New Delhi: In a bid to make everything from bikes to breakfast cereals more affordable amid high interest rates and a slowing economy, the government announced a cut in excise duties on a wide range of goods to spur consumption.
The Indian economy, which has grown at more than 8% for 12 straight quarters, is starting to slow. Inflation, or the rising cost of goods, is at the same time denting the ability of millions of poor and middle-class Indians to buy goods that keep economic activity robust.
Immediate response: A Hyundai showroom in New Delhi. The company cut the prices of its small cars by as much as Rs19,000. Small cars, which account for about 75% of the total number of cars sold in the country every year, will get cheaper. (Photo: Madhu Kapparath/ Mint)
To counter slowing consumption, finance minister P. Chidambaram kicked off his excise cuts with a reduction on the general central value added tax, by 2 percentage points to 14% across all goods.
But the government really pulled out the stops in bailing out automobile makers, who have been wilting under declining sales by slashing excise taxes by as much as 10 percentage points in certain categories of vehicles. Other products such as pharmaceuticals goods were made cheaper by 8 percentage points and wireless data cards, packaging paper, coconut water and water purification devices also got less expensive. Mobile phones, however, became marginally more expensive.
Chidambaram reduced taxes on small cars by 4 percentage points, the second time in three years, and of two-wheeler, three-wheelers and buses by the same percentage points. In an economy that’s slowing down, it’s hard for the finance minister to ignore the sector because it contributes significantly to the gross domestic product and is the source of 17% of indirect taxes collected in India.
Typically, the government likes to keep the auto industry robust because it also affects transportation of goods in the economy and is seen as a lead indicator of economic activity. In response to the cut in excise duty, Hyundai Motor India Ltd cut the prices of its small cars by as much as Rs19,000; Maruti Suzuki India Ltd, by Rs18,000; while others such as Tata Motors Ltd said they will do so shortly.
“Two big issues remain: credit not being available and the high rate of interest,” said Pawan Munjal, managing director, Hero Honda Motors Ltd, the nation’s largest motorcycle maker. “The debt waiver (to farmers) could help as they will have more money in their hands,” to buy motorcycles. Chidambaram, in the same Budget, waived Rs60,000 crore of farm loans.
Automobile sales in India slumped by 1.3% in 2007 from a year ago as five-year-high lending rates forced customers to avoid or defer purchases while banks stayed away from financing two-wheeler purchases due to higher delinquency rates. About 45% of motorcycles and 70% of passenger car purchases in India are funded by banks or financiers, though two wheeler sales have been the most hit.
Growth push: The two-wheeler and three wheeler segments got a leg-up with a 4 percentage point cut in taxes. (Photo: Madhu Kapparath/ Mint)
“The outlook for the (automobile) sector is going to be positive with the excise cut and more disposable income for people by way of the cut in personal income tax,” said K.K. Mital, a fund manager with Globe Capital Markets Ltd. “But we’ll have to wait and watch whether this will result in incremental demand since the main issue of interest rates and credit availability have not been addressed.”
On three previous occasions when the government cut excise duty of passenger vehicles, sales rose sharply, by more than 30% on at least two occasions after such cuts. Banks aren’t sure that they will lend more to buy vehicles, though.
“A cut in duty does not necessarily mean an increase in loan disbursements. Interest rates will remain firm and I don’t expect any reduction in rates,” said Sumit Bali, CEO, Kotak Mahindra Prime Ltd, the vehicle financing arm of Kotak Mahindra Bank. “Nonetheless, the duty cuts on small cars will help the industry grow around 10%, excluding the Tata Nano.”
Tata Nano, the world’s cheapest car, will be sold later this year at Rs1 lakh, and is expected to create a new market for low-cost cars.
The pharma sector was the other big beneficiary. In a boost to the pharmaceutical sector that contributes to about 1. 6% of gross domestic product, Chidambaram halved excise duty on drugs from 16%, caving into demands from the sector.
The new 8% duty structure will help drug makers save significantly on cost, which could benefit patients if the savings are passed on, industry executives and analysts said. Exemption of excise duty on anti-HIV/AIDS drugs is expected to help increase access by poor patients to such medicines, which are often beyond the means of several of the afflicted. In India, AIDS affects a largely poor, migrant population. For example, of the 2.5-3 million long-haul truckers that travel India’s highways, approximately one in 10 is infected with HIV, according to the World Bank.
For instance, Atazanavir, which is manufactured by Emcure Pharma Ltd in a tie-up with US’ Bristol Meyer Squibb Inc., currently costs Rs 4000 for month’s treatment—the excise exemption should help reduce the price to Rs 3,360.
“Though it will help increase the patient access to a certain extent, it may not make much of an impact because anti-AIDS drugs are always given in combination with other drugs,” said Amar Lulla, managing director of Cipla Ltd, which manufactures about 12 different drugs. Indian generics are already exempted from excise duty. But, a price cut in Atazanavir will add to the patient access at least to that extent, added Emcure’s director (operations) A.K. Khanna.
While the industry expects its inputs costs to come down from the various tax reduction measures, unchanged rules on setting off in-house research and development costs against revenues would impact investment, Lupin Ltd’s managing director Kamal Sharma said in a statement.
Ahead of the Budget, lobbies representing drug makers had asked for increasing to 200% an incentive of setting off 150% of in-house R&D expenses on research expenses. They also wanted R&D expenses to include investments in land, building, clinical trials and regulatory approvals overseas. India’s drug makers report revenues of some Rs65,000 crore, according to fiscal 2007 data.
Ammar Master contributed to this story.