Budget Bargain

Finance Minister P Chidambaram's budget sought to put into action what the

Congress-led coalition government has been promising all along towards making

India a global economic power.

While PC's budget weaves grandiose dreams of making India an IT hub, when

it comes to action, there's not much happening on the ground.

The budget holds a lot of promise for the telecom and hardware industries in

the country. But a reality check on both these sectors gives a completely

different picture.

PC manufacturers have no reason to rejoice at the 8% duty exemption they got

from the budget because the 16% countervailing duty (CVD) on components still

exists. Accessories like monitor, keyboard, mouse, modem, UPS etc will not be

covered under this exemption. The peripherals comprising monitor, keyboard and

mouse constitute around 25-30% of a PC's price depending on the configuration.

Therefore, importing PCs from MNCs would become cheaper than buying from

Indian companies like Wipro, HCL and Zenith because individual components will

cost more than the ones in fully imported machines. The government is also

expected to re-instate the excise duty of 8% on computers to bring back the

parity between fully imported computers and locally integrated ones.

PC majors like Zenith who announced price cuts of 10% revised it to 2%

because of the lack of clarification from the government on this issue. Dell and

HP have reduced their PC prices by up to 6%, while the prices of laptops remain

unchanged. These PC manufacturers might also roll back price cuts if the

government fails to clear this confusion.

According to PCS Industries Director BN Agarwal, the reduction in PC price

may be negligible because the excise reduction gets adjusted against the

unclaimed MODVAT of the components that go into making the finished product. No

wonder then that the domestic hardware industry, after the initial euphoria, is

protesting against the unfair duty structure, demanding a cut in CVD to bring it

in line with the cut in excise duty.

The government has sought to give a major thrust to the telecom industry and

has showered a series of incentives on this sector by increasing the FDI limit

from the present 49% to 74%. This increase in FDI limits is a huge positive sign

for telecom companies like Hutch, Idea and Bharti who are seeking foreign

investment. This can also lead to increased cross border M&A activity in the

telecom sector. Looking beyond the numbers, the ground reality suggests that FDI

might not happen as smoothly as suggested, what with the Left and other allies

opposing it. The government has also failed to motivate the local telecom

manufacturing industry.

Experts suggest that the government should have streamlined the obstacles in

the path of India becoming a manufacturing hub for telecom equipment. Though the

reduction in custom duty on components has given relief to the telecom and PC

equipment manufacturing industry, policy-makers haven't been seizing

opportunities for growth by the forelock.

The terminal date for the benefits that the telecom sector gets under section

80-IA for services commenced before March 31, 2004 and has been extended till

March 31, 2005. Also the 0% customs duty announced by the government on MSCs

(Mobile switching centers) will benefit service providers like Tata, Reliance

and BSNL. The custom exemption on Optic fibre cable raw material will also

benefit telecom companies like BSNL, MTNL, Tata and Reliance Infocomm. However,

in view of the government's all-out thrust to the power, road and ports

sectors, coupled with the low viability of telecom projects, only a portion of

the funds is expected to trickle down to the telecom sector.

"The rise in FDI cap will encourage and ease foreign investment

in this high growth sector at this stage where large funds are required and

excise cuts in specified capital goods for manufacture of mobile phones is

likely to send out positive signals about making India an investment

destination. But increase in service tax will increase phone bills and put

further burden on consumers," explained Kobita Desai, Gartner's principal

analyst for telecom.

The Budget has also left the IT and BPO industry untouched with no radical

policies to push the industry growth further. The finance minister also decided

not to touch the tax exemption component on software exports profits that the

previous government gave to this sector. The IT sector will continue to receive

the benefits it was entitled to under Section 10A/10B, which is definitely a

welcome move.

The government has also decided to establish an independent investment

commission to woo domestic and foreign investment in the country. The government

will proactively invite investment in the country via the Investment Commission.

But for the time being, the FIPB will continue to take care of all foreign

investments in the country. Now that the finance minister has opened the doors

for direct investments, the funds may flow in automatically, provided the

government manages to stop its alliance partners from crying foul about the

issue.

As expected, the biotech sector got a boost with the finance minister

allocating a Rs 1000-crore package towards research and development in the area

of agriculture and biotechnology. The tax concession awarded by the government

to this sector will have a positive impact on companies like Biocon and

Wockhardt. The industry has also been given tax incentives under section 801B.

Sanjay Jain, country MD, Accenture said, "The budget takes the reform

process to the next leg-from growth, it moves towards growth with equity.

However, in the immediate term, there are several measures that might pinch such

as the additional education cess of 2%, the increase in service tax, the

increase in excise duty on steel, etc."

In sum, the government's move to boost the telecom and hardware sectors,

while maintaining status quo on policies for the IT and BPO sectors, could

become counter-productive due to its lack of clarity on certain issues.

Rahul Gupta, in Mumbai CyberMedia News