Budgetary effects on oil and telecom

SMARTSHARE

Let's examine Budgetary provisions in two unrelated sectors: first, oil & gas. Customs duties on crude imports have been reduced from 10 per cent to 5 per cent.

Customs duties on other petro imports have also been reduced. Excise on petrol has been reduced to 8 per cent plus Rs 5 per litre from 23 per cent plus Rs 7.5 per litre, but the additional duty on motor spirit and high-speed diesel has been raised from Rs 1.5/litre to Rs 2/litre.

A 10 per cent service tax has been introduced on pipeline gas transport.

Customs duties on downstream petrochemical products have been reduced from 20 per cent to 15 per cent and customs duties on benzene, ethylene and naptha, etc, have been reduced from 10 per cent to 5 per cent.

The cess for the road-building programme under NHDP has been raised by 50 paise a litre.

This means lower protection for primary producers such as ONGC and thus, refiners who depend on imports must gain.

The additional specific excise duty hike from Rs 1.5/litre to Rs 2/litre will balance out the positive impact of import duty cuts. The margins of petrochemical producers will be hit since customs duties on naptha and polymers have been cut.

Now let's look at the telecom industry. There's a customs duty exemption for items covered under the international Information Technology Agreement (ITA).

Customs duty on optic fibre cable is reduced from 20 per cent to 10 per cent. Cellular subscribers need no longer file mandatory income-tax returns.

Customs duty exemptions on network equipment continues, and there are exemptions on imports of components used in manufacturing mobile handsets and network hardware. A countervailing duty (CVD) of 4 per cent is imposed on items listed under the ITA.

Telecom equipment manufacturers are obvious gainers "" capital goods carry zero import duty. Cable manufacturers gain substantially. The removal of mandatory IT filings may boost cellphone subscriptions.

Mobile telephony will definitely get a push as handset prices drop despite the 4 per cent CVD. It will be cheaper to rollout new networks but the depreciation cut could mean more tax payable.

Examine the company that is a player across both segments "" Reliance Industries (RIL). RIL is involved in the entire energy and petrochemical chain: it wants to enter gas transportation as well as retail marketing of petro products.

In telecom, RIL is the holding entity for Reliance Infocomm, which is a major CDMA player with over 10 million subscribers.

RIL valuations have been obscured by the fraternal power struggle. Infocomm has also faced fines and penalties for allegedly rerouting ISD calls as local to avoid access deficit charges. It has also been the subject of much media speculation about mysterious share-transactions.

Let's assume that those problems are ultimately, temporary. Does RIL gain in its "core" business and does the telecom business gain? It seems that way though it's an insanely complex exercise to attempt to figure this.

In O&G, RIL will remain primarily an importer in 2005-06 - so, it should gain. In telecom, the planned network rollouts will be cheaper and the cheaper handsets should push subscriber growth.