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.

P Chidambaram

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

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

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