The Hindu Business Line : Still a drain on the purse

If you were among those who had hoped that the Rupee’s relative recovery from the March 3 levels (of nearly Rs 52 to a dollar) would signal a significant cut in PC prices across-the-board, you may be disappointed.

After various rounds of PC price hikes were necessitated due to the local currency’s weakness last year and in early March this year, the Rupee’s recent movement around the 48.10 band could have provided the much-needed respite to the hardware industry.

But the impact has been somewhat muted, say industry pundits, thanks to an increase in global component pricing over the last few months.

(When the rupee appreciates against the dollar, items that are imported or those that use imported components, such as PCs, become cheaper to make. Hence the widespread expectation that prices for these items would go down when the rupee appreciates and up when the rupee depreciates.)

While some PC players did end up reducing prices over the last few weeks on the back of longer term contracts with component suppliers or by leveraging old inventory, others preferred not to tinker around with the rates.

PC maker Acer says it recently passed on some benefits to consumers, and IT hardware major HCL Infosystems too has cut prices by up to 2 per cent. “Although the Rupee has strengthened, there is still quite a bit of fluctuation. Nevertheless, we have effected a 1.5-2 per cent reduction in prices in the last two months or so. For any further reduction we will wait for the currency to stabilise further,” says HCL Infosystems’ executive vice-president - Marketing, George Paul.

Paul admits that higher component prices have partly offset the full benefit of the Rupee (while the local currency has weakened considerably over the last few days, it is still stronger than the 52 to a dollar level seen in March). “There has been an increase in price of LCDs, as globally there has been a variation in the demand-supply mix…The global demand has shot-up. A possible economic turnaround in the coming months could raise demand for other components as well,” Paul points out.

Acer too has brought down prices by 4-5 per cent, according to W S Mukund, Managing Director of Acer India. “A strong Rupee and the resultant price-cut in products can help push sales. We had taken a call last month itself and done some adjustments in pricing. If the Rupee strengthens, we will pass on the incremental benefit to the customers,” he says, adding that while the extent of price cut differed for each model, on an average this would be close to Rs 1,000.

However, the price reduction trend is not uniform across the industry, this time around.

Zenith Computers’ Chairman, Raj Saraf, told eWorld his company has not effected any change in PC prices. This is because the prices of memory products, Hard Disc Drives (HDDs) and LCDs, have spiked over the last few months, he says.

Why of price rise

So what has really led to this rise in IT component prices, globally? “Key component vendors had built up a large inventory in anticipation of the holiday season sales in the US and Europe in December but following tepid demand, they were left with large inventory pile-up which were later liquidated at discounted rates. This, in turn, reflected in the pricing of components such as memory products and monitors,” explains S Rajendran, Chief Marketing Officer, Acer India.

A natural relief to the component makers came by way of the Chinese New Year when fabs and manufacturing facilities headed for the annual shutdown. In some cases, given the general slowdown in the market, these shutdowns were even extended. “Generally, when factories re-open after the annual shutdown, there is a certain lead time involved in starting the production. During this period although the demand remained low, there had been a natural course of consumption of IT products — on the other hand the supply side got rationalised. As a result the situation reversed and component prices rose,” he says.

Industry watchers say that LCD prices have moved up by 10-15 per cent since January-February timeframe, while in the case of memory products, the price rise has been steeper — nearly 30 per cent in the last 60 days. “The Rupee was hovering at 50/51 per dollar in March but post the elections this year, it is moving at about 48.10 to a dollar band. So the scope for price reduction has to be seen in the backdrop of 10-30 per cent price hike in the case of key components. Hence, this time, there is no uniform response on the pricing front from vendors. The decision by players is varied, and depends on the elbow room they have,” says an industry official.

Regardless of the individual response by players, even the partial breather on account of the currency comes at a time when consumer sentiment appears to be recovering. “There is a slight improvement in buying sentiment and it is visible in our retail outlets, where we are seeing more footfalls. For instance, the month of May turned out to be better for us than April and our notebook and Netbook shipments nearly doubled during the month,” says Rajendran of Acer.

Hopes rest on Budget

The industry is now hoping that the Union Budget would provide more stability and restore the hardware sector back to its previous growth path. “The monetary and fiscal measures announced by the Government in the recent past have been able to instil confidence in the industry to an extent. With lower-than-expected consumption of IT products in FY09 owing to the economic slowdown, we now hope for a long-term growth-oriented policy,” says the MAIT Executive Director, Vinnie Mehta.

Topping the industry wish-list is continuation of the existing 8 per cent excise duty and CVD on all IT products, across the value-chain. Further, providing appropriate incentives for IT manufacturers, finished products and components in India, as in the case of semiconductors, would have a positive impact on IT manufacturing investments, they say.

Key recommendations

The industry’s key recommendations from the ensuing Budget include aligning the rate of service tax to that of the Excise duty/CVD to avoid structural anomalies. “There are many outsourced services that go into making of PCs. But currently the Service tax is pegged at 10 per cent while the rate of excise duty/CVD is 8 per cent,” he says.

The industry further wants the abolition of 4 per cent Special Additional Duty (SAD) on all IT products and components. The SAD was introduced on imports to balance the impact of local taxes on domestic-manufactured products. With CST being phased out, the SAD should, therefore, be abolished or at least be made on a par with it.Another pain-point is the long standing abatement issue. The Excise duty or CVD on IT products such as notebooks, printers, set top boxes has been levied on the MRP since January 2005. Abatement is provided while computing the duty reflecting the local taxes and the channel margins, currently stipulated at 20 per cent.

The industry rues that the abatement rate does not mirror the correct cost structures of the industry. At the time of introduction of such a system, the industry was assured that such a rate would be revenue-neutral; however with the current applicable rate, the effective levy has gone up by at least 50 per cent. It is, therefore, recommended that the rate of abatement be enhanced to 35 per cent, to be on a par with consumer durables, points out Mehta.

And finally, the industry hopes to see an acceleration of the mission-mode projects encapsulated in the National E-governance Plan. This, it says, would spur IT usage in the country, and also provide an impetus to hardware sales.

moumita@thehindu.co.in

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