WHO’S SMILING AND WHO’S NOT

The Interim Budget does not have any major announcements that affect the industry, except for some measures such as extension of interest subsidy (on pre- and postshipment credit) to boost exports in sectors such as textiles, leather and gems & jewellery. A slew of measures were announced as part of the stimulus packages in early December 2008 and January 2009. While some of these measures are positive for the respective sectors, the excise duty reduction (by 4%) across sectors has been mostly passed on to consumers. In the following sections, we assess the impact of all these measures, including announcements in the Interim Budget, if any
    Automobiles
The net impact of various policy changes is marginally positive across auto segments. However, lower economic growth prospects, weak consumer sentiment, high interest rates and stringent disbursement norms will continue to impact automobile demand. Due to the 4% reduction in excise duty announced in December 2008, and lower fuel prices and car finance rates, (partly offset by the increase in prices by some car manufacturers in January 2009), the cost of ownership for a typical compact car has declined by 3%.
    Banking Banks: Several liquidity enhancing measures have been announced since October 2008. However, the relaxation in nonperforming loan norms in real estate and corporate sectors may lead to weakening of asset quality and exert greater stress on the sector. The monetary easing measures combined with fiscal stimulus would be effective provided there is revival in both business and consumer confidence. With economic recovery expected to be protracted, these measures would have limited impact on the banking sector.
HFCs & NBFCs: The fiscal measures announced focus on facilitating credit availability, but implementation and revival in business and consumer confidence remains the key for these measures to be effective. Like banks, the fiscal stimulus would have a limited impact on HFCs and NBFCs.
    Cement
The government had lowered the excise duty on packaged and bulk cement by 4% in the fiscal stimulus package announced on December 7, 2008. Cement producers passed on the cutback in duties by reducing prices. Consequently, the impact of lowering of excise duty is neutral for the sector. The imposition of customs duty on imported cement, which was announced in the fiscal stimulus package announced on January 2, 2009, will not have a major impact as India's cement imports are negligible.
    Construction
The allocation of Rs11,840 crore under JNNURM will ensure greater focus on urban infrastructure development. The amount sanctioned is higher than Rs 6870 crore sanctioned in the previous budget. However, the crucial factor is the actual outlay. With IIFCL being authorised to raise Rs 10,000 crore via tax-free bonds, delays in order execution of construction companies on account of developers not achieving financial closure will reduce.
    Consumer durables/Household appliances
Impact of the reduction in the excise duties on consumer durables from 16% to 12% announced in the government's fiscal stimulus package in December 2008 is neutral, as a significant portion of the production of major consumer durable manufacturers come from excise free zones. Other producers have partly passed on the excise duty cuts.
    Housing
The fiscal stimulus package in early December 2008 classified loans under Rs 20 lakh as priority sector lending. The new classification of loans is aimed at encouraging banks to lend. However, due to the deterioration in the job market scenario owing to the prevailing slowdown, especially in the IT/ITeS and financial services sectors, banks may continue to hesitate to increase their advances. However, the Rs 4000 crore re-finance facility for NHB will ensure availability of loans for the sector. The reduction in home loans rates by PSU banks to 8.5% for loans up to Rs 5 lakh (10% margin) and 9.25% for loans in the range of Rs 5-20 lakh (15% margin) has prompted large private players such as HDFC and ICICI Bank to cut rates by 50-75bps.
    Paper
The government reduced excise duty on paper from 8% to 4% for most varieties of paper. The overall impact is neutral as producers have passed on the duty cuts. The government also exempted newsprint, uncoated paper and light weight coated paper used for printing newspapers / magazines from customs duty on February 11, 2009. The impact of this is also neutral as domestic newsprint prices are lower than the landed costs even post the duty cuts.
    Roads and Highways
IIFCL will refinance 60% of commercial bank loans for PPP projects with an investment of Rs 1,00000 crore over the next 18 months. This will improve the availability of credit for infrastructure projects such as BOT road projects undertaken by private players. Despite a budgetary allocation of Rs 9900 crore for national highways and Rs 4000 crore towards the development of rural roads, the implementation of projects may be slow due to policy ambiguities and land acquisition delays.
    Steel
Steel players will benefit marginally from government measures such as bringing HR coils under the restricted category and levy of import duty on flat products. The reduction in excise duty will not have any impact, except in cases where the output is sold directly to the consumer, as most steel sales are MODVAT'able. The withdrawal of export duty on iron ore fines and export duty reduction on iron ore lumps and pellets will encourage iron ore exports.
    Textiles
The extension of the interest subvention on pre-shipment and post-shipment credit till September 30, 2009, will benefit exporters through lower interest costs on working capital loans. The impact of the acrossthe-board excise duty cut of 4% is negligible on the cotton textiles chain, as CENVAT is optional; the reduction in excise duty on polyester and other man-made fibres to 4% has been passed on. The increase in the duty drawback rates on fabrics and the extension of the DEPB scheme till December 31, 2009 will benefit exporters. Powered by: CRISIL, India's leading Ratings, Research, Risk and Policy Advisory company. www.crisil.com