Budget creates confusion in IT industry over countervailing

However, not everybody is happy with the move. "In one stroke it legalises the grey market," scoff the big fish of the industry. The bigger domestic brands do not find anything "swadeshi" in the Budget for the manufacturing industry. More than what the government gave with one hand (by way of reduction in duty rates in some components), has been taken away by the other through the 8 per cent countervailing duty, feel industry representatives.

Says Vinnie Mehta, deputy director, Manufacturers’ Association for Information Technology (Mait): "The introduction of the special additional duty of 8 per cent on parts and components and other inputs has marginalised the advantages of the reduction in basic customs duty. Finished goods have been exempted from the said duty." This has not only reduced the existing duty differential between finished goods and parts and components, but has also made domestic manufacturing unviable.

Sharad Talwar of HCL Infosys, one of theleading domestic brands, finds imposition of the 8 per cent countervailing duty confounding. "It will not help the Indian industry in any way." Most parts and components for the IT industry –ICs, hard disk drives, floppy drives, mother boards, etc — are not made in India. Imposition of the duty will only add to the cost of the manufacturer, aver the industry. "Exempting trading from the special additional duty will definitely work against the intention of the government to promote the domestic manufacturing industry," says Mehta. The fact that manufacturer-exporters have not been allowed duty-drawback on the special additional duty and may well have to absorb the additional cost to remain globally competitive, makes the country’s hardware exports non-price competitive, feel most players.

Though the gains have not been substantial for the hardware industry, the reduction in duties may reduce the domestic industry’s manufacturing costs, feels Ravi Sangal of New Delhi-based IDC, an international marketsurvey major. "Indian brands will continue to remain aggressive, price-wise.

However, the quantum of the price-cuts may go down." The industry is yet unclear on whether the 8 % flat duty to be levied on imports is applicable to MNCs importing PCs. "If the duty is to be paid by companies availing Modvat, then only domestic brands would have to pay it," observes a domestic PC player. "However, MNCs will not cut price to begin with and may be prepared to face loss for some time," feels Sangal. Industry observers feel that most players were playing a wait-and-watch game, holding back changes in prices following the recent devaluation of the rupee, wanting to factor in the Budget impact. As the dealer margins have been under pressure in the last two year, computer prices may instead go up or may remain static for few months, warn analysts.

Modi, however, does not agree with this. "As the small assemblers have been most benefited by the Budget, this time they may lead the price-cut brigade." Though thequantum of cuts may not exceed 3-4 %, Modi predicts the domestic brands may be forced to follow the foot steps of the small players this time. It is the entry-level configurations, namely the vanila Pentium 166MMX and the Pentium 200MMX ranges, which is going to see most of the action. With Intel, slashing price of its Pentium II chips worldwide to make them the basis of entry-level configurations, the pressure to stall price-cuts may only be temporary, feel most industry players.

For firms — big or small — the way to survive the choppy waters is to concentrate on providing solutions around the box, building up margin by value additions, feels Talwar. And that is where the smaller players score over the bigger ones.

However, what continues to gall the industry most is that in spite of the present government going on record to make IT part of its national agenda, it is yet to give IT infrastructure status. The fact remains that the industry has been one of the highest employment generator for thecountry and also an essential input for productivity enhancement. "The government should look at the industry not from the angle of garnering revenue but from the point of increasing profit. IT is one industry that can cut costs in other sectors. Therefore, the need for special treatment," says a industry representative.

Though the Budget is silent on hardware exports, the focus has to be niche-oriented, feels Talwar. "Contract manufacturing holds lot of scope for Indian hardware exports," says Sangal. Though the Budget has announced nothing essential for the software sector, industry’s demand for ADR/GDR options for its employees under the Employee Stock Option Scheme has been granted. According to Nasscom, an association of software and service companies, this would encourage more off-shore software development and restrict brain drain. However, demands for easy finance options for meeting working capital needs remains unanswered.

The industry, however, has not given up hope. It is waiting with a batedbreath for the report of the national informatics committee set up the Prime Minister looking into the ways and means of setting up National Informatics Infrastructure. The proposed privatisation of Internet Service Provider will be the other milestone that the industry wants to reach at the earliest.

Says Mehta about the impact of the across the board 8% CVD: "Given the government’s bullishness over the IT industry, I think this anomaly is not by design but due to oversight." For the time being, all that the industry can do is to keep its fingers crossed and hope that Mehta is right.