Chemicals: Side stepped in the Budget

• The following changes in the duties have been proposed in the Union budget 2010-11:
  Central Excise duties partially rolled back and the standard rate on all non-petroleum products enhanced from 8% to 10% ad valorem.
• The budget proposes to reduce surcharge on domestic companies to 7.5% from 10%.
• Minimum Alternate Tax (MAT) to be increased to 18% of book profits from 15%.
• Weighted deduction on expenditure incurred on in-house R&D enhanced from 150% to 200%. Also weighted deduction on payments made to National Laboratories, research associations, colleges, universities and other institutions, for scientific research increased from 125% to 175%.
• The rate of service tax of 10% applicable since 24.02.2009 has been continued.

Budget Impact

No sector specific announcement was made in the budget 2010-11. So it has a neutral impact on the sector.

Stocks to watch

Castrol India; BOC India; Beck India; Foseco India; BASF India; Industrial Organics

Outlook

Indian economy is passing through a difficult phase due to global economic meltdown. With advanced economies of USA, EU and Japan projected to contract during the year, IMF and other agencies have revised the GDP growth downwards for India as well. This has exposed Indian producers to surge of imports from Asian and Middle East countries that were traditionally focused on exporting to China.

Chemical industry players from Middle East countries with their huge feedstock cost advantage are looking at India as an attractive destination for their products since export demand from China, Europe and other traditional destinations have dried-up.

This would pose additional challenge to Indian producers in retaining their share in domestic market. With surge of imports from Middle East observed in many product categories, chemical sector has become extremely vulnerable.

Indian economy has been rapidly opened up to global suppliers while internal reforms are progressing at a relatively much slower pace. This has made local market more accessible to overseas suppliers than to Indian producers.

Plethora of taxes, levies and duties charged while transacting business internally, within and across state, often exceeds the duty barrier that exporter to Indian market face. This high cost of internal transactions needs to be compensated appropriately so that Indian manufacturing sector gets a level playing field.

However no major announcements were made in the Union budget 2010-11. Overall Union Budget 2010-11 maintained status quo for the Chemical Industry.

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