India Inc left to fend for itself

Aarati Krishnan Updated - November 14, 2017 at 04:31 PM.

With a higher impost on companies, limited giveaways to consumers and a tight rein on government spending, this Budget has no magic prescription to lift India Inc

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With a higher impost on companies, limited giveaways to consumers and a tight rein on government spending, this Budget has no magic prescription to lift India Inc from its current slump. Overall, it may be status quo for leading companies, while mid- and small-size companies may be worse off than before.

Pricing power

To start with, Corporate India has limited ability to absorb the higher excise duty and service tax imposed in the Budget. The 2 per cent increase in excise duty will affect two-thirds of the companies in the listed universe.

Higher excise duty is normally passed on to consumers by way of product price increases, but this appears difficult this time around. Steadily rising input costs and interest rates have already forced a series of price increases by manufacturers. They may be wary of taking further hikes, even if it amounts to less than 2 per cent of sales.

Evidence of this: The top 500 companies closed the latest December quarter with a 5 per cent drop in profits year-on-year, despite a healthy 26 per cent sales growth.

History suggests that sectors with thin profit margins such as steel, auto components, textiles, tyres will find it difficult to take price hikes. So will those faced with weak demand such as durable goods makers. Sectors such as FMCGs and cement may enjoy pricing power.

Whither spending?

Also, this Budget, unlike previous ones, does not put much money into the hands of the consumer. There is no big-ticket spending on social schemes to drive rural sales. Giveaways on personal tax too are not generous, at a mere Rs 4,600 crore.

Some of the proposals may well shrink the consumer wallet — for instance, the Rs 18,660 crore addition expected from the wider service tax net.

Finally, despite appeals for help from the many distressed sectors in India Inc (infrastructure, realty, airlines, capital goods), special sops have been doled out only to a few such as power generation.

Budgetary provisions on the General Anti-Avoidance Rule and tax status of foreign investors too may not be conducive for the stock market.

Overall, the Budget seems to have focussed on putting government finances back in shape. India Inc will have to fend for itself.

Published on March 16, 2012 16:48