HomeIndustry TrendsIndustry welcomes new budget wholeheartedly

Industry welcomes new budget wholeheartedly

Latest budget doesn’t need any analysis and the soaring stock market index is enough proof of the industries reaction to Nirmala Sitharaman’s third budget. The Finance Minister had clearly spelt out the government’s intention on several occasions before the budget and content of the budget follows the intent. From various provisions of the budget its clear that construction and infrastructure are the priority areas of the government and here is the brief impact analysis of the budget on some of the sectors.

Infra given highest priority

For fiscal 2022, the budgeted outlay for the infrastructure sector has jumped up 26% year on year, with the government’s focus on reviving the economy. Capex allocation for the nine core infrastructure sectors – civil aviation, new and renewable energy, power, railways, roads, shipping, rural development, urban development, and water resources – is expected to increase 17% in fiscal 2022 over fiscal 2021 budgeted spend.

Housing

The extension under Section 80EEA would continue to drive affordable housing (up to ticket size of Rs 45 lakh) demand, especially in markets with high inventory, such as MMR and Delhi-NCR, and benefit 40-50% of under-construction projects in the top 10 cities. Additional deduction of Rs 1.5 lakh will benefit home buyers for around first five years (when interest outgo is higher than Rs 2 lakh). The extension under Section 80-IBA will continue to provide profit-linked tax exemption to developers.

On the other hand, proposed spending on PMAY, both Urban as well as Rural has been slashed considerably for the new fiscal. The government may be thinking of financing the programme through Internal and Extra Budgetary Resources (IEBR).  Since the government lays lot significance to its housing programme, there may not be any slowdown in implementation of the project due to insufficient funds.

Steel

Steel is one of the industries that will benefit from the boost to the infrastructure segment announced in the budget. If all the plans in the budget materialise it may result in 25-30% increase of steel consumption in fiscal 2022.

However, the reduction of import duty on finished and semi-finished steel products to 7.5% from 10-12.5% may not have much impact on the industry. As a result of this reduction, landed cost of imported steel may fall by 2-4% (keeping all other variables constant). It should be noted that domestic steel prices are already at a discount of 6-8% to landed price. Also, 55% of India’s imports are from the free trade agreement economies of Japan and Korea.

Further, exemption of customs duty on imports will reduce landed scrap cost for electric-arc/ induction furnace players by 2.5%, thereby expanding their spreads. Typically, steel scrap is used by the secondary steel producers in a 40-45% blending mix along with sponge and pig iron.

Cement

The government has made its intentions clear – spend heavily on infrastructure to pump prime the economy and ensure its speedy revival. And the sops given for affordable housing will be continued for one more year which may help the real estate sector to recover from the abyss much faster. Both these factors bode well for the cement sector as these two sectors account for major portion for its consumption. Import duty relaxation on pet coke imports is also helpful for the industry to contain its costs. However, it may have to deal with the increased logistic costs due to ever increasing fuel prices.

On aggregate basis, the allocation to road sector increased by 15%. Government spending has been the key driver for cement demand over last couple of years. Increased spending on infrastructure development may support 9-10% growth in cement demand for FY22. On the other hand, there is reduction in allocation to Pradhan Mantri Awaas Yojna (PMAY) by 32% to Rs275bn which is dampener for the industry.

Building materials

Expected revival of real estate industry subsequent to various measures taken in latest budget as well as the earlier ones is a good news for the building materials manufacturers like decorative paints, wood panel, tiles, construction chemicals, etc. However, at the retail level demand from rural India may not be as robust as was seen last year due to lower allocation to some of the rural development schemes. However, slackness in rural demand may be compensated by revival of demand in Metro and large cities.

Roofing materials

Reduced allocation to PMAY is not a good news for the ACS manufacturing industry which has been seeing continued upsurge in demand owing to continuous rise in steel prices. However, demand for ACS roofing materials may remain elevated if the steel prices continue to rise further. Also, the government may provide additional funds for housing schemes through extra budgetary resources which may keep demand for roofing materials ticking in rural areas.

Pipes

The government has announced several programmes, both in urban and rural areas, which will increase demand for pipes in the coming years.

For example, Jal Jeevan Mission (Urban) aims to supply water in all 4,378 urban local bodies with 28.6mn household tap connections as well as liquid waste management in 500 AMRUT cities. It will be implemented over five years with an outlay of Rs 2,870bn. Swachch Bharat and Swasth Bharat programmes will aim at increasing cleanliness of urban India. These programmes will increase demand for pipes, especially for PVC pipes, in the coming years as pipes are an important material to be used in projects under these programmes.

All said and done what matters now is execution of the plans and programmes where we have been failing all these years. Let’s hope that this year will be a different one and we as a nation is geared up to become a $ 5 trillion economy soon.

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