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Budget dilemma: buy or defer

business Updated: Feb 20, 2010 22:26 IST
Gaurav Choudhury
Gaurav Choudhury
Hindustan Times
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It isn’t about what will be. It is about what you think it will be. As the much anticipated budget brings about changes in shopping patterns, a strange phenomenon hits the economy every year in February — sudden drops or rise in purchases of consumer durables.

Excise exigency

Anticipation hangs heavy in the air in February about possible changes in taxes in the budget, usually presented on the last working day of the month.

So, there is a spurt in sale of cars, television sets, refrigerators etc, when a hike in duties and a subsequent increase in prices is expected. At other times, sales dip when the expectation of a duty-cut is high.

“Households do consider hikes in prices before purchasing cars or white goods,” said D.K. Joshi, principal economist at rating agency Crisil.

For instance, consumers deferred purchases in February 2006 when expectations of an excise duty reduction were high. Sales inched up only by 1.84 per cent during the month that year against an annual growth of 7.56 per cent. The government obliged by cutting excise duties on small cars to 16 per cent from 24 per cent.

Stimulus rollback ahead?

Recent data releases confirm a turnaround in the economy this year.

Automobile sales grew by more than 25 per cent between April and January (2009-10). Consumer durables’ production grew a healthy 46 per cent in December on the back of 38 per cent growth in the previous month, mirroring higher purchases of goods such as televisions and refrigerators.

This has fuelled speculation that this year’s budget could set the tone for a withdrawal of fiscal stimulus measures introduced last year.

“The recovery is becoming stronger, and offers scope to partially reverse tax cuts that were announced to cushion the downturn,” said Rajeev Malik of Macquarie Securities.

It is likely that the government will partially reverse the 6 per cent point cut in excise duties announced through 2008 and 2009 to help companies counter the economic downturn.

The government had cut excise duty and service tax that brought down prices of several goods and services. Lower prices spurred demand for these goods. But it left a gaping hole in public finances, saddling the government with an annual debt burden of Rs 4,00,000 crore, or fiscal deficit, as is referred to by economists.

The annual Sales Spurt

This February, consumers seem to be advancing their purchases, lest they have to cough up higher prices post-budget. “There has been a spurt in sales of consumer durable products this month,” said Videocon Industries Chairman Venugopal Dhoot.

Other companies confirmed the connection between sales and budget expectations.

“In 2009, excise duty reductions helped stimulate demand as companies passed the benefits of excise reduction with price cuts. This spiked sales in the month of February,” said Samsung India Electronics Deputy Managing Director Ravinder Zutshi

“This year, too, sales have picked up in February,” he said.

With the threat of a withdrawal of stimulus packages, the days leading up to the budget may be the best time to beat an impending price hike.

Inflation double whammy

Inflation in India accelerated to 8.56 per cent in January, the highest in more than a year as food prices continued to remain high. But it is prices of manufactured products, which grew 6.6 per cent in the month that have emerged as the new worry.

“We expect a sharp increase in manufactured prices in the months ahead,” said Sonal Varma, economist with brokerage and research firm Nomura Financial Advisory.

Consumer durables companies have already indicated they would not hesitate to pass on the high cost of inputs to consumers.

“We are holding onto prices despite a sharp rise in prices of inputs such as copper and iron,” said the chief executive of a consumer durables manufacturer, who did not wish to be identified. “We’ll take a decision on hiking prices based on what measures are announced in the budget.”