Impact of Budget on

Manufacturing Sector
Importance of manufacturing sector in Indian Economy
Sectoral Composition
14%
of Indian GDP in 2010-11
15% Manufacturing sector is
the third highest
domestic product
2%
contributor to total
Indian GDP.
17%
16% Annual Survey of
Industries indicate that
around 1crore people
are engaged by this
2% sector.
8%
This sector contributes
27%
Agriculture, forestry & fishing Mining & quarrying 79.4% of total industrial
Manufacturing Electricity, gas & water supply production in the
Construction Trade, hotels, transport & communication country.(Mining and
Financing, insurance, real estate & bus. Services Community, social & personal services electricity contribute the
remaining 10.5% and
10.1% respectively)
 Composition of Indian Manufacturing Scetor

• Indian manufacturing sector is broadly divided into 14 sub segments and the weightage
they occupy in total production is given below:

Category %of contribution

Food Products 9.1
Beverages & Tobacco 2.4
Cotton Textiles 5.5
Wool, Silk & Mane Made Textiles 2.3
Jute & Jute Textiles 0.6
Textile Products 2.5
Wood and Wood Products 2.7
Paper & Paper Products 2.7
Leather & Leather Products 1.1
Chemicals & Chemicals Products 14.0
Rubber, Plastics & Petroleum Products 5.7
Non-metallic Mineral Products 4.4
Basic Metals 7.5
Metal Products 2.8
Machinery and Equipments 9.6
Transport Equipments 4.0
Other manufacturing industries 2.6
Total Manufacturing Sector 79.4
 Budget outlined a Very Strong intent to support
Manufacturing sector

• “..For sustained growth of GDP and productive employment

for younger generation, it is imperative that the growth in
manufacturing sector picks up. We expect to take the share
of manufacturing in GDP from about 16 per cent to 25per
cent over a period of ten years.”

• “..Government will come out with a manufacturing policy,

which will bring down the compliance burden on the industry
through self-regulation and help make Indian industry globally
competitive.”
 CEMENT INDUSTRY

Budget Announcements:
•Custom duty on two raw materials viz. pet coke and gypsum reduced to 2.5%

•Central excise duty rates revised as following:

• Retail sale price < Rs 190 per bag - 10% ad valorem + Rs 80 per MT
• Retail sale price > Rs 190 per bag - 10% ad valorem + Rs 160 per MT
• All other goods - 10% ad valorem
• Cement clinker - 10% ad valorem + Rs 200

•Exemption of excise duty on fly ash withdrawn and 1% duty without CENVAT credit levied
•A tariff rate of 5% excise duty is being prescribed on Ready-mix concrete (RMC). However these goods
would attract the concessional 1% duty without CENVAT credit facility.

Impact: NEGATIVE

The replacement of excise duty would result in a 2-4% increase of excise duty for the cement industry. In the
current operating scenario cement players would not be able to pass on this impact to customers.

Gypsum accounts for mere 2-3% of total costs and pet coke is used as raw material by very few companies.
Hence the reduction of customs duty would have a very insignificant impact on this industry.
 INFRASRTUCTURE

Budget Announcements:

•Allocation of Rs. 2,14,000 crore for infrastructure in FY12 (an increase of 23.3% y-o-y and amounts to 48.5%of total plan allocation).
•Increase in FII limit by USD20bn for investment in corporate infrastructure bonds.
•To boost infrastructure development, tax free bonds of Rs. 30,000 cr proposed to be issued by Government undertakings during FY12(Rs.10,000 cr for IRFC,
Rs.10,000 cr for NHAI, Rs.5,000 cr for HUDCO and Rs.5,000 cr for Ports)
•Allocation for Bharat Nirman has been increased by 20%. Allocation has been increased byRs.10,000 cr from the current year to Rs.58,000 c in FY12.
•IIFCL’s loan disbursal target has been raised to Rs250bn from Rs200bn.
•Additional tax exemption provided in 2011-11 has been extended on long term infrastructure bonds.
•Corpus of Rural Infra Dev Fund to be raised from Rs. 16,000 cr to Rs.18,000 cr.
•Extension of deduction for investment in long term infra bonds to FY12 (Rs.20,000)
•Exemption of service tax to 'Works Contracts' service provided for construction or finishing new residential complex under JNNURM and Rajiv Awaas Yojna.
•Aims to provide impetus to borrowings from overseas by facilitating setting up of infra debt funds. The income of such debt fund would be exempt from tax.
TDS would be at a concessional rate of 5%.
•MAT raised from 18% to 18.5% and surcharge reduced from 7.5% to 5%

Impact: POSITIVE
These proposals are expected to increase the funding of infrastructure sector and this inturn is expected to
spur economic growth through additional employment opportunities and asset creation.
 HOSUING

Budget Announcements:

•Existing scheme of interest subvention of 1% on housing loan further liberalised on home

loans of up to Rs1.50mn from the current limit of Rs1mn.
•The existing housing loan limit for dwelling units under priority sector lending enhanced from
Rs2mn to Rs2.50mn.
• Provision under Rural Housing Fund enhanced to Rs30 bn from the existing Rs20 bn.
• Tax free bonds of Rs50 bn to be issued by HUDCO in FY12.
• MAT to be levied on developers of the Special Economic Zones (SEZs) as well as units operating
in SEZs to ensure equal sharing of corporate tax liability.
• To enhance credit worthiness of economically weaker sections and LIG households, a
Mortgage Risk Guarantee Fund to be created under Rajiv Awas Yojana (RAY).

Impact: POSITIVE
These proposals are expected to demand for affordable housing in the economy.Investments are also
expected to go up due to the linkage of investment linked tax deduction for affordable housing projects.
However most laudable aspect is the intent to provide HOSUING FOR ALL SECTIONS of the economy. This
would have other socio-cultural impacts which across the developed worlds like USA and France have been
observed to be extremely positive contributors for the well being of the society(World Bank)
 AUTOMOBILE

Budget Announcements:
• A National Mission for Hybrid and Electric Vehicles to be launched in collaboration with all
stakeholders
• Full exemption from basic customs duty and special countervailing duty (CVD) on specified parts
of hybrid vehicles. Further, prescription of a concessional rate of excise duty of 5% on specified
parts (such as battery pack, battery charger, AC/DC electric motors and motor controllers).
• Full exemption from basic customs duty on batteries imported by manufacturers of electrical
vehicles.
• Reduction in the excise duty from 10% to 5% on the kits (and their parts) for converting fossil fuel
vehicles into hybrid vehicles.
• Concessional excise duty of 10% on vehicles based on fuel cell or hydrogen cell technology.
• Concessional rate of excise duty at 10% on factory-built ambulances. Further, refund-based
concession to vehicles up to a seating capacity not exceeding 13 persons (including the driver).

Impact: NEUTRAL
The Budget announcements for the auto sector are aimed at its long term development, with a focus on clean technology.
These announcements to have any significant impact in the short term, considering the fact that hybrid/electric vehicles have
a meagre share in domestic vehicle sales.

Increased allocation to the infrastructure and defence sectors could indirectly benefit manufacturers of commercial vehicles.
Revision of wage rates under the Mahatma Gandhi National Rural Employment Guarantee Act (NREGA) and the Government’s
continued thrust on rural development are encouraging factors for boosting demand for two wheelers in the rural and semi-
urban areas.
 METALS

Budget Announcements:
• Proposal to enhance the rate of export duty for all types of iron ore and unify it at 20% ad
valorem.
•Reduction in basic customs duty on Calcined Petrol coke to 2.5% from 5%
• Full exemption from export duty is being proposed on iron ore pellets to encourage the value
addition process for fines.
• Proposal to fully exempt stainless steel scrap from basic customs duty.
• A Group of Ministers is proposed to be set up to consider all issues relating to reconciliation
of environmental concerns emanating from various departmental activities including those
related to infrastructure and mining.
• Proposal to further extend Rashtriya Swasthya Bima Yojana to cover unorganised sector
workers in hazardous mining and associated industries like slate and slate pencil, dolomite,
mica and asbestos etc.

Impact: NEUTRAL
The redution in customs duty on petrol coke would have a limited impact on alumiunium.

The hike in export duty for iron ore is expected to result in long term benefit due to the thrust on conservation of domestic
natural resources which in turn would result in self reliance for the domestic economy.
 CAPITAL GOODS

Budget Announcements:
• Concessional customs duty of 5% on specified agricultural machinery to be reduced further to 2.50% and the
same is extended to parts of such machinery.
• Capital investment in fertiliser production proposed to be included as an infrastructure subsector.
• Reduction of the basic customs duty on micro-irrigation equipment from 7.50% to 5%.
• Capital investment in creation of modern storage capacity will be eligible for viability gap funding of the
Finance Ministry. Cold chains and post-harvest storage to be included as an infrastructure sub-sector.
• Full exemption from excise duty to air-conditioning equipment and refrigeration panels for cold chain
infrastructure. Full exemption from excise duty to equipment used in cold storages, mandis and warehouses.
• Exemption from import duty for spares and capital goods required for ship repair units extended to import by
ship owners. Concessional basic customs duty of 5% and countervailing duty of 5% applicable to high-speed
printing presses is extended to mailroom equipment.
• Full exemption from basic customs duty is being extended to tunnel boring machines, bio-asphalt and
specified machinery for its application in the construction of national highways.

Impact: NEUTRAL
Capital Goods contribute directly to capacity creation in the economy. Moreover historical data shows that an increase in
capital goods production would have a direct positive impact on the investment component of GDP. The Incremental Capital
Output ratio for the Indian economy as outlined by Prime Minister’s Economy Advisory council is 4.This indicates that a growth
in savings vis a vis investments would create a four time increase in production. Hence a huge impetus to growth can be
observed from this segment.Moreover the above outlined slew of measures indicate addressal to structural issues of inflation
and capital formation in agricultural sector.This augurs very well for the economy.
 CONCLSUION

This budget in short with a strong intent to support manufacturing sector has outlined various measures which
directly and indirectly positively affect the growth.

Many measures have been outlined to create additional capacities for growth. However these incentives may
fail to materailse to full extent due to the following measures:

•Poor Addressal to some Structural Issues: The Disbursal rates in the sanctioning the amounts for rural
infrastructure and Bharat Niramand have been considerably low in the last few years.For example out of Rs
16000crs allocated for Rural Infrastructure only Rs3000crs have been dibursed.This delay is attributed to poor
administrative policies at state levels.Budget does not address these issues.

•High on optimism and low on contingency plans: Budget also assumes a high growth momentum in Indian
economy to continue. However in the wake of uncertainty in commodity prices especially crude, economy
might undergo severe pressures through inflation, currency depreciation, interest rate hardening and worsening
of current account balance. These would evoke strong negative sentiments for the FII inflows. Any reversal in FII
trend might leave domestic investment sources dry.Thus effecting many infrastructure proposals in the budget.

•Possibility of strong core inflation: The externalities like augmented demand due to increase in disposable
incomes, higher employment would create demand in a relatively short term period. However measures of
capacity creation have long gestation.Henec a mismatch in demand and supply of economic resources might
arise in FY12 materializing as strong Core inflation.