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Budget fails to excite IT industry

Priya Ganapati

The Union Budget seems to have elicited mixed reaction in the information technology sector. While the software industry tries to stifle its disappointment over the lack of major sops, the jury of domestic hardware manufacturers is still out and debating furiously the implications of Finance Bill 2000-01.

After the raw deal given to it last year, it is not suprising that the hardware industry has reacted with caution. The reactions range from "pragmatic and practical" and "not so thrilling" to "mildly positive".

But before we get down to the details, the good news for PC buyers.

PC prices will come down.

But before the euphoria rises, let's break the bad news too: The reduction will be barely 5 per cent.

Sharad Talwar, marketing manager, HCL, explained, "The overall customs duty has come down. The duty on critical components has been reduced by 5 per cent. This will result in a 3-4 per cent reduction in prices for domestic PCs. Now depending on the configuration this will mean a drop of Rs 1,000 to Rs 1,500."

But others seem more optimistic. Bhaskaran, financial controller, Compaq India, said, "The price change will be around 4-5 per cent, which is favourable to the customer. This implies an overall cost reduction of Rs 2,000 to Rs 2,500 on a PC worth Rs 50,000."

Raj Saraf, managing director, Zenith India, one of India's leading domestic PC manufacturers, agrees. "Yes, the reduction is just about 4 per cent. Which means a fall in price of around Rs 2,000."

Though this may not seem like a major cut, Finance Minister Yashwant Sinha's pronouncements on the floor of Lok Sabha did initially send up a cheer in the industry.

• Customs duty on finished products will be reduced to 15 per cent from the existing 20 per cent.
• Duty on motherboards will go down to 15 per cent from 20 per cent.
• Duty on microprocessors, FDDs, HDDs, CD-ROMs, colour monitor tubes, memory storage devices and integrated circuits will be zero now, as against 5 per cent earlier.

Vinnie Mehta, director, Manufacturers' Association of Information Technology, explained, "A 4 per cent SAD has been imposed on imported components and finished goods. We are still unclear whether this is applicable on those products that have been brought down to zero duty. But the cuts in duties for various components has almost been nullified by this imposition of SAD."

Som Mittal, managing director, Digital India, added, "I don't know how the fact that excise duty has not been reduced will impact the PC market. But by hitting us with SAD, the FM has used another tool to increase revenues."

Mittal agrees with the earlier estimates on the revision in PC prices. "I don't think there will be any significant difference because when the impact actually comes down to the consumer, it will be around 2 to 3 per cent. But we can safely put a figure of 5 per cent reduction in PC prices."

Compaq's Bhaskaran, however, chooses to also highlight how this reduction in PC prices will benefit manufacturers in the reduction of their overall inventory cost. "For example, at present the duty on computer chips is zero. So if the manufacturer is willing to set up a hub, then the cycle time for him is reduced, which brings about a reduction in the inventory cycle or the inventory cost."

Consumers will, however, not have to wait long for the effect of the budget on PC prices. The industry estimates range from a week to 15 days.

But does this mean the PC penetration graph in India is ready to surge upwards?

Sadly, the marginal reduction in PC prices does not provide the impetus that analysts have been seeking. India has 30 per cent less PC penetration than other developing countries like China, Mexico and Brazil.

The budget is not poised to change this. Industry experts polled by rediff.com agree that PC penetration in the country will not grow to keep pace with the government's dream of making India an IT superpower.

Mehta is blunt when it comes to expected growth. "Let us be clear that the reduction in prices is not going to translate into anything great. Excise duty still remains high. So I think the pre-Budget growth estimates of about 45 per cent will hold. There will be no major difference in that."

Atul Vijaykar, head of Intel India, agrees. "PC penetration is growing at around 40 to 50 per cent, which is on a fairly aggressive path. So I think the Budget will only marginally speed up this growth rate. But there is the bigger issue of deployment of PCs in India. The PC density per capita in India needs an exponential growth and not just an incremental one as provided by the Budget."

But there is a small controversy blowing here too. Though MAIT is the representative body of hardware manufacturers, the rest of the industry is quick to shoot down its figures.

HCL's Talwar says, "45 per cent is definitely an overestimation. I think a more realistic figure will be around 30 per cent. PC sales post-Budget wil definitely rise because there is a pent-up demand. People have been waiting for the Budget before they make their purchases. So I think sales will grow by 5 to 10 per cent."

To justify his figures, Talwar adds that his estimates are from organisations like IMRB and IDC.

Saraf has a different take, though. He thinks the Budget will not impact PC sales. Rather, the proliferation of dotcom companies in the country will propel PC users towards purchases. But he agrees with Talwar's figures of a growth rate of around 35 per cent post-Budget.

Mittal is the odd man out. He refuses to believe there will be any change in the growth rate because of the Budget. "I don't think there will be any difference or that PC penetration will go up," he said.

The grey market seems to have been hit worst by the Budget. Industry opinion is unanimous that the grey market will take a beating with the reduction in duties. "The reduction of duties to zero will make a difference to the grey market," Mehta said.

Vijaykar elaborated, "Nearly 20 per cent of microprocessors coming into the country is through 'parallel' channels. With the duty on microprocessors brought down to nil, I expect that this channel will get reduced by half."

But the rest of the industry seems to shy away from making even a rough estimate on how much the grey market will be affected. From Talwar to Mehta, the answer is the same. "It will be substantially affected. But it is difficult to predict by how much."

Grey-market operators, for their part, do not seem to be too worried. "I don't think this will make any difference to us. We had anticipated some of the cuts," one confident operator told rediff.com

But the domestic manufacturing industry seems to have got quite a boost with the Budget. Mehta said, "The duty differential between finished goods and domestic products has increased. Earlier this used to be around 2 to 3 per cent. Now it has gone up to around 9 per cent. The import of finished goods has become cheaper by around 0.5 per cent. At the same time, locally manufactured products have an edge of 3 to 4 per cent. So the domestic manufacturing industry has received a breather."

Talwar is confident that this means greater sales for HCL too. "The sales of branded PCs will receive a fillip. The overall PC market will go up. We being the largest brand will benefit. The duty differential has also increased, which is conducive for manufacturers in the country. The Budget has given a clear and positive direction that it supports the domestic manufacturing sector."

But the industry is also disappointed that the finance minister has chosen not to bring down the excise duty from the existing 16 per cent.

Mehta said, "The excise duty remains the same. We had hoped that it would be reduced to around 8 per cent. This would have then helped us slash PC prices by around 10 per cent instead of the marginal 5 per cent now."

The non-reduction of excise duties seems to be a sore point with the rest of the industry too.

Arun K Thiagarajan, vice-chairman, Wipro Limited, hoped the government would try to make up for the industry's disappointment. "MAIT had recommended a reduction in excise duty of computers and peripherals, which has not been realised. But due to the proposed single rate of 16 per cent we accept that it would have been difficult for the FM to accede to our request, and only hope that state governments will be able to bring down the rate of sales tax to a uniform zero," he said.

Intel's Vijaykar added, "We had expected more aggressive steps like reduction in excise duties and steps to improve the telecom infrastructure. But the pronouncements in the Budget on this have not been up to the mark. There is nothing in the Budget that looks to solve the IT industry's infrastructure problems."

Mehta is unhappy that the finance minister has not accepted the demand to allow cent per cent depreciation in a year for all IT and electronic products. "We also wanted the central and local sales taxes to be reduced to nil on IT products. But this has also not been met," he said.

The final take on the industry's reaction to the Budget:

Bhaskaran, financial controller, Compaq: "It is not too thrilling."

Vinnie Mehta, director, MAIT: "So far, so good."

Raj Saraf, managing director, Zenith India: "But, anyway, this reduction in prices keeps happening every year."

Girish Paranjpe, corporate vice-president, finance, Wipro Technologies: "It is a practical and pragmatic budget considering the problems like Kargil and Orissa cyclone that the government had to face."

Atul Vijaykar, country head, Intel India: "I view the Budget as mildly positive, it's just not bold enough."

With inputs from Kanchana Suggu

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