Excise duty cut on capital goods not enough to boost demand

Excise duty reduced by two percentage points to 10 per cent to stimulate growth

The government today attempted to stimulate growth in the slow-moving capital goods sector with a two percentage point cut in excise duty to 10 per cent. This move, companies say, shows the government acknowledges that their sector is in serious trouble. However, it will not lead to fresh order inflows, 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 sectors have reduced their expenditure looking at the slowdown in the economy. The sectors are also marred with over-capacity as they had expanded expecting a surge in demand. The reduction in taxes announced today, also has a short shelf life, till June this year. Many do not expect 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, managing director of Thermax, says the government has now taken a serious note of the problems that these sectors are facing. "This gives an indication that the government wants to help us. But this is just one move. Many more have to come, such as a reduction in the interest rates, and increased spending and better capacity utilisation," he said.

The government, in the Budget, said the manufacturing 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 on Monday. The finance minister also announced a proposal to offer rebate or waive all central and state taxes that 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 and understand which items will be exempt from tax," said Shankar Raman.