India to boost industrial output, ease cost burden in 2015-16

Focus article by Nurluqman Suratman

SINGAPORE (ICIS)–India hopes to ease cost burdens of domestic producers, including petrochemical manufacturers, as a means to boost the country’s overall manufacturing activities in the new fiscal year, but the country’s high debt burden could constrain future growth, analysts said.

Its central bank on Wednesday issued a surprise 25-basis point cut in key interest rates to 7.5% to support growth amid easing inflation. The second interest rate cut this year was meant as a pre-emptive policy “given low capacity utilisation and still-weak indicators of production and credit off-take”, the Reserve Bank of India said in a statement.

The Indian economy is projected to post growth of between 8.1-8.5% in the fiscal year ending March 2016, with inflation average seen at 5.0-5.5%, according to the country’s Ministry of Finance (MOF). Economic growth is expected to accelerate from the 7.4% target in the current fiscal year and return to levels last seen five years ago.

The macroeconomic targets are contained in the national budget drafted by the MOF and announced on 28 February.

“Recent policy announcements, including the budget, support Moody’s expectation that India’s growth will remain stronger than the global average,” credit ratings firm Moody’s Investors Service said.

Tata Chemicals managing director R Mukundan said: “There is nothing specific announced for any particular industry including chemicals and fertilizer industry, however, rationalizing subsidies is a welcome step and we look forward to its implementation.”

India has halved its petroleum subsidy following steep falls in crude oil prices, but will be keeping its massive subsidies on food and fertilizers, under the proposed budget.

Reduction in customs duty on certain raw materials will also help Indian manufacturers going forward, Mukundan said.

According to petrochemiocal industry sources, India will be cutting the basic customs duty of selected petrochemical and plastic feedstocks when its 2015-2016 fiscal year begins.

Customs duty is a type of indirect tax levied on goods imported into India, as well as on goods exported from the country.

For ethylene dichloride (EDC), vinyl chloride monomer (VCM) and styrene monomer (SM), the basic customs duty will be reduced to 2.0% from 2.5%, while the special additional duty that applies on naphtha for use in the production of excisable goods will be halved to 2%.

Meanwhile, the Indian government will be raising its infrastructure spending by $11.3bn for the upcoming fiscal year to boost economic growth.

These proposals and “the focus to support the start-ups will also go a long way in encouraging domestic manufacturing,” said Mukundan of Tata Chemicals.

Among legislative fiscal measures proposed by the MOF were the cutting of the country’s corporate tax to 25% from 30% over the next four years and the imposition of goods and services tax (GST), which will replace all current central and state taxes across India.

The MOF also proposed the abolition of wealth tax but an extra 2% surcharge will apply to all individuals with a taxable income of Indian rupees (Rs) 10m or higher.

Credit ratings firm Moody’s Investors’ Service, however, said that the proposed increase in India’ s service tax – the indirect tax paid on the value of services consumed – to 14% from 12.36% will raise the cost of production for domestic corporates.

Lowering the fuel subsidy allocation for fiscal 2016 could also have a negative impact on upstream oil and gas firms “as it indicates that the subsidy burden of these corporates will remain high in fiscal 2015 and that they will have to bear any shortfall in the subsidy amount in fiscal 2016,” Fitch Ratings said in a note.

“The continuation of the structural reform process, and efforts to reduce infrastructure bottlenecks – as reflected in several items in the budget – is credit positive,” it said.

In line with plans to boost economic growth, India has pushed back its target to reduce its debt-to-GDP ratio to 3% by a year to 2017-2018.

India’s medium-term fiscal consolidation strategy has been loosened somewhat and the lack of a more ambitious deficit reduction path will mean that India’s debt burden will continue to be a rating and credit weakness, Fitch Ratings said.

The country’s debt-to-GDP ratio is projected to hit 4.1% in the current fiscal year ending March 2015.

Additional reporting by Steve Tan

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