sector is the third largest in the world, after the US and China. To counter sluggish demand, big players like acc, gacl, India Cements, l&t and Grasim had formed a price cartel, improving bottomlines. But it has to be seen if the cartel will sustain or if the government will take any action.
Currently, cement is the government’s second largest excise earner, after tobacco. Cement going for Gujarat relief work has been excise-exempted, which should help up offtake. Other than this, the industry is not expecting any levy benefits. On the raw material front, no significant cost increases are expected and marginal rise in freight shouldn’t really affect bottomlines. The duty on limestone has increased steadily over the years and a rebate here would significantly help the industry.
PHARMACEUTICALS:
The $3.9-billion pharma market is highly fragmented with over 20,000 manufacturers. But it’s seeing some consolidation now via mergers and acquisitions. Simultaneously, bulk drug capacities are being hived off. mncs are also willing to hive off tail-end brands and focus on product/therapy areas of the future. Another recent feature is co-marketing agreements. For instance, Ranbaxy and Glaxo co-market the antibiotic Cephalexin, Glaxo and Lupin their anti-TB products. These will further consolidate the hold of established players.
The industry hopes for significant overseas revenues from r&d work outsourced to India. Some relief is expected for these initiatives through cuts in import tariffs on raw material and capital equipment imported for r&d. Income from r&d should also see higher tax exemptions. The industry hopes some drugs will be taken out of the dpco purview. If, however, some old products under the dpco are replaced by new ones, the sector may be adversely impacted. Domestic players are also demanding duties on currently duty-free imported life-saving drugs, which, when produced in India, bear levies.
REFINERIES:
Till quite recently, the sector was predominantly under state control through the administered pricing mechanism (apm). Some decontrol has happened since but control on five products—motor spirit, high-speed diesel, aviation turbine fuel, kerosene and lpg—which contribute almost 70 per cent of the volumes remains.Main gainers of deregulation will be the old players with old and depreciated units. New refineries will be hit hard as their margins under market-determined prices will be lower than under the apm.
Last year, the sector bore the brunt of high crude prices. The government reduced import duties from 12.5 to 10 per cent to provide some relief and a further cut is unlikely. There is hope, however, that like the private sector, public sector refineries will be allowed to import their own crude rather than channelise it through ioc.Apart from this, announcements are expected on phased removal of subsidies on kerosene and lpg or at least a shift of subsidies from the oil pool account to the budget account. The other possible area for decontrol would be to allow private refineries to market controlled products like petrol, diesel, lpg and kerosene.
SOFTWARE:
Software is among the fastest growing sectors and the top forex earners. Software exporters currently enjoy tax exemption on export profits. This exemption should continue and Budget 2001 may have some fiscal incentives for firms operating in the domestic systems integration area. Apart from this, limits on overseas acquisitions—currently capped at $1 billion—may be raised to allow speedy inorganic growth for Indian IT companies.
In fiscal 2000, software exports grew by 65 per cent. But the US slowdown has dampened sentiments. But companies like Infosys, Satyam and Wipro continue to have very strong prospects. The key will be to get into "mission-critical" work and expand the client base in the US and Europe to beyond the top 300 companies.
BANKING:
The Indian banking system is in the midst of a technological revolution with more and more banks offering atms, e-broking, Internet banking, mobile banking and so on. Banks are consolidating through mergers and acquisitions. Many public sector banks have restructured and are offering successful vrs schemes. The key will be to establish a broadbased deposit base, which means access to low-cost funding, and at the same time offer value-added services.
Banking definitely requires a privatisation thrust. The sector has already seen a lot of consolidation among private banks and nationwide reach and strong technology platforms will be the key to profitability. Reducing government holding and allowing private players to step into the psu banks will help meet the capital needs to fund technology and expansion plans. The other area where the government can help is by setting up systems to ensure speedy handling of bad debts and non-performing assets.