Budget 2017-18 is going to be unique in many aspects. It will be for the first time that the Railway budget will be merged with the Union budget, and will be announced a month in advance, on 1st February. GST all set to be implemented in July 2017 and with the effect of demonetisation still circling in the market, expectations are somewhat higher than in the preceding years.
For a sector which still operates 80% on cash, sales suffered in the aftermath of demonetisation, by 40% to be exact... we expect the government to address this issue.
The past year started off with the promise of being one the most profitable financial years for the consumer durables industry in almost four years. The implementation of the 7th Pay Commission, the favourable monsoon and the increase in buying power of citizens all served as positive signals for the industry. However, the move to demonetise higher denomination currencies affected the ACE (Appliances and Consumer Electronics) industry to a large extent. While demonetisation was done for the commendable aim of curbing black money, it caused significant liquidity issues within the economy. For a sector which still operates 80% on cash, sales suffered in the aftermath of the decision, by 40% to be exact. The move has affected the sector in the second half of the third quarter and might have withdrawal effects too. However we expect the government to address this issue and implement relevant measures to minimise the impact of demonetisation.
We anticipate the budget to reach a consensus over some of the issues that have slowed the ACE industry's growth for a sizeable amount of time. An industry which is a significant contributor to the economy, it is anticipated to register almost a 2X growth over the global growth average as reported by Frost & Sullivan in its Skilling for Durable India report 2016. The ACE market is expected to reach ₹192,847 crore in 2021, growing by a CAGR of 10.1% from 2015.
Today, mobile handsets that are a key element to the industry are facing limitations. First and foremost there is no clarity on the GST rates on mobile handsets which raises the question of whether the "Make in India" initiative would still enjoy patronage under the GST regime as well. We hope the budget association is able to shed some light on the issue. We expect it to reduce the CGST rate to 0% applicable without input tax credit for domestically manufactured mobile handsets. Further, SGST at 5% should be applicable at each stage which should be creditable (as under the present regime).
We are counting on the augmentation of the BCD rate on ACE goods from 10% to 20% to discourage imports and promote the idea of "Make in India".
Additionally, in the previous GST Council meeting the government placed refrigerators, washing machines and other electronics of daily use in the 28% slab rate under the goods and services tax. We expect the 2017 budget to thoroughly look into this decision and place the appliances under the 18% slab and mobile phones under the 12% slab rate—an augmented GST rate will increase the tax burden on the goods, which would be inflationary. After all, consumer durables and mobile handsets have become things of necessity rather luxury.
Currently, appliances such as microwave ovens, air conditioners, televisions, washing machines and refrigerators enjoy a BCD (Basic Customs Duty) rate of 10%. These goods can also be imported as completely built units from ASEAN and SAFTA countries like Thailand and Japan at concessional rates of BCD ranging from 0-6%. The practice has resulted in the erosion of the component supply base in India, since there is not enough domestic demand to be catered to by the component manufacturers and they have not been able to reach economies of scale.
We are counting on the budget committee this time around to augment the BCD rate on ACE goods from 10% to 20% so as to discourage the import of these commodities and promote the idea of "Make in India". China has emerged as the world's largest producer and supplier of manufactured goods and components—its scale of production is almost 7-10 times the level of production in the Indian market, and they have also devalued their currency by almost 12% in the last few months. The government of India previously increased the BCD rates within the automotive sector as well which further resulted in the increase of exports and global investment numbers.
Lastly we are counting on the government to formulate on its decision on the imposition of Special Additional Duty (SAD) on populated PCBs and mobile handsets alongside phased manufacturing. This will help in promoting local electronics manufacturing in the country, thereby achieving the government's objective of "Make in India". Although the timeline for imposing the duty needs to be calibrated, we expect it to be withdrawn for a period of one year as a lot of investments have been made in the interim period.