Capital goods margins face new pressure

Finance Minister Jaswant Singh's proposals on Thursday are expected to have an adverse effect on the domestic capital goods industry, with margins now expected to come under pressure.

"The reduction in the peak customs duty from 25 per cent to 20 per cent and the removal of the special additional customs duty is expected to have a negative impact on the margins of domestic capital goods manufacturers such as ABB, BHEL and Crompton Greaves.

The domestic producers already face stiff competition from imports, which have increased around 18 per cent in 2002-03 vis-à-vis 2001-02," CRIS INFAC said in its assessment of the proposals.

However, some industry sources pointed out that there exists huge idle capacity in India that would come into play with the revival of the economy and this would help the capital goods industry.

BR Jaju, CFO, Crompton Greaves, said the reduction in duties was not a major hit but a wake up call to the industry to become competitive.

India imported capital goods of Rs 30,706 crore in 1998-99. The size of these imports can be gauged by the fact that the country's petroleum imports that year were in the region of Rs 26,919 crore.

Following the slowdown in the domestic market, imports of capital goods declined to Rs 21,569 crore in 1999-2000 and during 2000-01 the figure stood at a similar level of Rs 21,576 crore. This, however, rose to Rs 29,090.90 crore in 2002-03, as a result of the economic revival.

"The capital goods industry is bound to feel the impact of duty cuts on project imports and power projects and the abolition of the special additional duty, though it will be beneficial to organisations investing in the capacities," Y M Deosthalee, CFO, Larsen & Toubro said.

Juergen Schubert, managing director of Siemens, was bullish despite the duty cuts. "With no significant change in the excise duty on locally-manufactured capital goods, there will be a marginal negative impact on our local industrial products. Duty reduction on project imports will increase competition for our industrial projects business. However, the overall pie is likely to expand, as new investments are likely to materialise," Schubert said.

K Ramachandran, head of advisory at BNP Paribas, added: "The capital goods industry enjoyed the benefits of higher tariff and a depreciating rupee, which made landed costs of imports dearer. The industry has already been affected to some extent due to the rising rupee. Now, even the customs duty has been reduced. This will make the equipment suppliers bid at lower costs to compete."