The Union Budget 2013-14 turned out more to be a balancing act with no real acrobatics from the Finance Minster, P Chidambaram as all eyes stayed glued to the television awaiting some rabbits from his hat. ICR brings you the opinions of the industry gurus on the budget.
With the cement industry being marred by various issues like fuel supply, costs, logistic challenges, slower growth, increasing prices of raw materials and above all the price fluctuation of cement in the year 2012, the industry leaders sat all ears to the new policies and the Union Budget 2013-14 that P Chidambaram, Finance Minister announced from Delhi. Each of them hoped for an amendment in policies that would benefit the overall industry.
Expectations Looking back to the last issue of ICR, the cement daddies of the industry suggested a list of amendments to be introduced which included:
• Tax free bonds, formation of infrastructure debt funds and formulating a comprehensive policy for developing Public Private Partnership projects (PPPs).
• Plan for promotion of low cost housing.
• Provision of a level playing field for the industry; basic customs duty to be levied on cement imports into India.
• Import duties on items required for manufacture of cement to be abolished.
• Duty free import of coal, gypsum, pet coke: Duty on pet coke and gypsum is 2.5 per cent, if imported, while there is no duty on cement import. This leads to anomaly in that "Import duty on inputs is higher than the finished goods." It would be therefore, highly beneficial to cement industry, if import duty on pet coke, Gypsum and other fuels are withdrawn or reduced as in case of coal.
• Consideration of wharf age charges and handling losses on exports of clinker / cement: Since such export would earn valuable foreign exchange for the country, waiver of wharfage charges on such cement/clinker export would enable the industry to make its products competitive in the international market. Also excise duty on a certain percentage of such export as a part of handling loss may be waived.
• It was also desired that cement should be stipulated as, ‘Declared goods’ under section 14 of Central Sales Tax Act so that it is put on an equal footing with other core sectors goods like coal, steel, crude oil, jute, cotton yarn etc.
• The cement industry is putting up "Waste Heat Recovery" plants so as to derive more energy from the same energy resource, in a way; this is akin to green energy. All of this requires further capital investments. To help the industry in its endeavor to produce more such environment-friendly energy, it is requested that such energy generation be treated as Renewable Energy Source.
With a view to creating a world-class road infrastructure in the country for the rapid and inclusive growth of the economy, the Working Group recommended that:
i) All new expansions in the national and state highways may be made of cement,concrete as a policy. To begin with, this percentage could be 30 per cent of the total allocations.
ii) All existing bitumen national and state highways where strengthening is required should be replaced with concrete surface, by adopting the technology of concrete overlays, popularly known as White Topping.
(iii) Use of PPC may be made mandatory in the construction of roads as a policy not only for National and State Highways but also in the construction of roads by all agencies including CPWD, state PWDs etc. This has already been permitted by the Indian Roads Congress (IRC).
(iv) All existing city roads having bitumen surface be converted gradually to cement concrete and new ones should preferably be constructed with cement concrete technology.
(v) All connecting roads in villages must be done with cement concrete technology.
Declared Budget
To begin with the government hiked the freight rate by 5.78 per cent, which will lead to the price rise of cement in India. However, the budget has provided for a mild relief for the cement sector by reducing the basic customs duty on bituminous coal from 5 per cent to 2 per cent and countervailing duty on coal which has been proposed to be reduced to 2 per cent from 6 per cent, this announcement would help reduce the fuel costs. The Finance Minister stated that the key to restart the growth engine was to attract more investment, and that the government will improve communication of its policies to remove any apprehension or distrust in the minds of investors.
A number of steps to mobilise investment have been announced in the Budget keeping in view that as per 12th Plan the private sector will need to contribute 47 per cent of the proposed Rs 55,00,000 crore investment in infrastructure. Infrastructure Debt Funds (IDF) would be encouraged. India Infrastructure Finance Corporation (IIFCL) will offer credit enhancement to infrastructure companies that wish to access the bond market to tap long term funds. Some institutions will be allowed to issue tax free bonds up a total sum of Rs 50,000 crore (as against Rs 25,000 crore in 2012-13). Assistance of the World Bank and Asian Development Bank will be sought to build roads in the North Eastern States and connect them to Myanmar. The corpus of Rural Infrastructure Development Funds (RIDF) is proposed to be raised to Rs. 20,000 crore. Rs 5,000 crore will be made available to NABARD to finance construction of warehouses, godowns, silos and cold storage units designed to store agricultural goods and products.
The government is seeking to mitigate the huge shortage of housing in cities around the country in an election year by proposing to set up an Urban Housing Fund with an initial allocation of Rs 2,000 crore in 2013-14. This comes along with a move to provide Rs 6,000 crore of additional funds for the Rural Housing Fund. The Urban Housing Fund will be set up by the National Housing Bank and will help in creation of new homes in the budget and affordable housing categories, helping bridge the humongous shortage homes in the country. The Rural Housing Fund set up through the National Housing Bank is used to refinance lending institutions, including Regional Rural Banks (RRBs) that extend loans for rural housing. This will create further demand for rural housing as RRBs will have more money to lend to home seekers in rural areas. This new demand that will be created through the flow of credit will drive creation and supply of new homes in both rural and urban areas. Chidambaram informed that the newly set-up Cabinet Committee on Investment has held two meetings and taken decisions in respect of a number of oil and gas, power and coal projects. CCI will take up some more projects shortly, he said. The Minister also informed that a regulatory authority is being constituted for the road sector. Bottlenecks stalling road projects have been addressed and 3,000 km of road projects in Gujarat, Madhya Pradesh, Maharashtra, Rajasthan and Uttar Pradesh will be awarded in the first six months of 2013-14.
The Budget proposes the introduction of an investment allowance for new high value investment. A company investing Rs. 100 crore or more in plant and machinery during the period 1.4.2013 to 31.3.2015 will be entitled to deduct an investment allowance of 15 per cent of the investment (in addition to depreciation) from its taxable profits. This will be a big booster for companies undertaking expansions.
Tax on royalty paid by Indian subsidiaries to foreign parent companies increased from 10 per cent to 25 per cent. However, the applicable rate will be the rate stipulated in the Double Tax Avoidance Agreement (DTAA).
Reactions
The Union Budget 2013-14 received mixed reactions from the industry. ICR spoke to a few leaders in the industry. Whilst some of them thought that the budget was flat and no growth could be expected, the others thought that it was balanced. Dr JD Bapat, Independent Consultant opined, "I would say the budget declared is a very balanced one especially with in view of the upcoming elections. The steps and policies introduced by the government make sure that the inflation remains in control."
However, Vinod Juneja, Managing Director, Binani Industries does not agree that the budget is balanced. On the contrary, he feels that the shares at the stock market haven’t been doing well post the declaration of the budget. Stating the reasons for the same he says, "Though the reasons for the same could vary but one of the core reasons I believe is that the investors do not have faith in the investment plan that the government has announced."
Even Narendra Patel, Head of Indian Concrete Technology Institute, expressed, "I am not at all satisfied with the budget declared and it definitely hasn’t met my expectations as well as the expectations of the industry." The opinion was shared even by TR Badrinayanyan, CEO, Sany Industries, one of the leading equipment manufacturers. He went on to say that the budget declared was a very flat one and no firm action was taken to boost the growth of the economy. "The budget was declared as a routine exercise as it does not create the conditions for favourable growth required keeping in view the current economic situation."
On the other hand, Shailendra Chouksey, Whole time Director, JK Lakshmi Cement, has a mixed opinion about the same. Being happy about the allocation of funds to rural development and the government aiming to build the fiscal and the current deficit, he says that the budget does not have any plans for the growth of the industry. Explaining further he said, "If you compare the last year’s budget with the current year, we do not find much of a difference. The policies announced are good for the economy in the long term but offer no significant steps per se for the growth of the economy."
However, Anand Sundaresan, Managing Director, Schwing Stetter, differed from the above opinion and confessed that he didn’t expect any big surprises from the budget anyway. He further expressed satisfaction stating, "I can say there was a determination in the voice of the Finance Minister with respect to boosting the infrastructure projects, enhancing the freight corridor and announcing the construction of 3,000 km road in the next six months for the country."
Impact on the sector
The budget announced, has a profound impact on the industry. Despite the slump and various other issues and controversies dominating the industry, the cement sector grew marginally by 5-7 per cent but with the government announcing the awards for the construction of the 3,000 km road projects, the EPC companies expect business and feel that the demand for cement will be boosted and positive growth is expected. Dr Bapat said, "The industry has grown in tough times also, with these new policies being announced by the government the sector will witness a better growth and we are extremely positive with the same." Even Sundaresan remains positive when it came to the growth of his sector. He went on to say that three things would boost the company’s as well as the sector’s business. "The hike in the infrastructure projects due to the freight corridors, 3,000 km road projects and the subsidy given to the windmill power projects and other conventional sources of energy: all are positive factors."
While talking about the impact of the budget, on the industry, Chouksey was sceptical and stated, "As mentioned earlier, no concrete polices have been announced for growth, however, I see a silver lining which could lead to the growth of the industry." Explaining his point further, he elaborated on the following points.
• One is the additional rebate of Rs 1 lakh additional interest to qualify for income tax rebate for the first time borrowers, provided their loans is below Rs 25 lakh and the property value is upto Rs 40 lakh.This should fuel the demand for housing. In terms of rural development, the allocation of 74,429 crore against 2012-13 was 73,175 is not a big deal. In the year 2012-13, the government did not spend the allocated funds, for various reasons, but with respect to the figures that they had declared the schemes of NREGA, Indira Awaas and Pradhan Mantri Sadak Yojna could get a jump of Rs 143 crore. Since these three schemes have a bearing on the cement consumption.
• Similarly, the fund allocated to the highways in the year 2012-13 was 25,000 crore and the revised estimates is Rs 25,859 crore. So more or less everything remains the same. It’s just that the estimates have been revised and should help in boosting the demand of cement provided the Government spends the declared amount. Juneja on the other hand felt that the constant rising costs of raw materials and the freight prices will impact the industry and the company as well. He foresees a hike in the prices of cement. "The taxes on cement and the hike in the prices of freight will bring up the costs of cement in India. As it the southern market had been witnessing the issues with prices. Now the entire sector across the country will witness the problem of inflation."
• Narendra Patel severely criticised the new policies that were announced. He said, "The governments assumes that the construction and the real estate industry is an orchard full of fruits and whenever one wishes one can pluck the fruits and the benefits of the same can be extracted. As per the history, the cement sector always remains on the receiving end and the other sectors are untouched. We expected the reduction in excise duty, which didn’t happen, certain other policies to be amended. None of the expectations got fulfilled. On the contrary, freight taxes have been increased and with this cement prices all over the country will be hiked." Explaining the situation further he said, "The northern region of India, which is a surplus market, will have cut throat competition in prices and the southern market will quietly accept the price rise. His opinion was shared by Badrinarayanan too. He said that no firm steps were taken by the government to boost the sector and it has failed to meet the expectation. He predicts a flat year of growth and suggests the introduction of new technologies which is the only way to help the sector regain its old pace.
Shortcomings
Almost all the industry leaders felt that the hike in the freight prices is one of the major shortcomings. Dr Bapat said that the hike should have been done in phases and not at a time. Thought hike in freight prices was not a big surprise as this had to happen sue to the rising prices in the costs of petrol and diesel.
Patel feels that, "Newer technologies should be encouraged which didn’t happen, where the construction material quantity is reduced and more of it can be conducive for the construction. Encouraging pre cast technology could be one solution where things could get better or else the industry is expected to face tougher times."
Expressing his views on the shortcomings of the budget, Sundaresan said that the only thing he felt that could be improved was the excise duty which could be brought down by two per cent atleast. "Two per cent is not a big deal, but it would have made us happy. But it was good that they didn’t increase it at least. However, I am extremely happy with the approach of the government since they promised that the fiscal deficit which is 5.3 per cent currently, will be reduced to 1.3 per cent by the year 2016-17. That according to me is really a very big step.
However, Narayanan felt that the government missed out on the essential policies. "No definite announcement on the mega projects that could have set in motion the agenda for growth. It is missing the focus on infrastructure growth for the country for the current financial year and as per the future plans. In his list of shortcomings of the budget, Chouksey highlighted number of points which make the budget not so industry friendly.
• Apart from the point that no strategy has been declared for the growth of the industry. One of the worst points in the budget that if any company violates the service tax and / or custom duty, the company shall be issued with a non- bailable warrant. "Now this is a very tough step and unnecessary since the departments are headed by various officers who have different interpretations."
• The other thing is that we had also asked for rationalisation of taxes and zero import duty, which has not happened.
Talking about growth of the industry Chouksey elaborates, "I am not sure that without any drastic steps for growth, how does one expect to continue to drive the industry forward since the budget is more or less the same."
Conclusion
An analyst from Anand Rath Securities summed up the sentiment at the bourses: My top pick from the cement sector in the large cap segment is UltraTech Cement and from the midcap segment it is Shree Cement and JK Lakshmi Cement. The Budget was positive for the sector with support to highway regulator, National Highway Authority of India (NHAI), doubling the spends of the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) and the impetus to urban and the rural housing. The budget has bagged mixed reactions from the industry. With new policies and innovation proposed by the government particularly the announcement of the 3,000 km road project, the sector is expected to grow. But the thing to be seen over here is how soon the implementation will happen since the industry has already hit the bottom. If the strategies announced, are not in place the industry will lose out. Will the government actually spend the amount allocated as mentioned in the budget? Only time will see if the industry grows drastically or marginally.
Key allocation during 2013-14
Power- Rs 59,329.41/-
Petroleum and Natural Gas- Rs 79052.16/-
Coal and lignite- Rs 11,754.21/-
New and Renewable Energy -Rs 3,915/-
Railways- Rs 63,363.25/-
Road Transport and highways- Rs 25,859.91/-
Shipping- Rs 7087.3/-
Rural Roads – Rs 21,700.00/-
Urban development -Rs 10,021.12/-