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Smartphone sales in India may suffer from a higher tax on handsets costing more than $37

Chidambaram Eyes IPhone, Z10 to Plug Budget Gap: Corporate India

Smartphone sales in India may suffer from a higher tax on handsets costing more than $37 just as Apple Inc. (AAPL) steps up efforts to tap demand for data services in the world’s second-largest mobile-phone market.

Finance Minister Palaniappan Chidambaram yesterday said he would raise the excise tax on high-end phones to 6 percent from 1 percent to help finance welfare programs for the country’s poor and fund the widest budget deficit among the largest emerging economies. Samsung Electronics Co. (005930), which sells the Galaxy range of smartphones, said the move “won’t have a positive impact” on the mobile-phone industry and will force customers to pay more.

India’s government, after attempting to squeeze wireless operators including Vodafone Group Plc (VOD) and Bharti Airtel Ltd. (BHARTI) with higher license fees and airwave tariffs, is now targeting handsets for revenue from an industry that has boomed since Prime Minister Manmohan Singh opened the economy more than two decades ago. Chidambaram also increased tax on high earners, luxury cars and yachts.

“This is a bit over the top,” said Rajan Bharti Mittal, vice chairman and managing director of Bharti Enterprises Ltd. that controls Bharti, which operates the nation’s biggest cellular network. “Mobile handsets and smartphones are hardly luxury items. This should be reviewed.”

Rural Jobs

Chidambaram said he needs to raise 16.7 trillion rupees ($306 billion) in the 12 months starting April 1, 16 percent more than the revised estimates for the current fiscal year, to meet expenditure and rein in the deficit at 4.8 percent of gross domestic product.

He allocated 330 billion rupees for his government’s flagship rural jobs program and 100 billion rupees for a plan to give the poor low-price food grains as the ruling coalition faces nationwide elections by May 2014.

The higher tax will hurt Apple, BlackBerry and Samsung because the top-end models will appear overpriced to buyers, said Mittal.

Apple, which hasn’t treated the Indian market as top priority until recently, is seeing its efforts pay off since introducing its iTunes store in the South Asian country and slashing prices on older models like the iPhone 4. Shipments rose to a record 254,000 in the fourth quarter, from 52,000 in the third quarter, according to data provided by Framingham, Massachusetts-based researcher IDC.

Not Favorable

Apple’s London-based spokesman Alan Hely declined to comment on the increase in excise tax.

Waterloo, Ontario-based BlackBerry (BB), formerly known as Research in Motion Ltd., which introduced its latest Z10 model in the country last month for $800, said the tax measure could deter consumers who aspire to own smartphones.

“India is on its way to becoming the world’s third-largest smartphone market,” said Sunil Dutt, managing director of BlackBerry in India. “This isn’t favorable to the growth of the segment.”

Phones that cost below 2,000 rupees, which Chidambaram has exempted from the excise tax, account for 75 percent of India’s market, according to Gartner Inc. Cheaper phones are popular in the country, where the World Bank estimates more than 800 million people live on less than $2 a day. The Galaxy S3 costs about 29,000 rupees, while the iPhone 5 starts at 45,500 rupees.

Erode Margins

While the higher tax may erode margins for phone makers, it may not dent demand, said T.M. Ramakrishnan, chief executive officer for devices at S Mobility Ltd. (SPCEM), a local company that imports handsets from Asia and sells them under its brand.

“It will surely impact the industry’s focus on making smartphones more affordable,” he said. “Also, it may get that much more difficult for smartphones to penetrate rural areas.”

Apple, Samsung and BlackBerry are counting on the growth of data services in the country after carriers started offering third-generation services in 2011. The market for smartphones in India is set to grow 50 percent in 2013, according to IDC, while in China the rate is set to slow to as low as 40 percent from as high as 150 percent in 2012.

Mobile data traffic surged as much as 300 percent in the last 12 months, while revenue grew 50 percent from the previous year, according to Mohammad Chowdhury, leader of telecommunications practice at PricewaterhouseCoopers in Mumbai.

Damp Sales

“We will see some damping in consumer sales,” Chowdhury said. “In turn this will impact negatively the uptake of data services in India, and in all likelihood slow it down just at a time when it has begun to gain momentum.”

The government’s efforts to raise 400 billion rupees from the sale of airwaves in the year ending March 31 failed after carriers balked at the fees set by the nation’s telecommunications regulator in the first round of auctions in November. Instead, it met only 25 percent of that goal.

“The government has targeted another successful industry to raise revenue,” said Anshul Gupta, a Mumbai-based analyst with Gartner. “This will trigger a price rise, meaning people will have to pay more, especially for mid-tier and high-end phones.”

To contact the reporter on this story: Kartikay Mehrotra in New Delhi at kmehrotra2@bloomberg.net

India Minister Honeymoon Over on ‘Questionable’ Budget, BNP Says

India will probably miss a deficit target set yesterday by finance minister Palaniappan Chidambaram as his budget plan to narrow the nation’s fiscal gap is based on “highly questionable” tax and spending assumptions, BNP Paribas SA said.

The deficit will overshoot the target of 4.8 percent of gross domestic product presented to parliament yesterday by at least 0.5 percent of GDP unless the nation’s economy grows faster than forecast, Richard Iley, an analyst at BNP, wrote in a report dated yesterday.

“The honeymoon is over,” Iley wrote. “Chidambaram has been a breath of fresh air since his appointment last August, but now he hopes to reverse cuts in 2014 and has pencilled in a capex boom financed by populist tax hikes on the rich, a sharp pick-up in disinvestment proceeds and implausible control of subsidy spending.”

Total expenditure will climb to 16.7 trillion rupees ($307 billion) in 2013-2014 from an estimated 14.3 trillion rupees this financial year, budget documents showed. Gross market borrowing was set at a record 6.29 trillion rupees for 2013-2014, an increase of almost 13 percent. Net borrowing will be 4.84 trillion rupees.

Government spending has contributed to inflation of almost 7 percent, which has limited the extent of interest-rate cuts by the central bank in an economy that expanded last quarter at the weakest pace since 2009.

Chidambaram allocated 330 billion rupees for the ruling coalition’s flagship rural jobs program and 100 billion rupees for a plan to give the poor cheap food grains, ahead of a general election due by 2014.

Government Spending

A report yesterday showed GDP rose 4.5 percent in the three months to Dec. 31 from a year earlier, lower than forecast and the weakest pace in almost four years, as cooling investment, a drop in exports and government spending cuts sapped growth.

The government will announce another set of decisions during a reply to the budget speech in parliament, Chidambaram said in a briefing yesterday. The immediate goal is to move GDP growth above 6 percent, he said. India is targeting a growth rate of of 7 percent in FY15, he added.

Chidambaram imposed a one-year 10 percent tax surcharge on annual personal incomes above 10 million rupees and increased customs duties on yachts, high-end motorcycles and luxury cars. He raised the surcharge on some companies to 10 percent.

‘Too High’

Projected spending on a subsidy program ranging from diesel to food and fertilizers will decline about 11 percent to 2.2 trillion rupees in 2013-2014. Oil subsidies will decline 33 percent to 650 billion rupees.

Revenue assumptions are “too high,” Credit Suisse AG analysts Neelkanth Mishra and Ravi Shankar wrote in a note dated yesterday. Increased spending will be “supportive of growth” and could “hurt the current-account deficit and the currency,” they wrote.

“The deficit could be much higher than budgeted,” according to the Credit Suisse report.

Indian rupee one-month non-deliverable forwards dropped to near a six-week low of 54.90 per dollar today. The currency many weaken to 55 per dollar in three months, Goldman Sachs Group Inc. forecast.

The S&P BSE Sensex sank 1.5 percent to 18,861.54 yesterday, ending February with a drop of 5.2 percent, its first monthly loss since October. The Bank of New York Mellon India ADR Index tumbled 1.8 percent to 1,111.51 in New York, capping a 2.8 percent monthly decline, its biggest since October. SGX CNX Nifty index futures for March delivery fell 0.8 percent to 5,708.5 at 11:33 a.m. in Singapore.

Earnings Impact

Chidambaram in 2012 revised the budget-deficit goal for this financial year to 5.3 percent from 5.1 percent of GDP. He set a target of narrowing it to 3 percent by 2017. The shortfall, which was 5.8 percent in 2011-2012, is the widest in the BRIC group that also includes Brazil, Russia and China.

Jim O’Neill, chairman of the asset-management division that coined the BRIC acronym for the biggest emerging markets a decade ago, said Indian markets are not impressed with the budget. India isn’t “coming to grips with its issue,” O’Neill said in an interview with ET Now channel yesterday.

The budget lacked “sizzle,” Citigroup Inc. analysts Aditya Narain and Jitender Tokas wrote in a report dated yesterday.

The tax increase may cut market earnings by 1 percent to 1.5 percent in the financial year starting April 1, according to the report. The budget is “marginally positive” for utilities, capital goods, real estate, energy stocks and negative for auto companies, according to the Citigroup analysts. Credit Suisse recommended shares of companies including ITC Ltd., Emami Ltd., Tata Consultancy Services Ltd. and Wipro Ltd.

To contact the reporters on this story: Weiyi Lim in Singapore at wlim26@bloomberg.net; Matthew Oakley at moakley@bloomberg.net

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About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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