The Hindu Business Line : Stimulus package: Markets to see muted response

Some cheer for manufacturing companies and disappointment for infrastructure players. That, in short, may capture the immediate market reaction to the monetary and fiscal stimulus package announced by the Government over the weekend.

The key surprise element in the package comes from the four per cent cut in CENVAT rates (excise duty) on all non-petroleum products.

Expecting to cost the exchequer Rs 8,700 crore, this will translate into significant excise duty savings of anywhere between 28 and 50 per cent on the range of manufactured products (current CENVAT rates on most goods are at 14, 12 or 8 per cent).

In a weakening demand environment, companies are unlikely to be able to retain the benefits of this excise cut or use it to expand their profit margins. But the reduction certainly allows elbow room for companies to cut product prices in an effort to stimulate demand, without further sacrifice on margins.

Makers of consumer goods, FMCGs and automobiles may be the key beneficiaries of this cut.

The other key element of this package — a Rs 10,000-crore refinance facility for infrastructure projects to be routed through IIFCL — may not be material enough to bridge the financing gap in this sector. This may, at best, be a short-term measure that will meet the funding gap for specific road and port projects already in the pipeline.

Though the Rs 10,000-crore facility is expected to refinance bank lending of twice that amount, the relatively small size of this package and doubts about banks’ willingness to loosen their purse strings may curtail its effectiveness.

The Government has left the door open for further such measures over the next 18 months to push through infrastructure projects of the value of Rs 1 lakh crore.

With stocks of leading infrastructure players already gaining ground over the past week, the “infrastructure” chapter of the stimulus package may not provide much fuel for further upside.

Finally, further measures aimed at aiding export-oriented sectors such as gems and jewellery, textiles and iron ore too may not act as a significant trigger to stocks in these sectors.

While the combination of RBI’s measures and the ones announced now may help ease the funding woes for exporters and reduce financing costs associated with doing business, the bleak economic data emanating from the US and much of Europe suggests that even more competitive pricing may not be sufficient to offset the impact of sheer lack of demand, for exporters to these regions.

Overall, whether it is interest rate cuts or price cuts triggered by excise duty savings, it will be a while before the beneficial impact, if any, of these measures show up in the profit numbers of India Inc.

Expect a muted response from the stock markets to the stimulus package.

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