Zero Duty, Zero Thought

As we worked on this Financials volume of the four-part DQ Top 20 series,

other financials played out in the market. The year 2004 saw two Union Budgets:

a pre-election January mini-Budget from the former NDA, and a 'main' Budget

from the new government in July, which announced 'zero excise duty' for the

PC.

The subsequent fracas highlights several things.

First, complexity. Everyone from MAIT to the vendors was prompt to welcome

the Budget; vendors announced PC price cuts, and 'after reading the fine print',

withdrew them. And worried about a market flooded with Chinese, or Dell, PCs.

Second, good intent (forget the uncharitable view about some hidden agenda

for a single company). So what if the road to hell is paved with good

intentions. Zero duty sounds like a good thing for prices. And the 'WTO zero'

regime is a year away.

Third, a casual approach to domestic IT. Those tech-savvy economists forgot

that a major duty cut helps when the item is actually being imported and not

largely made locally-you need to factor in the large manufacturing base that

has been set up in India by most PC vendors. And they reduced duty on a finished

product and left the inputs at much higher duty.

Fourth, the lower visibility of the domestic IT market-such a mess would

have been unlikely with services exports. There'd be early warnings and

lobbying. Such as before the January Budget clarification that tech services

companies would continue to enjoy Section 10A/10B benefits after M&As.

For those who came in late: The NDA's January mini-Budget reduced Excise

duty on PCs from 16% to 8%, and scrapped the 4% SAD across. The July Budget

dropped Excise on PCs to zero. It did not touch peripherals, even PC parts like

monitors and drives. Only one key vendor, importer Dell, managed real price

cuts. Vendors also realized that the 16% CVD (countervailing duty) was still

around.

At end-July, after representations via MAIT and other channels, came the

level-playing-field additional duty for PC imports (equivalent to that paid on

input parts and peripherals by local PC makers): 7% for a full PC system, 6%

sans monitor. Excise/CVD on inputs continued at 16%; Customs duty was scrapped

on cabinets, key-switches, etc, and on SMPSs (though the latter are made in

India).

And the industry went about its business again, and PC prices went back up to

pre-Budget levels. After a three-week-long glitch at the core of Indian IT-the

PC market-and avoidable confusion about the future of manufacturing.

This goes to show that we have some way to go for the domestic IT market and

its players to become visible and influential in India. The market's recovery

in 2003-04, and that its slice of the total $20 billion Indian IT industry pie

did not shrink (for the first time in ten years) were good steps in that

direction.

Prasanto K Roy