The 2 percentage point increase in excise duty announced in the budget for 2010-11 on Friday is unlikely to eat into the profitability of the corporate sector as most of the companies plan to pass on the burden to consumers.
Industrialists from a whole range of sectors such as automobiles, consumer durables and consumer goods said that in the past, any reduction in excise duties were immediately passed on to the consumers and this year's hike will also have to be borne by the market.
Manufacturers are prepared to take a dent in their demand that could arise from the price hikes.
“The excise duty hike will be passed on to the consumers and I think it will have an impact on demand,” said Pawan Munjal, managing director and CEO, Hero Honda Motor Ltd. “When excise was reduced in 2008, consumers benefited from it and we did not use it for our own profits. Hence now, we do not have the liberty to absorb the cost.”
Corporate profitability took a bit hit late in 2008 and early last year in the aftermath of the global recession that created uncertainties and dampened demand in the market. However, consumer demand was restored, largely on account of a 4 percentage point reduction in excise duties at that time.
“The increase in excise duty coupled with an increase in commodity and petrol prices will lead to a cost increase which will be passed on entirely to the consumers,” said Ravinder Zutshi, deputy managing director of consumer electronics giant Samsung India.
Some business leaders are not sure if their demand will be hit as a result of the excise hike being passed on to buyers.
“The excise duty hike was expected and will lead to increase in prices of two wheelers by Rs 500-1000 depending on the model,” said Venu Srinivasan, chairman and managing director, TVS Motor Ltd, adding, “I do not think there will be a major impact on consumer demand.”