Global Outlook

Stable Economy is one of the long-term benefits of Indian Union Budget 2010-11

Contributed by Nirmal Bang

By Nirmal Bang

With the recent fuel price hike and Budget 2010-11, the UPA government has demonstrated a will to reduce fiscal deficit to 5% levels.

The current deficit, at nearly 7% of GDP, is a testament to two broad factors: increased government spending during UPA’s first tenure and measures to counter effects of the September ’08 meltdown.

The latter in the form of a robust stimulus package announced in January ’09 helped cope with a looming downturn. Inevitably, a rollback was the moot point prior  to Union Budget 2010-11.

The stimulus package - comprising cuts in excise duty and CENVAT rates - was effective in calendar year 2009 to enable an approximate 7% growth in GDP. The manufacturing sector was a significant beneficiary of this.

According to Society of Indian Automotive Manufacturers (SIAM), total sales in the domestic market stood at 11 lakh units in January ’10 as against 7.7 lakh units in the same period of 2009, a jump of over 40%. So, growth was visible as consumer interest rose.

Similarly, reduced lending rates helped the construction industry to stay afloat. Several low-cost housing schemes were effective in the period, as consumers were unafraid to invest in properties.

So, even as a rollback threatened such growth patterns, Budget 2011 outlined the need for heavy-industry growth to be more real. The question is whether the Indian economy is prepared enough for a hard grind. The answer is yes.

The Economic Survey, released a day prior to Budget 2011, has 2007 as its latest period. While it is hard to gauge the impact of the counter-cyclical measures in preserving employment, it does stress on the importance of the manufacturing sector.

The heavy industry employs nearly 48 lakh persons - more than half of the private sector. So the stakes are huge in terms of the rollback.

The rollback comprises rate reduction in central excise duties and an enhanced standard rate on all non-petroleum products from 8% to 10%. The rates of duty applicable to portland cement and cement clinker have also gone up.

The excise duty component on large cars, multi-utility vehicles and sports-utility vehicles, which was reduced as part of the first stimulus package has been increased by two percentage points to 22%.

PRESENT TENSE

The immediate concern for manufacturing and construction will be on account of the rise in commodity prices. With the stimulus package it was possible to absorb the effect of input prices without upsetting growth. For the car market in India (a fair indicator of consumer demand), for instance, February was the tenth straight month of growth. It clocked 1.46 lakh units in February ’10 — the highest ever recorded in a single month.

In a sense, the market did anticipate the rollback of excise duties and other taxes as much as attractive loan rates. This is possibly why sales peaked prior to the Union Budget.

In January ’10 sales of market leader Maruti Suzuki increased 18.6% to 70,029 units from 59,060 units in the corresponding period last year. Hyundai Motor India registered over 40% growth as did Tata Motors in the same period.

In the motorcycle segment, Bajaj Auto sales rose almost three times to 1.8 lakh units in January. Consumer sentiment has been well and truly alive even as buyers worldwide would be more circumspect.

This demand revival is important as it offsets a negative growth in the agriculture sector. It will have myriad implications. Coupled with fuel price hike, commodity prices will continue to go up.

For manufacturing OEMs, costs will rise and with reduced tax or duty-related benefits, their cost structures have to be more streamlined and resilient than ever.

For heavy industry, there will also be challenges in demand in the farm equipment and commercial vehicles sector as demand is likely to not remain at high levels.

STABLE ENVIRONMENT

Given such pressures on consumers and producers alike, one of the long-term benefits of Budget 2010-11 has been the stability it has brought to the economy. In February ’09, following the worst quarter in many years for manufacturing and export sectors, there were several instances of reverse migration.

As demand threatened to fall, the blue-collar workforce - consisting also of contracted labourers from other states - moved away from industrial clusters.

In the Interim Budget speech in 2009, Pranab Mukherjee defined the scope of the problem. “During 2008-09, there has been a dip in the growth rate of GDP from an average of over 9% in the previous three fiscal years to 6.7%. It has affected the pace of job creation in certain sectors of the economy and investment sentiments of the business community,” he said. As demand returned during the year, so did stability. And much of this can be attributed to government intervention in stimulating demand.

Now, the government intervention seeks to acquaint producers with a less-hostile environment. And OEMs are more prepared for tough times.

The second heartening aspect of the stimulus package has been the creation of demand pockets. In the automotive industry, which is a good indicator of consumption patterns, the small car segment expanded beyond the Rs 3 lakh price-point symbolized for many years by Maruti Suzuki. This happened in a year when demand itself was perceived to be threatened.

In effect, this has translated from auto sales at the lowest point (Nano at Rs 1 lakh to Rs 1.86 lakh) to compact cars like Volkswagen Polo (sub Rs 6 lakh). Overseas automakers, in particular, have made the most of the revival period: General Motors’ Chevrolet Beat and Ford Figo (both at Rs 4 lakh levels) now have more brands in a segment where players like Hyundai and Maruti Suzuki have been dominant since long.

Duty and tax cuts have been useful in bringing parity in the mass car market — the closest ever thing to a levelplaying field.

GM India registered a record growth of 101% in sales in December ’09 compared to the corresponding period in the previous year. It sold 8,258 units in December ’09 as against 4,041 units in December last year, making it the highest-ever monthly sales figure achieved by GM India since its inception. About 36% of this came from Chevrolet Spark, the small car in its stable.

In the motorcycle segment, the likes of Bajaj Auto have decided to transfer some impact of the rollback and input prices to the consumer. A stable market lends itself to this change brought about by the Union Budget.

As much as the Budget has served up a reality check for producers and industry in general, it has kept a close eye on the consumer, whose avatar as a taxpayer will be particularly critical in coping with the deficit.

To sustain demand levels, the working class (which is a significant portion of the consumer base) needs incentives to contribute to economic growth. This will also be an important source of revenue for the government.

To meet incentive objectives, taxpayers can now invest in infrastructure bonds to the tune of Rs 20,000 and increase their deduction limit from Rs 1 lakh to Rs 1.2 lakh. There is also a revised tax slab, which widens the base for the government.

In the coming year, the Centre will be hard at work to devise a magic potion for the agriculture sector. But in the meantime, much of the growth will have to be from manufacturing as said by the Finance Minister in his Budget speech. India Inc will more than survive without the stimulus package that was doled out at the right time.