Keane Insight

Duty cuts: Hardware industry dances on the streets

After years of complaining of stepmotherly treatment, the hardware industry finally has reason to cheer after the finance minister suddenly slashed customs duties and cut excise rates. While political analysts may see this as nothing but poll-related sops, the fact remains that the Indian hardware sector will be hugely benefited, says Srikanth R P

When Budget 2003 was announced at the end of February 2003, Indian hardware vendors were an extremely disappointed lot. They were upset with the finance minister for just giving a cosmetic touch to the entire tariff reduction process by reducing customs duty from 15 percent to 10 percent in the case of routers, switches, modems and fixed wireless terminals. But the recent surprise duty and excise rate cuts by the government, with an eye on early general elections, has brought much cheer to the hardware sector.

Indian hardware players are jubilant about the government’s decision and are unanimous on the opinion that this move will boost hardware manufacturing in India. The government’s decision to halve excise duty from 16 percent to 8 percent will have a major effect on the prices of PCs, which will head downwards. This has been followed by a decision to abolish the 4 percent Special Additional Duty (SAD). Some experts expect PC sales to rise by as much as 40 percent after this move.

Gains for PC vendors

Says Bimal Raj, CEO, Allied Digital, “With this announcement, the gap between the branded players and the grey market has decreased substantially. Excise duty was the single biggest deterrent in the PC industry. We feel that the excise cut and removal of SAD will narrow the price difference between the branded players and assemblers from 15 percent to as low as 4 percent.”

Obviously, branded PC vendors are celebrating. Says Raj Saraf, chairman and managing director of Zenith Computers, “The reduction of excise duty will hurt the grey market that used to benefit by importing goods without paying any duty. We foresee the prices of PCs dropping to as low as Rs 15,000 in less than a week from today. As prices drop, volumes will increase and branded manufacturers will get an upper hand.”

Arun Narayan, product manager, PCS Industries, believes that this is a dream come true for PC vendors. He says, “The impact would be significant as excise duty has always been calculated on the sale value. We believe that the direct impact on PC prices would be in the range of 6-8 percent.”

Manufacturing gains

The abolition of the 4 percent SAD in the case of components could also encourage PC players to seriously start looking at India as a manufacturing base. Additionally, the abolition of the SAD in the case of components could also help local manufacturers become more competitive in the global market. Says K R Naik, chairman and managing director, D-Link India, “Manufacturers can now import low-value and large-volume IT components and stock them here while high-value components like chips and ICs can be procured just in time for manufacturing. IT exports will increase and this will improve India’s position as an IT hub.” Naik believes the initiatives taken by the government will lead to increased investments in the IT sector and lead to the development of a strong IT component industry in India.

This move from the government could also help boost the already booming ITeS industry. For instance, the biggest cost for the call centre/BPO space has been the cost per seat. With the prices of PCs falling, vendors believe that this would have a significant impact on the ITeS industry.

Specific infrastructure equipment for basic, cellular, Internet, VSAT, radio paging and public mobile radio trunked services and parts of such equipment are also exempt from basic customs duty now. The ISP industry, which has been fighting hard for survival because of unfavourable government regulations now has reason to cheer as equipment like switches and routers will now be exempt from customs duty. Additionally, customs duty on specified raw materials used for manufacturing of electronic components or optic fibre cables has being reduced. This move will go a long way in boosting the infrastructure and connectivity needs of the country. Recorded video compact discs (VCD) and digital video discs (DVD) have also been exempted from excise duty, which will benefit domestic vendors like Moser Baer.

Though the announcement says that baggage rules have been relaxed and individuals who bring notebooks as part of baggage are exempt from duty, it is still not clear whether this is applicable to a fresh buy or only in the case of a transfer of residence.

In summary, every company that Express Computer spoke to said that they were extremely positive and optimistic about the future. For once, the baby (hardware) who has cried all his life for attention is finally getting his due.

srikanth@expresscomputeronline.com