In a bid to boost demand and revive manufacturing growth, finance minister P Chidambaram on Monday reduced excise duties for key sectors like automobiles, consumer non durables and telecom.
Chidambram justified the duty cuts – measures such as these are usually avoided in an interim budget – citing the deceleration of investment in manufacturing that required urgent attention.
"The deceleration in investment in manufacturing is particularly worrying. Consequently there is no uptick yet in manufacturing," he said, unveiling the interim budget for 2014-15 in parliament. "The current economic situation demands some interventions that cannot wait for the regular budget. In particular the manufacturing sector needs an immediate boost."
Manufacturing output, which has remained sluggish for most part of fiscal 2013-14, contracted 1.6% in December, according to government data released last week. The decline was led by sharper-than-expected fall in consumer goods production.
The duty cuts, which will make small cars, mobile phone and a host of consumer goods cheaper, are estimated to cost Rs. 400 crore to the exchequer in the short term, but budget numbers for 2014-15 suggest the revenue lost now will be more than offset later by revenue gains for a faster recovery in the manufacturing sector.
The domestic automobile industry that is poised to witness an unprecedented second successive annual decline in 2013-14 received a booster dose. The excise duty on small cars, mid size cars, motorcycles, scooters and commercial vehicles was reduced by 4%. Duty on large cars saw a 3% reduction while SUVs that had seen increase in taxation in the last few budgets, got a 6% reduction.
At 8%, excise duty on small cars now is at its lowest ever level. Car companies said the tax cuts would see an immediate reduction in prices of cars by Rs. 10,000-400,000.
"We believe that this reduction would reduce the acquisition price thereby making vehicles more affordable which would improve the consumer sentiment and hopefully revive the demand for vehicles," said Vikram Kirloskar, president, Society of Indian Automobile Manufacturers (SIAM).
"The Automotive industry is the engine of growth for the manufacturing sector as a whole as it supports key industries like auto-components, capital goods, raw materials, electronics, chemicals, plastics, software etc. Revived growth in the automotive industry would have significant positive impact on these key downstream and upstream manufacturing sectors."
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The largesse was not restricted to automobiles alone. Duty on consumer non durables was reduced from 12% to 10% while that on mobile phones came down to 6% with CENVAT credit and 1% without it. It would make processed food items and mobile phones cheaper.
"The budget does well in aiding consumption, having lowered excise duties on some key segments like capital goods, consumer durables and mobile phones," said Sunil Lalwani, managing director, Blackberry India.
"It also positively impacts the domestic manufacturing ecosystem with the announcement around locally manufactured cellphones. In a growing mobile market like India, where the telecom sector contributes nearly 3% to the GDP, any positive amendment to the tax structure to reduce costs can consequently spur growth and bridge the growing urban-rural divide."
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