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Saturday, Mar 02, 2002

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Capital goods sector has nothing to cheer about

Sowmya Krishnan

THE Union Budget has only added to the woes of the capital goods industry, which is yet to recover from the economic slowdown, mainly due to excise changes and a continuation of the inverted duty structure.

The reduction in peak customs duty from 35 to 30 per cent will not have much impact on the industry as most of the items, barring a few, fall under the 25 per cent bracket. The import duty on piston engines will now be brought down to 30 per cent from a peak rate of 35 per cent.

However, this will not have a major impact on engine manufacturers as imported engines are not a real threat to established players in the industry.

But diesel engine manufacturers such as Kirloskar Oil Engines (KOEL) and Cummins India will now pay a higher excise duty on their engines up to 10 HP. This would have a greater impact on KOEL, which has a significant market share in this segment.

Though excise duty was rationalised to 16 per cent for most items in the previous Budget, engines below 10 HP continued to be attract duty at eight per cent. But they have now been rationalised to 16 per cent.

Not much has been done to rectify the inverted duty structure that the industry has had to endure for the past few years. This means that it will be cheaper to import complete machinery rather than manufacture it domestically. This will continue to haunt most capital goods manufacturers.

Textile machinery manufacturers such as Lakshmi Machine Works and Textool have some reason to cheer. The industry has been going through a tough phase and many units have already become sick.

Last year the customs duty on specified machinery was reduced from 15 per cent to five per cent, thus widening the gap between the duty on finished machines and components and raw materials used for manufacturing these machinery.

This year, this anomaly has been rectified to some extent. The Budget has reduced customs duty on specified input items of reeling, twisting, and processing machinery for silk textile industry and also waived Cenvat on these items.

The Cenvat exemption extended to processing machinery, automatic shuttle looms and specified jute machinery would provide some solace to the ailing industry.

The issue of concessional rate of customs duty on project imports has not been addressed in this Budget too. This would continue to haunt road machinery manufacturers such as Ingersoll Rand (India).

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