An Uneventful Budget Binod Agarwal, President Dear friends, The Union Budget 2007 has left the Indian industry & trade somewhat cold. To my mind, it is not because the Union Budget 2007 goes wide off the mark and derails the growth process. It is because there were a lot of expectations of the industry and business community against the backdrop of buoyancy in economy and revenue collections. The industry was expecting that going forward, the FM would come up with bold measures aimed at further rationalisation of taxes and simplifying the tax regime to take the growth momentum to the next level. The Union Budget has clearly fallen short of the expectations of industry & trade. Given that the inflation has been constantly rising in this year, the FM had no choice but to raise resources for correction in supply-side mismatches, particularly of primary articles including wheat, pulses, edible oils and cement. The Union Budget making higher allocations for agriculture and rural economy including expansion of farm credit, augmentation of irrigation facilities, rejuvenation of water bodies and recharging underground water, and scaling up production of certified seeds for higher productivity of pulses, is understandable under the circumstances. Reduction in import duty on edible oils and differential excise duty on cement also seek to arrest inflationary trends and to provide immediate relief to the Aam Aadmi. In the context of Government's compusions, the Finance Minister has done a fine balancing act by allocating higher resources for the agriculture, rural, health and education sectors without tinkering with the tax structure much. Since the implementation on the ground and not the outlays, has been the Achilles heel in the past, the real test of the Government would be how much and how soon these allocations are going to translate into outcomes. It also remains to be seen how fast we are going to see action on the ground and whether the resources earmarked for the target groups would percolate down to the intended beneficiaries. Road infrastructure development is one example. NHDP has been bogged down with delays arising primarily out of land acquisition and awarding contracts. The road construction activity under NHDP has virtually come to halt with mere 0.26 km of road being added per day. The same is the case with rural and inter-state road projects that are well behind their scheduled time of completion. As far as the automobile industry is concerned, the Union Budget is not something, which will make the industry go gung-ho. In other words, the Budget is neither rocking nor shocking. I would term it as an uneventful budget for the reason that given its excellent performance in the last 3-4 years, there was air of expectancy within the auto industry, as also within trade and society as a whole that the excise duty on all cars irrespective of their size and engine capacity would be rationalised at 16%. All said and done, the Budget is a mixed bag for auto industry. One of the positive aspects of the Budget for automobile industry is that the ball has been set rolling for phase-out of CST, which should eventually pave the way for introduction of composite GST for both goods and services from 2010. The Budget proposes to reduce the CST to 3%, to begin with, from 1st April 2007. The other measure that should cheer the automotive industry is the extension of weighted deduction of 150% for in-house R&D for a period of five years up to 2012. The higher allocations and thrust on Bharat Nirman programme including rural, agriculture, health & education sectors and road infrastructure development would help raise the rural incomes and lead to increased pace of economic activity and people's mobility. This will, in turn, create demand for vehicles. Reduction in peak rate of customs duty should also help in bringing down somewhat the production cost of vehicles for some of the manufacturers. Marginal increase in exemption limit for income tax will hardly have any significant positive impact. However, there are a number of sore points on the flipside, which may negate the pluses for automotive industry contained in the Budget. Moreover, a number of additional services have been brought into the service tax net, which are likely to put cost pressure on the auto companies and dealerships that have already been witnessing rising interest costs due to hardening of interest rates for the last two years or so. (i) Increase in dividend distribution tax to 15%; (ii) levy of additional cess of 1% for secondary education; and (iii) levy of service tax on renting/leasing of immovable property for commercial purposes, are some of the measures that are likely to dampen the upbeat mood within industry & trade. On balance, the impact of Union Budget on auto business will turn out to be neutral. The silver lining is that the economy is doing very well currently and is expected to sustain the growth momentum in the short and medium terms in view of the fact that strong macroeconomic fundamentals are in place. As a result of rising disposable incomes and aspirations of people, the burgeoning middle class will keep the industry on a high growth trajectory. The thrust on rural economy will also expand rural market for automobiles, which remains vastly untapped. Before the Union Budget is passed, we, in FADA, would urge the Government to (i) Rationalise the excise duty on all cars at 16%; (ii) Increase the depreciation rate for cars from 15% to 33 1/3% in tune with the market realities; and (iii) Roll back the service tax on renting/leasing of immovable properties for commercial use proposed in the budget, to keep the growth momentum going. Adverting to the activities of FADA, by the time this issue reaches you, our major event in the eastern region, viz. Eastern Region Auto Seminar on the theme "Managing Growth" scheduled for 15th March 2007 at Hotel Taj Bengal, Kolkata would have" concluded. I am happy to inform that we have been able to enlist an impressive array of speakers who would be sharing their vision and wisdom with the participants in various areas of dealership functioning. The convention - a unique opportunity for the automobile dealers and allied businesses in eastern region in particular to enrich their experiences, could not have been better timed given that West Bengal is re-emerging as an industrial and automobile-manufacturing hub. I am expecting this event to be a memorable one for FADA, MIA, automobile dealers and other participants. Since I am writing this column before the day of convention, I shall share the outcome of its daylong proceedings on various aspects of dealership management in the next issue. Regarding the FADA Academy training programme, which I have talked about in the previous issues of this Journal, we are making headway, albeit at a slower pace. The training courses at Kolkata and Kolhapur for Sales Executives are set to commence in April 2007. The training courses at Mumbai, which were also slated to commence in March/April, have got stuck due to some glitches that are being sorted out. Hopefully, the first session will get going at Mumbai soon. I count on your inputs and suggestions for further strengthening the activities of FADA and making it more useful for its members and society. With best wishes, Yours sincerely, Binod Agarwal