NHDP-III to be launched in FY06

Budget 2005-06: Engineering
Power business contributes to a large part of the engineering sector's order books. And with the government clearing the blueprint to add 100,000 MW of electricity generation capacity by 2012, the engineering sector is likely to be a major beneficiary. Also, as part of the government's APDRP program, the states will have to unbundle the generation, transmission and distribution, and invest in T&D infrastructure. This will further augment the performance of the engineering sector.

Budget Measures

	An SPV to be launched to finance infrastructure projects that are financially viable. Investment limit for 2005-06 is fixed at Rs 100 bn.
	NHDP-III to be launched in FY06 to target selected high density highways not forming part of the GQ or the N-S E-W corridor; Rs 14 bn provided in FY06 to four-lane 4,000 kms.
	Excise duty on ACs has been reduced from 24 per cent to 16 per cent.

Budget Impact

	The launch of the SPV to boost infrastructure development, which will consequently aid business for engineering companies.
	The move to reduce excise duty on ACs will have a positive impact in select companies who are into the business of electromechanical projects and cooling services.

Sector Outlook

The Indian engineering industry derives a large proportion of its revenues from the infrastructure sector. As such, the creation of a special purpose vehicle to finance infrastructure projects is a step in the right direction. Within the broad spectrum of infrastructure, the power sector is a major contributor to revenues for engineering companies. Considering the high transmission and distribution losses (around 45 per cent), the government initiated the APDRP scheme under the Electricity Act of 2003. Under this scheme, an expenditure of Rs 400 bn on behalf of the central government has been planned. This will help companies providing engineering solutions in the T&D space. Moreover, the government has plans to add 100,000 MW of power by 2012. In this backdrop, we expect the order books of engineering majors to grow at a healthy rate. Considering government's focus on the power and infrastructure spending, we remain positive on the sector over the long term.

Industry Wish List

Ravi Uppal, Vice Chairman & Managing Director, ABB India

General

Reduce composite tax burden on corporates
Invest in infrastructure with a sense of urgency
Bring down peak customs duty to 15 per cent and announce concrete timeframe to bring to ASEAN levels
Simplification of tax structure and increased efficiency of tax administration

Power

Speedy implementation of Electricity Act and recently announced National Electricity Policy
Increase government investment in power and clearly indicate funding pattern. At the same time, facilitate private investment by making it financially viable and ensuring a fair and transparent regulatory regime
Correct inverted customs duty structure

Manufacturing

Proactively facilitate & encourage investment in Manufacturing through incentives like investment allowance, tax holiday for new undertakings etc.
Incentivise exports of manufactured goods, engineering services etc.
Process
automation industry contributes greatly to quality and productivity making Indian manufacturing globally competitive. It should therefore enjoy the same benefits as computer hardware for customs and other indirect taxes as well as depreciation.
Service tax should be exempted on domestic engineering services and all other input services used in the delivery of output services that are either exported or rendered in the domestic market. This will help in development and growth of the emerging engineering services market

Budget over the years

Budget 2002-03	Budget 2003-04	Budget 2004-05

Allocation of Rs 2,500 crore for the Pradhan Mantri Gram Sadak Yojana (PMGSY). Private sector participation in Greenfield airport projects will be encouraged through a package of concessions.	48 new road projects with an estimated cost of Rs 40,000 crore (Rs 400 billion) to be initiated. Renovation of two air ports at an estimated cost of around Rs 11000 crore (Rs 110 billion).	Government's stress on infrastructure spending, in areas like power, construction, ports, and civil aviation Specified raw materials for manufacture of parts of cathode ray tubes and specified capital goods for manufacture of mobile handsets, plasma display panels exempted 10 per cent rebate on railway freight rates for heavy machinery 2 per cent education cess on all taxes
		[Read more on Budget 2004-05]

Key Positives

	Power play: Since power utilities are one of the biggest consumers (generation, transmission and distribution) for engineering companies, reforms introduced in the power sector like privatisation of SEBs will help in strengthening the order book size. Huge addition in power generation capacity (100,000 MW by 2012), in order to meet the demand supply gap will be a big positive for the sector.
	Infrastructure development: The government is focusing on development of infrastructure like roads, ports etc. This will be big positive for engineering and construction companies.
	Industrial 'act': Industrial divisions of engineering companies are likely to benefit from the increased focus on automation and capacity addition plans drawn by the India Inc.

Key Negatives

	Slow pace of reforms: Since the new government is planning to review some of the provisions of the Electricity Act, reform implementation could slowdown. To that extent, the order booking for engineering companies could grow at a slower rate.
	Captive competition: Duty free import of T&D equipments by power generation units if allowed by government can have some impact on margins of the T&D majors because of competition

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