The consumer goods industry has breathed a sigh of relief, with the finance minister leaving the excise duty on products unchanged in Budget 2011.
Executives said the prices of consumer products have gone up in recent months because of rising raw material costs, and they could have ill-afforded to pass on to consumers another price hike on account of a higher levy.
Finance minister Pranab Mukherjee said on Monday he was not raising the 10% excise duty on products such as refrigerators, washing machines and air conditioners as the government wanted to see companies improve their margins, which would translate into higher levels of investment. He, however, introduced a 1% levy on 130 previously duty-free items, including ketchup, pencils, instant food and tooth powder.
Prashant Khatore, tax partner at the consulting firm Ernst and Young, said a hike in excise duty on consumer products would have pushed up inflation. “I don’t think the government wanted to open another front in terms of inflation.”
The government had slashed excise duty on consumer products from 14% to 12% to 10% over the past three years to help the industry cope with the 2008-09 economic slowdown. But following a recovery over the past year, companies were afraid the finance minister would roll back the cut.
“The industry expected a roll-back of stimulus packages and the excise duty rate to go up by 2 percentage points, but in the absence of these changes the industry will continue to grow at the same pace,” said Y.V. Verma, chief operating officer of LG Electronics India Pvt. Ltd.
LG, he said, has raised prices of digital and electronic products, home appliances and air conditioners by 7-8% over the past eight months.
Eric Braganza, president of Haier India Pvt. Ltd, said rising costs of raw materials such as copper, steel and plastics have largely caused the rise in prices. Haier would raise prices again in March, he added.
Ravinder Zutshi, deputy managing director, Samsung India Electronics Pvt. Ltd, said the budget could prove to be a catalyst for economic growth. “I would view this budget as a growth-oriented budget that should boost the fundamentals of the economy and boost consumption,” he said.
Braganza of Haier India said he expects the consumer products industry to continue growing at 15%.
But some executives said the finance minister could have provided incentives such as a further reduction of excise duty on products with low penetration, such as refrigerators and washing machines, and customs exemptions on imported items such as liquid crystal display (LCD) panels to accelerate the industry’s growth.
“The Indian consumer durables industry is 15-20 years behind China and has a reach of 15%, whereas 85% of population still remains untouched by these products,” said Verma of LG Electronics. “This budget has not attempted any incentive for the consumer durables sector to grow faster than its current pace.”
YV Verma, Chief operating officer, LG Electronics India
•The Union Budget this year is lackluster. It will have little or no effect on the consumer durables manufacturers.
• The corporate tax reduction from 7.5% to 5% is very low and will have no real impact on companies like ours.
• The prices of home appliances room air conditioners will not change on account of Budget provisions.
• The Indian consumer durables industry is 15-20 years behind that of China and has a reach of 15% whereas 85% of the population still remains untouched by these products. The Budget has no incentive for the consumer durables sector to grow faster.
Adi Godrej,Chairman, Godrej group
•In general, it is a very good Budget— growth-oriented and balanced. One of the most important things is the signal given for introduction of GST early.
•On the consumer front, measures on affordable housing, agriculture, increase in the exemption of income tax will help middle-class consumers.