Paper industry urges govt to hike customs duty

Due to increased dumping of paper, the domestic players are vulnerable; so they seek hike in customs duty and / or safeguard duty be imposed, cut customs duty on inputs like pulp, coal etc.

Current Status

The global paper demand has turned very sluggish.  The excess supplies globally are being dumped into various countries, including India.  This dumping of paper is affecting the Indian paper sector, which is in the midst of massive capacity additions. 

Due to recession in America and in Europe, there is a contraction in demand. As a result of several paper mill have closed in North America and Europe. Despite closing of mills, there was also fall in demand for paper. This contraction in demand has lead to huge inventory pile-up and a sharp fall in prices in international market. As a result, the countries like China, Indonesia, Finland, Sweden, Germany and the US started to export their product to countries like India, where the demand continues to grow.

The paper industry is targeting a capital expenditure of over Rs 13,000 crore in the next 2-3 years, towards capacity expansion, modernization and enhancement of efficiencies. Over the next one and a half years, at least 6.5 lakh tonnes of additional annual capacity is expected to go on stream in the domestic market. But due to global economic recession, few companies have put their projects on hold. The industry is keeping its fingers crossed on the market improving in the coming years to support a faster pace of absorption.

Industry Expectations

The paper industry coupled with Indian economy is witnessing an unprecedented turmoil and facing extra-ordinary scenario. The paper market is flooded with imports of a large quantity of coated and un-coated wood-free grades of paper. As a result, industry wants:

• Imposition of 20% safeguard duty on select varieties of paper falling under HS Codes 4802 and 4810 of Chapter 48 of customs tariff manual.
• To enhance the peak rate of basic custom duty (BCD) from 10% to 15% on paper/paperboards along with re-introduce component of special additional duty.
• Lower rate of BCD on import of wood pulp, waste paper and coal, which are the inputs to industry.
• Looking for restoration of OGL status for import of Recyclable Waste Paper free from impractical conditions that impair import.

With the reduction in excise duty announced during the stimulus package, the amount that can be availed as CENVAT every year has also reduced very significantly, thus acting as a disincentive for fresh capital expenditure. As a result, the industry wants the excess amount of un-availed Cenvat Credit should be permitted to set-off against any other Central levies viz. custom duty on imports, minimum alternative tax, income tax etc, government to issue bonds similar to oil bonds to the extent of un-utilized Cenvat Credit which companies can sell in the market and after completion of a period of two years as envisaged under the Excise Rules, the remaining Cenvat Credit may be refunded to the concerned manufacturing units in cash.

The industry also want depreciation rate to be restored to the earlier rate of 25 per cent.

There still exits multiple duty entitlement pass book rates, which is causing discomfort to exporting mills. To achieve success in export market, the industry wants the government to disband multiplicity, rationalize and apply a uniform DEPB rate of around 12 per cent to all varieties of paper/paper boards.

Analysts/market expectations

Since the government has already cut down the excise duty by 600 basis points (in December 2008 by 400 basis points and in February 2009 by 200 basis points), no future cut is expected in excise duty. Future stress on primary education, rural education and more allotment of money for the various education schemes is expected. Beside it, not much is expected from the coming budget for the paper industry especially for the stop flow of cheap import.

Stocks to watch

Ballarpur Industries, JK Paper, Tamil Nadu Newsprint & Papers

Outlook

With demand turning sluggish, and as the competition for the shrinked pie intensifying with surge in imports, the domestic paper industry is finding it difficult to increase prices. The landed cost of imports are lower than the domestic prices, which may force the domestic players to cut prices, if the government does not levy safeguard duty on imports.

Sluggish demand, dampened export prospects, higher capacity and lower utilization, loss of pricing power due to increased dumping together is affecting the demand and margins for the Indian paper sector.  As such, any measures in forthcoming budget like allocation of more funds for Sarva Sikhsha Abhiyan or more emphasis on rural and primary education, along with measures to curb the increasing cheaper import will boost the confidence of domestic players and there plans for further expansions.