Expect softening of duties to address inflation: CII

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Q: Do you expect to hear the Finance Minister talk about controversial issues like the FBT?

 

A: We have been at it for a long time and we will continue to have another round after the Budget is over to say how very disappointed we are that FBT (Fringe Benefit Tax) has not been touched.      

 

Q: What about service tax - some people believe this time around inflation may not go from 12% to 14%. What's your own feeling?

 

A: In the context of inflation, its going to be difficult for any Finance Minister to be increasing the rate particularly in services because a lot of that is now moving from upper part of pyramid to the lower part of the pyramid and therefore its going to be quite difficult to touch that.

 

But I would like to say that even on a secular basis that should not be touched; we are canvassing for the excise duty to come down to a level where the collective duty both on sales tax and excise duty together should not be more then 15%, so there is no case for taking it up.    

 

Q: Is corporate India worried that growth will slow down after three good years? Do you think there is a fear or a concern that growth might be slowing down because of interest rates going up?

 

A: The happy news is that I don't see growth slowing down at the ground level despite the fact that the EMI has moved up because of interest rate movement. But let's face it, the last three years growth has come up largely because of installment credit being much less expensive and therefore has triggered consumption and people have bet their future earnings on the basis of EMI and there's been a dis-saving and which has resulted in this huge demand growth.

 

What is a tipping point; is very difficult to say whether this tipping point has been reached or would it reach another 0.5% more, but the happy news is that I don't see the growth taking a major hit because EMI has moved up. Let's take my own industry, commercial vehicles industry, of course there has been a little set back, some holding back for a few weeks but I don't see the ground level demand in terms of replacement requirement getting affected as yet. The earnings are quite good, so we still see a lot of fundamentals being right.   

 

Q: Is that a situation you expect will percolate across industries because just to talk about your own industry the situation is probably different for the passenger vehicles and two-wheeler manufacturers as well?

 

A: As I said, I have not heard and I have been keeping a fairly close tab on that. I have not heard as yet major concerns coming up. As I said, there is some holding back in some pockets, there is a certain degree of worries in terms of whether they can afford it but overall the demand is still good and if we don't escalate the interest rates any further then I think it will settle down at current situation. But if the tipping point is just another 0.5% away, 1% away then it could be a different story altogether.

 

Q: What is your own gut feeling of when it starts to actually hurt the growth curve? Has it already arrived? Will it manifest itself with a lag? Is it 0.5% away? What's your gut feeling?

 

A: My gut feeling is that because of the fact that today the industry is getting far more efficient both in terms of capital usage and in terms of labour usage, despite of course the commodity price increase, the overall profitability is going northwards, not southwards.

 

When I say profitability, I am not talking about gross operating margins. You will find that taking a hit but the operating leverage being what it is, because of the expansion, there is an overall improvement. If interest today is less of a burden than it was about a year ago, five years ago, ten years ago and therefore from corporate viewpoint that's going to hurt all that, much as of now, the tipping point is slightly further away.

 

The issue is again maybe at one end of the spectrum is the property situation where there could be an issue coming up and the tipping point maybe a little more reachable there in the property followed by perhaps passenger cars and then followed by more capital good oriented investments