Excise duty changes: Little impact on industry

The reduction of excise duty in Interim Budget 2014 for automobiles, capital goods and mobiles is unlikely to see investors flocking to the stock market

Nothing much was expected from Finance Minister P Chidambaram’s Interim Budget 2014 and nothing much was given. However, there were some ssmall positive surprises but these are unlikely to impress investors. 

Automobiles
The big surprise from the Interim Budget 2014 came for the automobile sector which has been growing at its lowest level for the decade. The finance minister announced a cut in excise duty from 12 per cent to 8 per cent for small cars, motorcycles, scooters and commercial vehicles. Excise duty on SUVs, which was hiked in the previous Budget, was brought down from 30 per cent to 24 per cent and excise duties on large and mid-segment cars were reduced from 27/24 per cent to 24/20 per cent.

Markets, however, do not seem to be too excited with the development as auto sector stocks are up on an average by only around 1 per cent. This could be because some of the companies have announced that they will immediately pass on the excise cut, thus there would be no immediate benefit on the company's profits. Further, since the cut is presently only applicable for a period of three months, the market does not believe there would be any improvement on the sales front on account of price cut.

 
Capital Goods
There is also a small change in excise duty on goods falling under Chapter 84 and 85 of the Central Excise Act. Goods that fall under this act are nuclear reactors, boilers, mechanical and electrical machineries. All of these goods are directly related to reforms and growth in the power sector. No such growth is presently visible, which is why capital goods stocks like BHEL have reacted negatively despite the announcement.

 
Mobile Phones
To encourage domestic production of mobile handsets in the country, Chidambaram restructured excise duty to 6 per cent with a one per cent credit without Cenvat credit of 1 per cent. But this seems to be an eyewash. Excise duty on mobiles had been increased to 6 per cent for mobile handset above Rs 2,000. So the only benefit is the one per cent credit without Cenvat credit, which can hardly be termed as a benefit.

None of the listed players are in this segment, even those companies that do assemble the units in the country largely get most of the electronics imported. Companies that manufacture these products are generally competing with cheap imports from China. It is a hike in import duty of such mobiles which would have been more beneficial for the sector.

 
Sugar
The finance minister claimed that the sugar sector has been fully decontrolled, but some controls continue for the sector. Only a week back, the government announced a sugar subsidy of Rs 3,333 per tonne for exports of sugar up to 4 million tonne. The government had also announced interest free loans to mills to pay sugarcane farmers. Those clauses of the Rangarajan Committee report (which had recommended complete decontrol) have only been implemented that support the mills. None of the clauses like those recommending profit sharing with farmers have been implemented.
 
With no special incentives for growth being announced there are few takeaways from this Vote on Account. The market would have to wait for the final 20130-14 Budget after the new government comes to power for direction.