Booster Dose #3: Govt lowers excise rates, big deal?

This is the third instalment of the weekend stimulus package. The government has lowered the cenvat rate by 4% across all rate slabs: 14%, 12% and 8%. The ad valorem duty on cars has been reduced to 20% from 24%, but it is still higher compared to the highest cenvat rate.

Lower duties translate to lower costs for companies, giving them some breathing space. But cenvat reduction will not benefit certain companies. All companies who are availing excise exemption by setting up plants in places like Himachal Pradesh and Uttaranchal. Since they anyway pay nil excise, the exemption is of no use. Then there are companies who have a huge cenvat credit including service tax credit. In effect, they pay cenvat only on the value addition. If cenvat declines across the board, then input tax credit too will decline and the net impact may remain the same. Cement attracts an ad valorem duty or a specific duty, the government has reduce both ad valorem and specific duty by the same proportion. Excise on cotton textiles has come down to nil per cent. No change for petroleum products, tobacco and specific duty products.

On the customs duty side, naphtha imported for power generation can be imported duty free. Export duty on iron ore fines has been withdrawn, it is 5% (from 10%) on iron ore lumps. All these changes are effective today.

Additional measures:
a. The government will pump in Rs 20,000 crore in non-plan expenditure, which is small looking at the size of the Indian economy.
b. Refund of terminal excise duty and CST for exporters, will release funds to exporters.
c. Textile Upgradation Fund to get additional Rs 1,400 crore
d. The govt authorizes the India Infrastructure Finance Company Ltd to raise Rs 10,000 crore through tax free bonds. This money is to be used to refinance long term bank lending to infrastructure projects. Again Rs 10,000 crore seems peanuts but the govt says its initiatives will support a PPP programme of Rs 100,000 crore. The problem lies in these projects raising the remaining funds at viable interest rates.

Now, if either people start spending like earlier or the government spends heavily, can one kickstart demand. Now, getting individuals, who are worried about jobs and their future, to start spending is difficult. So, on government falls the onus of concerted spending. On that record, the government’s intentions are good but its war chest looks quite meager. The Chinese government had announced a $600bn or Rs 30 lakh crore spending package. Now, how much China actually spends is a different matter. India’s economy is not as big as China’s, but it can certainly do with a much bigger economic package.

The government is clearly short of resources, having splurged on a lot of schemes with questionable benefits, in the past five years, including the farm loan waiver scheme. The only thing this package will stimulate it seems is a lot of debate. The SEZ scheme also denies the exchequer of tax collections. The excise cuts are an exercise in lowering cost pressures for companies. They have already abated at the basic raw materials’ level but are not translating to lower costs down the line. Hopefully, these excise cuts will spur companies to reduce prices and encourage consumers to buy.

If companies don’t and decide to boost margins the government’s effort will be a waste. The loss in revenues it is staring at will be worth it only if sales pick up. A better thing would have been to lower import duties; industry would have howled in protest, but prices would have come down sharply. Lower excise duties will of course mean lower countervailing duty on imports, so they will become somewhat cheaper. But it’s not the same thing. A government with elections looming ahead and no money to spare can’t be expected to do much.

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