'Govt acknowledges cap goods sector in trouble'

However, the 2% reduction in excise duty won't lead to fresh order inflows

The government today attempted to stimulate growth in the slow-moving capital goods sector with a 2% reduction in excise duty  to 10%. This move, companies say, shows the government acknowledges that their sector is in serious trouble. However, it will not lead to fresh order inflows, atleast not immediately. 

 

“The excise duty cut will make capital goods more affordable but whether it will boost demand is a real question. This measure is not going to change consumption  patterns or demand and I do not expect a significant turnaround in the sector. Given the limited shelf life of the measure it may not induce orders,” said R Shankar Raman, chief financial officer of Larsen & Toubro.

 

Capital goods companies have been battling lack of orders as the infrastructure and metals sector have reduced their expenditure, owing to slowdown in the economy. The sector is also marred with over-capacity as they had expanded as they had expected a huge surge in demand. The reduction in taxes announced today, also has a short shelf life, till June this year. Many do not expect any wonders to happen in that period. 

 

“The targeted reduction in excise  to support the languishing  sectors is welcome, although the extent of revival may be inhibited by the short time frame and  the  sluggish economic activity as well as weak sentiments,” said Naresh Takkar, managing director of credit rating agency, ICRA

 

M S Unnikrishnan, the managing director of Thermax says that the government has now taken a serious note of the problems that the sector is facing. “This given an indication that the government wants to  help us. But this is just one move. Many more have to come like reduction in interest rates, and increased spending and better capacity utilisation,” he said. 

 

The government, in the Budget, however said that the sector needs immediate help. “The current economic situation demands some interventions that cannot wait for the regular Budget. The manufacturing sector needs an immediate boost,” said P Chidambaram, the Union Finance Minister, in his speech. 

 

The Finance Minister also announced a proposal to rebate or waive all central and state taxes which are levied on exported items and proposed a minimum tariff protection so that there is an incentive to manufacture goods in India rather than import them.

 

“This will encourage exports, improve  foreign exchange earning and reduce current account deficit. But we need to examine the fine print needs and understand which items will be exempt from tax,” said Shankar Raman.