- Some of the measures announced to support rural consumption
- Import duty provides safeguards to electrical, electronics goods as well as chemicals
- Contract manufacturers to benefit in medium to long run
- Hike in duty on chemicals to pinch user industries
- Duty on ceramic products to protect domestic players
- Infra focus – too little and too late
Budget 2019 proposed changes in Customs duties on a number of imported goods to boost domestic manufacturers. The announcements would help promote Make in India initiatives and pave the way for the government's vision of doubling Indian GDP over the next five years. The initiatives in Union Budget 2019-20 largely aspire to build on the reforms that have been undertaken in the past.
Duty revisions mostly supportive
The Budget included a number of initiatives to bolster the fortunes of local manufacturers and keep up the momentum on the ‘Make in India’ initiative. Hefty allocations towards various schemes such as Pradhan Mantri Gram Sadak Yojana (Rs 19,000 crore), Jal Jeevan Mission (Rs 10,000 crore) and PM-Kisan (Rs 75,000 crore) is likely to spur consumption growth in rural areas. Similarly, construction of 1.95 crores affordable houses over the next 3 years under the Pradhan Mantri Awas Yojana would further aid the demand prospects of a number of industries.
In addition to the demand boost, the finance minister announced a number of Customs duty revisions to curb supply of non-essential items and instead promote in-house production of such goods and services. The announcements featured a number of items – the list mainly safeguards electronics and electrical goods suppliers as well as chemical companies.
Increase in Customs duty on optical fibre, optical fibre bundles and cables to 15 percent from 10 percent appears positive for companies like Finolex Cables and Polycab. The increase in duty on CCTV, IP cameras, digital video and network video recorders to 20 per cent from 15 per cent would create a level-playing field for listed players like Dixon Technologies (contract manufacturer of TVs, mobiles, washing machines and CCTV camera) and protect them against cheap imports. Similarly, import of Split Air Conditioners (both indoor and outdoor units) will now attract Customs duty of 20 percent (vs 10 percent earlier) and this cost revision is likely to force the leading brands to leverage the capabilities of AC contract manufacturers like Amber Enterprises for their production requirements.
Like electronics and electricals, the chemicals sector saw a number of duty revisions for items -- from raw materials (PVC, EDC) to intermediates (Palm stearin) to end products (plastic articles, naphtha). Given the integration of chemicals with other sectors, the impact of the revision would be felt across industries.
Duty hikes on fatty acid is marginally negative for FMCG majors like HUL. PVC rate hikes will benefit players like Finolex Industries, as they control the entire value chain of pipe manufacturing. Overall impact on the sector is anticipated to be inflationary as the demand for chemicals is largely met through imports. There exists an enormous potential for expansion in the chemical sector, but the companies are either constrained by lack of raw materials or available capacity.
Higher import tariffs for ceramic products (roof tiles, floor tiles) would give some relief to the ailing tiles and sanitaryware industry. The sector has been stagnant in the past couple of years and is facing a challenging time amid high competitive intensity, subdued real estate demand and high input costs. Furthermore, increase in basic Customs duty of Vinyl Flooring would help in curbing imports from China, Vietnam, South Korea and other Asian countries.
For automobiles, the measures (exemptions and subsidies) were restricted largely to electric vehicles, the benefits of which would accrue only in the long run.
Infrastructure development a key challenge
Infrastructure bottlenecks have been the biggest pain points for India Inc. Budget 2019 tried to address these concerns by identifying the need to deploy Rs 100 lakh crore towards infrastructure over the next five years. While steel, cement and capital goods would gain directly from the planned expenditure, the domestic manufacturers also stand to benefit from the same.
Construction of roads, railways and waterways would reduce transit times, allow better connectivity and easy access to the end-markets. Development of integrated transportation hubs or multi-modal logistics parks would enable better storage solutions. Thrust towards digitisation is helping businesses to leverage technology to have better control over their supply chain. Additionally, this year’s proposal on corporate tax rate reduction to 25 percent for small companies having turnover of Rs 400 crore is expected to have a widespread effect on the industry as the turnover threshold covers nearly 99.7 per cent of all firms.
The allocation appears robust, but the key challenge, as always, will be execution. Effective implementation could propel India’s ease of doing business rankings as it should help reduce cost overheads as well as alleviate some of the operational concerns facing the industries.
The moot question, is it enough?
The push for manufacturing assumes utmost importance at this juncture as a favourable industrial policy could propel the country into a manufacturing and exports hub at a time when the US and China, the world's two largest economies, are at loggerheads with each other due to the trade war. A significant lift for the manufacturing segment is a prime requisite as it not only strengthens the domestic economy, but also fortifies India’s position in the global economy. The country has a booming young population and the rapid development of this sector can solve the problem of job creation.
Furthermore, the ancillary benefits (technological advancements, export competitiveness) arising from in-house value creation would be also huge and could have a ripple effect on the entire economy.
While the Budget 2019 definitely marks another progressive step towards Make in India, the quantum of changes appears very small. Overall impact of the duty revisions is mildly positive as proposed changes are likely to add a few decimals points to the overall GDP. The economy is on a downhill as GDP growth from the January-March quarter slipped below 6 percent, the slowest pace in past 5 years.
Robust framework of policies and actions to develop manufacturing ecosystem is the need of the hour as the country is facing challenges on multiple fronts (weaker domestic consumption, slower global growth and trade tensions between the US and China, a large young population) and seen from that perspective, this year’s Budget leaves a lot to be desired.
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Disclaimer: Moneycontrol Research analysts do not hold positions in the companies discussed here