Indian Budget 2006 :: Budget Impact on Sectors

01. Auto: - (Major gainer)

a) Excise duty on small cars have been reduced from 24 per cent to 16 per cent.

b) Emphasized on the development of various roads projects.

The budget has partially heard the demand of the automobilies industries and reduced the excise duty from 24 per cent to 16 per cent on small cars of length not exceeding four meters and engine capacity not exceeding 1,500cc for diesel cars and 1,200cc for petrol cars. As a result of this Maruti Udhyog and Tata Motors would be major gainer. The companies have reduced the prices of small cars like Maruti 800, Zen, Wagon R, Alto, Indica, etc. by about Rs. 12,700 to Rs.25,000 to pass on the excise concession. The industry was expecting the excise duty reduction on commercial vehicles also. the government is focusing on making India as a manufacturing hub and thereby foreseeing opportunities of outsourcing in manufacturing sector like automobiles. The finance minister talked about incentives for the hugs labour intensive manufacturing sectors like automobiles, but not been clarified in this budget. The industry would bolster the road transportation system and would further provide thrust to the demand of commercial vehicles.

02. Banking and Financial Services: - (Will gain from liquidity)

a) To unwind the special securities, through conversion of these non-tradable special securities into tradable, SLR Government of India dated securities.

b) Tax sops under Sec 80C extended to bank deposits over 5 years.

c) To remove the limit of Rs.10,000 in respect of contribution to certain pension funds in section 80CCC, subject to the overall ceiling of Rs.1,00,000.

d) FBT on pension contribution up to Rs. 1 Lac, waived.

e) 2 per cent interest subsidy on farm credit in FY06.

f) To increase farm credit to Rs.1,75,000 crore from current levels o fRs.1,41,500 crore.

g) Short-term credit to farmers at 7 per cent. Banks asked to open separate window for tenant farmers.

h) Food processing will be treated as a priority sector for bank credit.

Banks were facing tight liquidity situation with credit to deposit ratio of 100 per cent. There was a clear-cut asset liability mis-match as short-term deposits were funding the long-term-credit. The unwinding of the special securities will facilitate increased access of the banks to additional resources for lending to the productive sectors. With this, Bank of India and Canara bank are expected to be the gainers, as these banks are having arounds 3 per cent G-Sec portfolio in such securities. The tax sops on 5 years deposits are also expected to ease the liquidity pressure.

As the repayment capacity of food processing sector will be better than the other priority sectors for bank credit, its inclusion in priority sector will be beneficial for banks with a major bias to private sector banks. The 2 per cent interest subsidy will marginally improve the asset quality of farm loans. The increase in the farm credit amount and short-term credit at 7 per cent could have a negative impact on the net interest margins. The FBT waiver is expected to benefit most of the private sector banks.

03. Cement: - (On a growth Path)

a) Direct access of the coal mining would be allowed to the cement producers.

b) Import duty on petroleum coke has been reduced from 10 per cent to 5 per cent.

c) Promotion of road construction projects would indirectly benefit cement companies.

The budget 2006 has opened a new avenue for cement sector by making coal mines accessible to the cement companies. This step world lead to reduction in fuel cost and would also reduce the dependence of cement companies on Coal India for the supply of coal. Reduction in custom duty on petroleum coke would benefit the companies like Shree Cement, Grasim, etc who use petroleum coke as fuel. The budget has emphasized a lot on infrastructure sector. Hence the sector would indirectly be benefited by the increase in the allocation of funds for road projects like accelerated road development programme in North Eastern region. Owing to increase in demand of cement companies like ACC, Ultra Tech, Gujarat Ambuja Cement, etc would be benefited. But the cement industry is one of the highly taxed industries and the budget has not provided any sops for the sector. The industry was expecting the reduction in excise duty of Rs. 400 per tonne to lower levels, but it has not been changed. Also the increase in MAT from 7.5 per cent to 10 per cent would affect the companies like JK Cement who pays MAT.

04. Fertilizers, Chemical and Petrochemicals: - (Kahin Khushi Kahin gam)

a) Customs duty on basic inorganic chemicals such as halogens, sulphur, carbon, hydrogen, has been reduced from 15 per cent to 10 per cent.

b) Customs duty on methanol has been reduced from 15 per cent to 10 per cent.

c) Customs duty on organic chemicals with the exception of chloromethane and trichloroethylene, has been reduced from 10 per cent to 5 per cent.

d) Customs duty on styrene, ethylene dichloride and vinyl chloride monomer has been reduced from 5 per cent to 2 per cent.

e) Customs duty has been reduced from 10 per cent to 7.5 per cent on catalysts.

f) Customs duty has been reduced on Ethyl Vinyl Acetate from 10 per cent to 5 per cent.

g) Coustoms duty has been reduced from 10 per cent to 5 per cent on Polymers of Ethylene.

h) Customs duty on naphtha has been reduced from Nil from 5 per cent.

Fertiliser companies have enjoyed a prebudget run up on account of high expectations. But the fertilizer sector hasn't received any direct benefits from the budget. Even though there were no direct benefits to the sector, indirect aspects such as improved farm credit, thrust on the agro industry and higher irrigated land are the some factors favorable for the fertilizer industry. The reductrion in the soda ash to 10 per cent from 15 per cent will act as a negative factor for many companies such as Gujarat Alkalies, Chemplast Sanmar, GHCL and Tata Chemicals, but the impact on the later two will be minimum, thanks to the recent overseas acquisitions of the companies. Even the reduction in the excise duty on methanol will make a negative impact on domestic producers. The duty on Naphtha for fertiliser companies has been reduced to 5 per cent from 10 per cent; this will make a marginal positive impact on the Deepak Fertilizers, GNFC and GSFC. The raw materials for fertilizers and exempt from the CVD.

In the petrochemical sector, the effective duty protection has reduced, and will have a negative impact on the industry players. The non-integrated player like Chemplast Sanmar, Vinyl Chemicals Thirumalai Chemicals and Tamilnadu petrochemicals are going to be sufferers.

05. FMCG and Food Processing Industry: - ( Reaping Gains)

a) Food processing will be treated as a priority sector for bank credit.

b) NABARD will create a separate window with a corpus of Rs. 1,000 crore for refinancing loans to the sector.

c) Many food items like condensed milk, ice cream, yeast, and pasta, including packaged items to attract nil excise duty from earlier of 16 per cent.

d) Excise on ready to eat packaged good and textures vegetable (soys) protein reduced to 8 per cent from 16 per cent.

e) Concessional rate of 8 per cent of excise duty extended to scented Supari with RSP of Re.1 or less per pouch.

f) Duty on packaging machines from 15 per cent to 5 per cent. Packaging machines serve a wide variety of industries, including food processing.

g) Customs duty on honey increased from 30 per cent to 60 per cent.

h) Customs duty on vanaspati, bakery shortening, inter-esterified, elaidinised fats of edible grade has been increased from 30 per cent to 80 per cent.

i) Customs duty on atlantic salmon reduced from 30 per cent ato 10 per cent.

j) Customs duty on packing paper reduced to 12 per cent from 16 per cent.

k) Increase in excise duty in cigarettes by 5 per cent.

l) Withdrawal of exemption of excise duty on unbranded goods.

m) Excise on processed meat, fish and poultry products to be reduced from 8 per cent to nil.

The sector has got a real boost from the budget, with maximum attention this time. Lack of funds has been one of the main reasons for extremely dismal development of agro based and food processing industry in India so far. With the easy finance made available, the sector is expected to show good growth in the future. The expected increase in the output of food grains will ensure the cheaper raw material for the industry. The reduction in excise duty will help the agro processing companies to improve their bottom line. The reduction in duty of packaging machines and packing paper will also help the food processing industry. Excise on the unbranded material will help the large players to compete with unorganised market. The major companies to be benefited from the developments are Heritage Food, Nestle, Dabur, ITC, HLL, Satnam Overseas, Lakshmi Overseas and Ruchi Soya. ITC would stand out as a major gainer with its presence paper segment and hotel segment also.

06. Infrastructure and Construction: - (Beneficial Budget)

a) NHAI would be restructured and would receive more budgetary support to the extent of Rs.9,945 crore in 2006-07 that is higher than Rs.9,320 crore in 2005-06.

b) Allocation for Bharat Nirman including the North East component has been increased by 54 per cent to Rs. 18,696 crore for 2006-07.

c) Seven sections across the country have been identified for developing 1,000 kms of access controlled expressways on the basis of Design, Build, Finance and Operate model.

d) Rs. 4,618 crore has been approved for a special accelerated road development programme for North Eastern region with Rs. 550 crore to be provided for 2006-07.

e) The allocation for department of shipping has been increased by 37 per cent to Rs. 735 crore for boosting investments in port sector.

f) Rs. 7,121 crore has been allocated under the Accelerated Irrigation Benefit Programme (AIBP) and thus targeted to create irrigation potential to the tune of 6 lakh hectares of land.

g) Increase in provisions for Rajiv Gandhi National Drinking Water Mission from Rs. 3645 crore to Rs. 4680 crore in 2006-07.

The budget has emphasized on the development of infrastructure sector with plenty of programmes declared as discussed above. Almost the entire segment including roads, ports, irrigation, etc has been granted funds. The roads project like golden quadrilateral has been executed at the faster rate of 4.48 project is expected to be completed by June 2006 whereas corridors projects is expected cuted on the basis of public private participations, companies like L&T, Gammon India, IVRCL Infrastructure and Projects, HCC Nagarjuna Constructions, etc would be the gainers. Bharat Nirman plan that has been introduced last year has been successful in roads, rural houses, rural electrification and rural telephone connectivity and is targeted to be over by 2009. The irrigation projects may benefit company like Patel Engineering. At the same time demand for pipes due to water supply and irrigation projects could provide a thrust to the order book of the companies like Finolex Industries, Indian Hume Pipe Company, etc.