Budgets have traditionally moved markets; the Sensex fell 5.8% in 2009 on budget day, 1.4% the year before and 4% in 2007. But, this year’s budget has the potential to shake the Sensex far more than usual.
If Finance Minister Pranab Mukherjee does decide, as is widely speculated, to raise excise duty rates from the current eight per cent to 10 per cent, a nervous market could react violently. A quick calculation by the Business Standard Research Bureau showed this would increase the tax payout for India Inc by as much as Rs 21,000 crore. If India Inc can’t pass on the hike to customers, its bottom line could take a huge hit, given that this accounted for 28 per cent of net profits of a sample of 1,278 manufacturing companies (excluding oil and gas) for 2008-09. For individual sectors like automobiles, the potential hit could be much higher.
In the automobile sector, for instance, in 2008-09, the average incidence of excise to gross sales was around 10.2 per cent. Compared to the quarter-ended March 2008, this fell by around 40 per cent in the quarter ended December 2009. Given that excise duty paid by the sector to its total profits was over 90 per cent in the December 2009 quarter, the ability of industry to pass on any excise duty rise is critical. In steel, where the 2008-09 excise-to-turnover ratio was around 8.5 per cent, the March 2008 to December 2009 fall in this ratio was around 45 per cent. And, the ratio of excise duties to the sector’s profits is 35 per cent.
Certainly, all broad indicators show the economy is on a revival path. Advance estimates for the year indicate Gross Domestic Product (GDP) could grow at 7.2 per cent, as compared to 6.4 per cent in 2008-09. Quarterly growth shows a steady rise (see graphic) and industrial production rose to a 29-year high in December 2009. In December, as many as 14 of the total of 17 industry groups comprising the Index of Industrial Production showed positive growth – food products, leather and ‘other manufacturing’ were the only ones not to do so.
The issue, however, is how critical the government stimulus has been for this growth recovery. While the monetary stimulus (reverse repo was cut 275 basis points, repo by 425 bps, CRR by 400 bps and SLR by 100 bps before the Reserve Bank of India began unwinding the stimulus a couple of weeks earlier) helped keep interest rates low, according to RBI Deputy Governor Subir Gokarn, the stimulus in 2008-09 added around 2.7 per cent in GDP. Use the multiplier associated with each item of the stimulus – that for the Pay Commission will be different from that for automobile excise duty cuts – and the GDP impact could be significant. In 2009-10, according to Gokarn, the stimulus was reduced to 1.8 per cent of GDP. The impact of the excise duty cuts in sectors like automobiles can be seen in the sharp spurt in sales growth.
Another way to look at the impact is to compare what’s happening to export and industrial growth. In textile products, for instance, while export growth plummeted in April-August 2009, industrial production rose 2.2 times. Obviously, domestic demand, probably fuelled by the stimulus, came to the rescue. Non-metallic mineral products, similarly, saw export growth fall from 19.4 per cent in April-August 2008-09 to minus 34.5 per cent in Apr-Aug 2009-10, industrial growth jumped from 0.7 to 7.8 per cent in the same period. There are several such groups.
The good news, of course, is that even if the minister raises excise and perhaps service tax rates, he will most certainly raise spending on social sector programmes like the National Rural Employment Guarantee Scheme. Also, there will be at least one or two more instalments of the pay commission arrears from state governments and this will boost consumer demand. According to the Crisil Centre for Economic Research, the Rs 40,000 crore spent on NREGA in 2009-10 alone added around 50 basis points to GDP growth this year, or around 7 per cent. In addition, industries related to food and non-food items benefited in real terms to the tune of Rs 7,129 crore and Rs 6,510 crore, respectively, in 2008-09 – the numbers, for the first half of 2009-10, were Rs 5,442 crore and Rs 4,970 crore, respectively.
