Centre cuts excise by 4 per cent; unveils Rs30,700 crore stimulus news
08 December 2008

New Delhi: Within 24 hours of the Reserve Bank's monetary stimulus to boost liquidity on Saturday, (See: RBI boosts liquidity; relief for real estate, export, small sectors) the Government yesterday followed suit with a Rs30,700-crore fiscal package aimed at kick starting the Indian economy once again.

The package comprises additional spending and excise duty that should boost consumption to implement a course correction away from the slowing global economy.

The fiscal package comes on the heels of a key interest rate cut by the Reserve Bank of India, and has Rs20,000 crore in additional expenditure, accompanied by an across-the-board four per cent excise duty cut amounting to Rs8,700 crore. Additionally, it also has benefits worth Rs2,000 crore for exporters by way of a two per cent interest subvention for labour-intensive export sectors.

Deputy chairman of the Planning Commission Montek Singh Ahluwalia said, "This is not just a fiscal stimulus package, it's an economic stimulus package that consists of some additional public expenditure, some reduction in excise duties and some incentives for bank lending."

Speaking to the media at a press conference, he said, "We will make special efforts to ensure that not only the additional expenditure of Rs20,000 crore is spent this year, but even what has been budgeted is actually spent to support the growth of the economy."

The government is also planning to initiate infrastructure projects worth Rs100,000 crore by according faster clearances to public-private partnership projects. It will also try to ensure easier financing through a tax break on fund raising by the India Infrastructure Finance Company (IIFC), whose speciality is being a lender to the infrastructure sector.

IIFC has been allowed to raise Rs10,000 crore through tax-free bonds by March 2009. The proceeds of this would be utilised to refinance bank lending of longer maturity to eligible infrastructure projects, specially in the highways and ports sectors. Ahluwalia said that IIFC's resources would support public-private projects of Rs1,00,000 crore in the highway sector.

The fiscal measures unveiled by the government complement the one per cent cut in the repo rate announced by the RBI a day earlier, and the refinance facilities for housing and small and medium industries designed to inject some cheer into the sagging real estate and manufacturing sectors.

Moreover, the government plan to implement steps that will ensure that the already budgeted expenditure of Rs300,000 crore will be actually spent within the next four months, before the financial year comes to an end in March 2009.

Background
The index of industrial production (IIP) slumped to a low of 1.3 per cent year-on-year in August this year, compared to around 6.0 per cent the month earlier and 10.9 per cent for the same month of the previous year.

Figures provided by the Central Statistics Office show that the seasonally adjusted volume of industrial production for the three months from June to August fell by 1.9 per cent compared to the previous three month period. (See: Industrial production slumps to 1.3 per cent in August)

The index grew at an even slower pace of 5.1 per cent this September, against 5.8 per cent in the same month last year. The index of six core (infrastructure) industries having a combined weight of 26.7 per cent in the index of industrial production (with base 1993-94) stood at 237.9 (provisional) in September 2008 and registered a growth of 5.1 per cent (provisional) compared to a growth of 5.8 per cent in September 2007.

For the April-September period of the current fiscal, the six core sector industries registered a growth of 3.9 per cent (provisional) as against 6.9 per cent during the corresponding period of the previous year. For the April-September period of the current fiscal, the six core sector industries registered a growth of 3.9 per cent (provisional) as against 6.9 per cent during the corresponding period of the previous year. (See: Core sector growth slips to 5.1 per cent in September)

Excise cuts
An across-the-board four per cent reduction in the ad-valorem central value added tax (CENVAT) for the remaining fiscal year on all products other than petroleum, and those where the current rate are lower than four per cent, has also been announced.

Before this, the three main ad-valorem excise rates applicable on non-petroleum products were 14 per cent, 12 per cent and eight per cent. They will now be 10 per cent, eight per cent, and four per cent.

Industry Reactions
Reactions have been varied from different quarters of the industry, with some welcoming the measures, while other say that the government has done too little, and too late.

Auto: The Indian auto industry welcomed the move with open arms, while pointing out that the cut would not lead to a major spurt in demand for their products to their erstwhile double-digit growth projections.

Maruti Suzuki was reported to be set to pass on the benefits of the duty cut to its customers by reducing prices of its passenger cars by three per cent, after having hiked prices of select models ranging from Rs2,000 to Rs6,000, just four days ahead of `Diwali' (See: Maruti hikes prices of select models ahead of `Diwali').

The cut amounts to a Rs8,000 reduction in the price of its bread winning Alto car.

Mumbai-based utility vehicle manufacturer Mahindra & Mahindra (M&M) also said that it would lower the prices of Scorpio and Bolero models, and may even consider reducing prices of the premium variants by over four per cent.

Korean car maker Hyundai and General Motors India would spend some more time mulling the implications of the government's decision before lowering any prices. P Balendran, vice-president of GM India was quoted as saying that the move does not address the key problem of the industry, which is the availability of loans that have dried up on account of the credit crunch, and the higher interest rates on them. Consequently, he did not expect demand to go up on account of the move.

Tata Motors would also reduce prices of its cars and commercial vehicles, with reports quoting a spokesperson for the company as saying that the company would pass on the benefit that will come through the cut in Cenvat in passenger and commercial vehicles.

FMCG: Consumer durable and fast moving consumer goods companies were more cautious about lowering prices in the wake of the duty cut. Their apprehension stems from the fact that a major part of their manufacturing already happens in the confines of excise-free zones such as Uttaranchal and Himachal Pradesh.

Report quoted sources in the FMCG business as saying that there would not be any direct impact on pricing on account of the excise cut, since most of the sector's manufacturing already takes place in excise-free zones. They point out that the benefits would be greater to companiewho manufacture closer to their consumer markets. Moreover, FMCG companies would need to look at the impact impact in terms of benefits on input costs of raw and packaging materials.

Pharmaceuticals: The pharmaceuticals sector would most likely not witness significant price cuts on account of the Cenvat reduction, as here too majority of drug manufacturing plants that serve the domestic markets are located out of the Cenvat applicable locaitons, such as Himachal Pradesh and Sikkim. Others already have some form of tax concessions.

There could, however, be some reduction in the prices of drugs manufactured in locations where Centvat is applicable.

Market impact
Reports suggested that shares of infrastructure companies, including road, port and textiles could decline, on account of the measures announced being "disappointing" for these sectors. They also suggested that investors in auto companies, specially those of two wheeler companies, could take positive cues from the combination of the interest rate revision and fuel price cuts from last week, in addition to the announced four per cent cut in duty that is likely to spur sales somewhat.

Shares of iron-ore exporters were reported to see an upward trend on account of the government's move to remove export duty on iron ore fines and reduce it on lumps.
Half hearted attempt?

Reports also said that economists still think growth could be at a low of around 6.8 per cent during the current fiscal, and would slow further to around 5.5 per cent next year. They also quoted various industry leaders as saying that the government could have done more.


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Centre cuts excise by 4 per cent; unveils Rs30,700 crore stimulus