Win Some, Lose Some

Like every Budget, Budget 99 has left in its wake many happy businessmen and severaldesolate ones. But the reason this time around is not that the finance minister hasprovided sops to some industries and not to others. Instead, the varied reactions stemfrom the fact that Yashwant Sinha has steered clear of sops to any specific industry. Hehas, rather, opted for standardisation and transparency in duty structures, and helpingalong industrial growth through enabling measures at two ends of the industry spectrum:housing, which is both labour-and capital-intensive and has a ripple effect on a range ofindustries, and the stockmarkets, which could give industry access to cheaper capital.

Those looking for specific reliefs are angry. "Budget 99 is totally disappointingand inflationary," says V.M. Raval, executive director, Telco. "The commercialvehicle segment has performed badly due to lack of demand. The higher excise will fin-ishit off totally." Last year, growth for the automobile industry dipped by 14 per cent.Now 1999-2000 too looks depressing. Indeed, there were strong rumours that Budget 99 wouldcut excise on passenger cars by 30 per cent. Instead, the readjustment of slabs has raisedexcise on multi-utility vehicles, passenger cars and commercial vehicles by one percentagepoint. Add to that higher diesel prices. Complains Raval: "Input costs have gone up;steel, components and capital goods are more expensive. It looks like a systematic attemptto kill this industry." Escorts chairman Rajan Nanda agrees: "This is a budgetof words, not deeds." Adds a lot from the Budget. But it was a mixed bag.

Daewoo Motors managing director Shiv Gopal Awasthi: "The industrywill have to absorb any further increase in costs as the consumer is not ready to paymore." Even the auto component industry is distraught. Says Surinder Kapur, CMD, SonaSteering: "There’s no encouragement for locali-sation of auto components. Eventhe differential between the import duty of completely knocked-down kits and local partshas been reduced, hurting indigenous industry."

Another sector that  hinged its chances of survival on the Budget wassteel, deep in recession for the last few years. The disappointment was evident when SAILchairman Arvind Pande walked out midway from a CII gathering watching the budget telecast.The steel sector faces falling demand, spi-ralling input costs and a market infiltrated bycheap—and perhaps better—imported steel. For the first time in over a decade,SAIL registered a whopping loss of Rs 617 crore in the first half of 1998-99. Firstestimates put the immediate impact of the Railway and Union Budgets on SAIL at about Rs156 crore, putting its bottomline under further stress.

Even Tisco managing director J.J. Irani, who otherwise applauded thebudget, was not amused. Says he: "We had asked for a reduction in excise from 15 percent to 10. Instead, it’s been increased to 16 per cent." In fact, the budgethas also reduced import duties by 2.5 per cent for hot-rolled coils for which the countryhas a surplus capacity of 2 to 3 million tonnes. Worse, the reduction in import duty oncoking coal, effected by the government a few months ago, has been taken away by thebudget. This now becomes 2.5 per cent costlier. Plus the 4 per cent hike in railwayfreight, and the 10 per cent income tax surcharge. Says a steel industry expert: "Theonly redeeming feature is the reinstatement of Modvat to 100 per cent which will partiallyoffset the excise hike." The catch: most construction steels like reinforced bars andgalvanised corrugated sheets do not get the benefit of Modvat.

But the emphasis on housing and infrastructure should work in steel’s favour.Another proposal which has brought some relief to SAIL is the voluntary retirement schemesupport package backed by government guarantees which can help cut manpower.

But for many others, the budget has brought cheer. Hindustan Lever isrelieved that the government has reduced duties on packaged tea. Excise on packaged teahas come down 8 per cent, and Lever has announced price cuts ranging from Rs 6 to Rs14 onits teas. The company feels the packaged tea industry can now look forward to good growth.Lever, however, loses ground in another business—excise on ice-cream has risen from13 to 16 per cent.

Exporters may have much to rejoice, even in the steel sector. Says aSAIL official: "Lowering of interest on pre- and post-shipment credit will give themuch-needed boost to exports." Says Lever chairman Keki Dadiseth: "The budgetaddresses a vital area of eliminating the anomaly between Indian and internationalinterest rates, which was impairing exports so far. Performance will probably improvenow."

The pharmaceutical industry is happy with Budget 99, although animmediate positive impact on bottomlines may not be seen. The proposed review of the DrugPrice Control Order (DPCO) has been welcomed as severe competition had driven drug pricesto unprecedented lows, even below the mandated DPCO price. Says P. Krishnan, countrymanager, Carlson Investment Management (Far East): "Even multinationals like Glaxoand Hoechst have around 50 per cent of their products falling under the DPCO category. Areview can bring some respectability to prices."

The budget has extended the 125 per cent tax benefit on in-houseR&D expenditure by five years till March 31, 2005. This can translate into long-termbenefits for the better domestic pharma players. The bulk drugs industry, till now plaguedby stiff competition and low margins, can expect some relief from the 10 per centsurcharge on customs duty. This would make drug imports costlier—customs duty willincrease from 35 per cent to 38.5. But will the 10 per cent surcharge on corporate taxoffset this? The exact monetary impact cannot be ascertained till the revised DPCO isannounced.

On the other hand, while much hype has been created about automaticapproval for foreign equity of up to 74 per cent, no visible change is likely to be seenimmediately. Barring a few transna-tionals like Pfizer, most parent companies already hold51 per cent stake in their Indian subsidiaries. Says Krishnan: "In the event of thePatents Bill going through and if India is viewed as a sourcing base for transnationals,the 74 per cent automatic approval might become more meaningful." Agrees C.B. Rao,deputy MD, Orchid Chemicals: "The automatic approval should benefit transnationalsbut that needn’t be detrimental to well-run domestic companies."

 But most of industry, satisfied or otherwise over the proposals,remain doubtful over the implementation. Says former Maruti chairman R.C. Bhargava:"The budget has many positive features. But policy and procedure remain ambiguous.Implementation of policy will be the crucial issue." Irani agrees: "One hopesthat all the good intentions are effectively and quickly put into practice." Budget99 has gone down more or less favourably with industry. Now its final success will hingeon whether the honourable intentions are implemented with equal ef ficiency.

Arindam Mukherjee With Vatsala Kamat in Chennai