The Hindu Business Line : A bigger push might help

The Government’s recent decision to effect a 4 per cent cut in Cenvat rate is expected to offer only a limited respite to IT consumers who have been through multiple rounds of price hikes earlier this year, when the Rupee weakened against the Dollar.

While players’ response to Cenvat reduction has been varied, as also the price cuts — ranging from 1 to 4 per cent on products such as TFT monitors, notebooks and desktops — most in the industry believe that huge inventory pile-up, and the Cenvat overflow due to anomaly in software duty structure could take the sheen off the Centre’s well-intended move.

“The consumer may want to see the a full impact of Government announcement on the net price of a PC, but a 4 per cent reduction is only possible on the hardware price. In case of software there is a Cenvat overflow. So in terms of end user price it is translating to roughly 2-4 per cent, based on the configuration of the product,” says George Paul, executive vice-president, HCL Infosystems.

Raj Saraf-promoted Zenith has indicated a price reduction of about 1 per cent, both on desktops and notebooks, and others such as LG responded to the Government’s move by saying they would reduce the prices of monitors by an average 1 per cent. PC major HP has not effected a price reduction, but instead has chosen to pass on the ‘benefits’ on a more immediate basis, through promotions and schemes on existing stock.

“HP is offering value-added ‘promotions’ and schemes to pass on a better value proposition to its consumers. These offers are almost equivalent to 20-30 per cent of the product cost,” says HP India President (Personal Systems Group), Ravi Swaminathan. The company is offering a home theatre worth Rs 10,500 with its Pavilion notebook, which starts at a price of Rs 40,000. Similarly, those buying the company’s Presario range (priced at Rs 30,000 onwards), would get a digital camera worth Rs 8,499 with every purchase.

MNC brand Acer agrees that the impact of the Cenvat rate cut on products would not be so immediate. “There is a huge inventory which has incurred the old duty rates. Only in case of fresh imports may one see an instant benefit of the reduced Cenvat being passed on to consumers. Typically, retailers carry an inventory of 10 days, distributors 30 days while manufacturers have three weeks of inventory — all this adds up to nearly 45-60 days of stock, and this inventory needs to be exhausted first,” S Rajendran, Chief Marketing Officer, Acer India, says.

Acer has not effected any change in the product pricing, as yet. “Going forward, we will cut prices…In case of imported items such as notebooks, projectors and TFTs there will be a benefit of 4 per cent, whereas the price drop for manufactured items such as desktops and servers will vary from 2-3 per cent, depending on the synchronised effect of the cut, across the manufacturing value chain. The impact on prices is governed by the extent of Cenvat overflow, depending on the configuration of a system,” Rajendran adds.

The industry is also asking the Government to rationalise duty on software which currently attracts 12 per cent service tax. Failure to do so would lead to a Cenvat overflow in case of local computer manufacturing. Put simply, while the excise duty on computers and software (customised) has dropped to 8 per cent, pre-loaded licensed software (such as Operating System, amongst others) continues to attract 12 per cent service tax. “This is leading to an anomalous tax structure and Cenvat overflow in case of domestic computer manufacturing, and needs to be addressed by according an 8 per cent excise duty on licensed software too,” says the MAIT Executive Director, Vinnie Mehta.

Until now, Personal Computers used to attract 12 per cent Cenvat rate, whereas the rate on input components varied from 0-14 per cent. Earlier this month, as part of measures to stimulate the economy, the Centre announced an across-the-board cut of 4 per cent in the ad valorem Cenvat rate on all products (other than petroleum and those where the current rate is less than 4 per cent).

When contacted, a Samsung spokesperson said the company has not announced any changes in the pricing of its IT products, including monitors, Hard Disc Drives and printers, following the Cenvat cut. “Our IT products are impacted by the adverse rupee-dollar movement. So we have not reduced the prices,” she said, pointing out that Samsung had not raised prices even when the Rupee depreciated significantly against the Dollar in the second half of 2008. “This was keeping in mind the sluggish demand,” she said.

Demand slowdown, liquidity crunch

Industry admits that there has been some bit of a demand slowdown. “From an industry perspective, while Government and the banking space continue to see IT demand and implementation, there is some amount of caution on the corporate side where we find that although companies have plans, they are holding back. In the consumer space, the overall sentiment is one of caution, and again people are holding on to liquidity,” Paul of HCL Infosystems says.

A senior industry official points out that even as the global financial crisis has depressed consumer sentiment back home, the problems of the hardware industry have also been compounded by liquidity crunch in the IT channels as banks have tightened their purse-strings. “On one side, the channels have been impacted due to slow off-take of sales and the large pipeline, and now the severe liquidity crunch is adding to their woes,” the official says.

The IT hardware sector — whose margins are under pressure due to rupee-dollar play — has, over the last few months, resorted to at least two rounds of price hikes (combined impact of 5-12 per cent) — but nothing that comes close to offsetting the full impact of depreciation of the local currency, or the concurrent rise in input costs. It is pertinent to mention here that the bulk of the components that go into a PC, including processor, hard disk drive, motherboard, amongst others, is imported. A weaker Rupee starts to pinch, as vendors are forced to shell out more to import these components.

Sumanta Mukherjee, lead PC analyst for IDC India, recounts that the PC industry — which operates on wafer thin margins — effected a price hike in June this year when the Rupee touched 43 against the Dollar, and again towards September-end when the local currency hit 50 against the dollar.

“The channels too had picked up huge stock just ahead of the festive season, and were not able to exhaust those stocks. Unless these old stocks are exhausted, vendors will find it extremely difficult to implement the benefits of the Cenvat cut. While some players have announced lower prices, I see that more as a way to liquidate the old stock,” Mukherjee adds.

Boosting consumption

MAIT feels that given the overall environment, there is an urgent need for a push not only at the taxation front, but also on the consumption side. “To spur IT consumption, it should be made mandatory for nationalised and PSU banks to earmark funds for SMEs and home consumers to be given as soft loans at a subsidised rate of interest. In addition, Governments could provide interest-free loans to all their employees for purchase of IT products. Currently, such loans are available to officials above a certain ranking,” says Mehta of MAIT.

moumita@thehindu.co.in

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