Budget to trigger demand for consumer durables

The consumer durables segment can be segregated into consumer electronics (TVs, VCD players and audio systems etc.) and consumer appliances (also known as white goods) like refrigerators, washing machines, air conditioners (A/Cs), microwave ovens, vacuum cleaners and dishwashers.

Budget Measures

	Hike in allocation towards rural development and increased spread of employment guarantee scheme
	Dividend distribution tax to be hiked from 12.5% to 15%
	Additional education cess of 1% to fund secondary and higher education

Budget Impact

	Increase in spending towards upliftment of rural populace to lead to increased demand for durables in the long term
	Higher education cess and dividend distribution tax to impact net profits and retained earnings

Sector Outlook

As we see it, India's per capita penetration of white goods continues to remain dismal. Availability of easy financing options, increased competition resulting in falling prices and reduction in customs duty has been boosting retail sales. We expect these factors to continue to assist white goods demand going forward. However, as a matter of conservatism, keeping in mind the paltry margins and the highly commoditised nature of the sector, we would classify this sector as a high-risk one for retail investors.

Company Impact

Hike in allocation towards rural development and increased spread of employment guarantee should increase demand for consumer durables, thus leading to higher growth for companies like Videocon.

Industry Wish List

	Cut in excise duty from 16% to 8%
	Removal of inverted duty structure, particularly so due to the free trade agreement (FTA) with Thailand
	Recognition of convergence in usage of technology products from a taxation perspective

Budget over the years

Budget 2005-06		Budget 2006-07

Excise duty on clocks, watches of retail sales prices upto Rs 500 per piece is being raised from 8% and 16%. Parts of clocks, watches of retail price upto Rs 500 per piece will now be liable to tariff with an effective tax rate of 16%. Excise duty on monochrome television has been raised from 8% to 16%. CTV will attract a uniform excise duty of 16%. Excise duty on imitation jewellery has been raised from 8% to 16%. Increased spending on infrastructure and maintaining economic growth momentum from a long-term perspective.		Excise duty has been imposed @ 2% on articles of jewellery on which a brand name or trade name is indelibly affixed or embossed on the articles of jewellery itself. Unbranded articles of jewellery and other articles of precious metals will continue to be exempt from duty. Imitation jewellery to attract lower excise duty of 8% as compared to 16% earlier. Excise duty on air conditioners is being reduced from 24% to 16%. Consequently, abatement from retail sale price is also being reduced from 35% to 30%. Peak customs duty reduced from 20% to 15%. The new income tax brackets, the change in exemption and deductions available to individuals and the increase in exemption for women.
[Read more on Budget 2005-06]		[Read more on Budget 2006-07]

Key Positives

	Yet to catch up: Penetration of durables continues to remain sluggish when compared to other developing economies.
	The India story: Rising income levels, consumption patterns and urbanisation are some of the key factors that would result in higher growth in volumes in the long run.
	Better affordability: Easy availability of finance has stimulated consumers to buy durables.
	Rural unexploited: With the government focusing on rural electrification programme, the consumer electronic manufacturers stand to benefit over a period of time. But this has been slow to come by.

Key Negatives

	Mismatch in duties: Higher import duty on key raw materials (ex: colour picture tubes) has been a cause of concern.
	Fiercely competitive: Exchange schemes and pricing-play by some manufacturers have had a negative impact on top players. Prices of durables and electronics have been on the decline over the last three years
	Growth is slow: Volatile performance of the agricultural sector has had a negative impact on demand. The sector's performance is highly dependent on monsoon and reforms, which has failed often.
	Imports Vs Indian: Threats of cheaper imports from China and other South East Asian countries, both for electronics and watches.

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