FocusIndian tax cut to boost local polymer demand

By Prema Viswanathan

SINGAPORE (ICIS news)--India's 4% reduction in excise tax (central value added tax, CENVAT) for all consumer products recently announced by the  government is expected to bolster domestic demand for polymers, producers, traders and end users said on Thursday.

The excise tax has been reduced to 10% from 14%, as part of the government's stimulus package to encourage domestic spending which was announced earlier on Monday.

"It is too early to assess the impact of the tax cut, but consumers will now have more disposable income, so we expect spending on consumer durables to increase, which in turn will boost demand for polymers,” said a source close to Haldia Petrochemicals, a major polyolefins producer.

The price cuts announced by the automotive sector and the cement industry in the wake of the government's announcement is bound to boost demand for polypropylene (PP), said a source close to Reliance Industries, India's largest polymer producer.

"The price cuts indicate that the tax cuts are being passed on down the chain and will definitely boost PP demand in the longer terms, as these two sectors are key to PP consumption," the source said. PP injection and copolymer grades are used extensively in automotive production, while raffia PP bags are used for cement packaging.

The full impact of the government's stimulus package will only be seen in January, when buyers return to the market after the Christmas and New Year break, said an end user of PP film.

"We are already seeing some pick-up in demand, but it is more due to low inventories. The real impact on demand will be felt later," he said.

A polyethylene (PE) converter who caters to the Indian market said that the 4% tax cut would improve his company's cash flow situation, "which is very important these days, when we are all tightening our belts to cope with the economic downturn."

The tax reduction would improve transparency in the supply chain, said a Mumbai-based polymer trader.

"There will be less incentive now for the unscrupulous traders to under-invoice their deals, which will benefit honest traders like us," he said.

"We hope the government will further reduce excise tax and eventually phase it out," he added.

However, some market players said the impact of the tax cut would be minimal.

"Only around 10-15% of the polystyrene (PS) end user segment, mainly the stationery and bangles manufacturers, will be affected by this move, as the rest are exempted from excise tax anyway," said a source close to Supreme Petrochem, India's largest PS producer.

Export-oriented polymer converters, who also enjoy exemption from the tax, were not affected by the move.

"For us, it will be business as usual," said a polyolefins converter, who exports most of his production to the US and Europe.

Polyurethane suppliers were also not very upbeat about the tax cut.

“There’s no significant impact in the short term because even if we pass on the lower costs by cutting our selling prices, buyers will still not be interested,” a polyurethane (PU) raw material supplier said.

“PU raw material demand has been weak because the local furniture and bedding application sector has been hit by weaker consumer demand resulting from the global economic downturn,” he said.

Chow Bee Lin contributed to this story

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