Duty cut to help paint sector

Budget 2005-06: Paints

The Indian paints sector is valued at Rs 6600 crore (Rs 66 billion) in value terms and is very fragmented. The organised sector accounts for about 70 per cent of the business while around 2,000 players in the unorganised players accounts for the remaining.

Budget Measures

	Construction of residential complexes having more than twelve residential houses or apartments together with common areas and other appurtenances.
	Exemption on tax deductible housing loan to continue.
	Under the rural development programme, 6 million additional houses to be constructed for the poor.
	Peak customs duty reduced from 20 per cent to 15 per cent
	The new income tax brackets, the change in exemption and deductions available to individuals and the increase in exemption for women.
	IT to generate around 7 million jobs till 2009.

Budget Impact

	The paint sector will benefit from the reduction in the peak customs duty on imports of raw materials. Since raw material typically account for 55 per cent to 60 per cent of sales for paint majors (of which around 50 per cent will be accounted for by imports), this will lower the cost of raw materials, even as input costs continue to trade firm. Packaging material costs will also be lower going forward.
	While the lowering of customs duty is a positive on the costs side, the threat from imports from select South East markets exists.
	On the balance, though cost of select residential flats would go up, higher savings and the focus on job creation by the government will percolate into higher demand for houses in the long-term.

Sector Outlook

Historically, the paint sector has grown at 1.5 times to 2 times GDP. But if the government is able to execute its rural focus in the long-term and increased investment in select urban cities in the medium term, we will not be surprised if the growth shifts to a new trajectory. While we are positive at the topline level, in the next one-year, the challenges of firmness in input costs will subdue growth in profitability. To that extent, investors have to exercise caution. Overall, we believe that this sector is a play on the economy, for which prospects are promising.

Industry Wish List

	The government has given great impetus to the housing industry and one hopes that the same consideration will be given in the current budget also. Housing sector revival boosts the growth of the general economy and thereby the paint industry.

	The government should give incentives to companies that invest money in R&D activities by way of weighted deductions for revenue spends and accelerated depreciation rates for investment in R&D equipments. This will help the Indian industry to become globally competitive.

Budget over the years

Budget 2002-03

Budget 2003-04

Budget 2004-05

Peak customs duty reduced to 30 per cent from 35 per cent.

Continuation of housing incentive.

Administered interest rates lower by 50 basis points.

Continuation in interest exemption on housing loans.

Peak custom duty reduced from 30 per cent to 25 per cent.

Spending in health, education and housing given priority by the government.

Income from housing projects for the construction of residential units of prescribed specification is exempt from income tax.

Allocation of Rs 2200 crore (Rs 22 billion) to provide a subsidy upto Rs 10,000 and loan upto Rs 40,000 for the eligible households.

1.0 million dwelling units financed so far and National Housing Bank has offered to reduce the rate of refinance by 25 basis points this year.

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