Some sectors may see demand suppression

Some sectors may see demand suppression
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First Published: Fri, Nov 13 2009. 12 30 AM IST
Updated: Fri, Dec 04 2009. 01 21 PM IST
Mumbai: The government had announced tax cuts and boosted spending in some sectors to combat the economic slowdown last year. Now, with the economy showing signs of a turnaround and the government needing to curb a growing fiscal deficit, Prime Minister Manmohan Singh has indicated that these measures will be rolled back next fiscal. Mint spoke to Apurva Shah, vice-president and head of research at broking firm Prabhudas Lilladher Pvt. Ltd to gauge the possible impact of the rollback. Edited excerpts:
The government is saying it will roll back the stimulus next fiscal. Is that inevitable?
There are two things. One is, can the economy or specific sectors continue to do well without the stimulus. I am of the opinion that if the excise duty cuts, etc., are completely rolled back, there will be an impact on demand. To that extent, it’s probably not a wise strategy to rollback the stimulus for the next, say, two-three quarters. After that, I am not sure; we’ll have to take a call at that time.
The second thing is that there are other ways to balance the budget and continue with the tax cuts. And continue with them irrespective (of the state of the economy)…in the sense that low taxes are always good for consumption and, therefore, the economy. The problem for the government is that it has to ultimately generate resources to balance the budget. Disinvestment is one of the routes that is being spoken about. Cutting subsidies where they are not deserved is another. So there are ways to deal with this. Then you need not roll back the stimulus at all.
How responsible was the stimulus for the decent company earnings seen in the past two quarters?
It’s probably not that clear what the direct impact is in some sectors. But, for example, if you look at the auto sector, it’s clearly benefited from the stimulus. Yes, there is a benefit for other sectors but it is difficult to pinpoint the cause-benefit relationship.
What will be the immediate impact if the tax cuts are rolled back?
In some sectors, it is very clear that the stimulus had a beneficial effect. In those sectors, there will be suppression of demand. And I would pinpoint particularly the commercial vehicle and auto (passenger vehicle) sectors. The sector is doing all right, and there is a small chance that some of the duty cuts might be rolled back.
Which are the other sectors that will be affected?
That will depend on what the rollback is, whether it will be widespread. For instance...the exports sector is not back on its feet. I’ll be very surprised if any of the incentives to this sector are rolled back, especially when it is dealing with a lot of issues such as an appreciating currency and all that.
Overall, if you see the earnings—a lot of it is due to cost savings, reduction in raw material prices, etc. There are no major upswings as far as revenue growth is concerned. So, while the government is making the right noises about rolling back, I think it’s at least five-six months away.
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First Published: Fri, Nov 13 2009. 12 30 AM IST
More Topics: Rapid Fire | Stimulus | Economy | GDP | Inflation |