Officials from the high-end luxury goods industry are looking at FTWZs as a profitable option. A few of them are positive that price benefits derived from these zones would be passed on to customers
Free-trade warehousing zones (FTWZs) are expected to benefit most of the players across various segments in India. However, the high-end or luxury items segment could benefit the most from such zones. Industry officials also expect a relief in the prices of such products.
“The net cost of high-end luxury products could be brought down by around 5%-7% through such zones. However, it is entirely upon the client if he will pass on this benefit to customers or not,” said Nijay N Nair, Strategic Initiatives, Arshiya International Ltd. The company is planning the first FTWZs in India.
Sudip Majumder, CEO, Acme Consultants Pvt Ltd, who has been instrumental in bringing ‘O2 Sparkling Vodka’—a high-end liquor—to India, said that these zones would help. “This will definitely help save a considerable amount. Surely, the proposed FTWZs at Mumbai, Delhi and Nagpur will make things more comfortable and profitable. With Mumbai and Delhi being the main hub and Nagpur being the central part of the country, these zones will definitely help importers. High-end customers will also get some amount of benefit on product prices,” said Mr Majumder.
“It will benefit customers. When my investments are lower, finance cost is definitely lower and I will pass it on to my customers. It will help as the investment on import duty is divided into small amounts depending on the demand and not at one stretch,” said Sarat Kumar Parsan, head, Parsan Brothers. Parsan has been involved in the import of alcoholic beverages.
FTWZs are zones created near a port or a hinterland, which allow duty-free storage of imported goods. The client using this space will have to pay the import duty on these goods once they are moved out of the FTWZ. The zone also provides space for assembling products.
Imported luxury items in India at present have to pay high import duty, ranging anywhere between a low of 24% to a high of 150% depending on the product being imported. A considerable inventory of such imported items has to be maintained in order to cater to the client on time.
However, if the maintained inventories fail to find a market within a suitable period, they have to be re-exported. Goods which have been re-exported qualify for a duty refund. However, the duty-refund period could be as long as six months. Thus, the amount paid as high import duty is locked in for a long period and is unavailable as working capital. “These zones help in duty deferrement and a large working capital would be available,” added Mr Parsan.
For an import duty of 24% on a luxury watch costing around Rs5 lakh, the amount paid is Rs 96,777. Typically, an inventory of 500 watches is maintained with an average holding period of 60 days. Thus, you spend Rs4.80 crore as duty to maintain an inventory of 500 watches.
If these watches are not sold in the given 60-day period, they are re-exported to some other market where there is a demand for such products. Assuming a six-month period for duty refund of Rs 4.80 crore, this translates into working capital of Rs 4.80 crore blocked for that period. “The interest that can be earned on this amount for a period of six months assuming a working capital return of 20% is around Rs8 lakh,” added Mr Nair.
The savings could be higher on high-end products with a high import duty of 150%. Taking a high-end tax of 150%—for a wine bottle that costs around Rs50,000—the duty paid is Rs 30,000. To maintain a modest inventory of 2,000 bottles you spend Rs6 crore. This working capital, if not blocked for six months, could earn around Rs15 lakh as interest.
The supply of high-value flats in the city will outstrip demand from March. At present, there is an approximate supply of a million sq ft for the top-end residential market in the metropolis
High-value flats, starting with a price tag of Rs5 crore (for a luxurious two, three or four bedroom, hall and kitchen) had vanished from the market between 2007-2008. The slowdown saw the affordable housing segment growing. However, during the second quarter of the current fiscal, the high-value flats segment also reported sales. Seeing the movement in this segment, a number of developers again started developing high-value flats around Mahalaxmi, Lower Parel, Prabhadevi and Worli in Mumbai. There is a huge amount of supply of approximately a million sq ft in the market for this segment. But what about the future demand scenario?
“There will be a slowdown in the tempo—which you saw in the past few months—for high-value flats from March in terms of both buying and construction. That is because there is too much supply in Mumbai for this segment. But I don’t see the demand coming in so fast and easy,” said Pranay Vakil, chairman, Knight Frank India Pvt Ltd.
The price of these projects starts from Rs32,000 per sq ft. A few projects in this segment are from the Lodha Group (Bellissimo in Mahalaxmi ); Godrej Properties (Planet Godrej near Mahalaxmi Racecourse); DB Realty (Orchid Turf View in Mahalaxmi and Orchid Crown in Prabhadevi) and K Raheja Corp (Vivarea in Mahalaxmi).
During the festival season, especially Diwali, this segment saw a lot of movement because buyers had realised that prices are not going to fall any more and reasoned that it was the correct time to buy. This buying was a release of the pent-up demand which had accumulated over a period of time.
From November 2009 till the beginning of this month, there was a lot of demand from Non Resident Indians (NRIs), because of the Dubai realty crash. These NRIs also decided to bank on Indian property because debt instruments abroad were fetching poor returns. Around 30%- 40% of the demand for these high-value flats were coming in from NRIs. “This time NRIs bought with a little more vengeance than before, because they feared that the rupee would become stronger soon and they may have to pay more dollars to buy these properties. Property-buying was being diverted to India from Dubai,” said Mr Vakil.
However, demand slowed down during the first half of January as Indians consider this period to be an inauspicious time to buy new homes. After February, most NRIs will go back to their host countries, which will lead to a dip in the pent-up demand. Again, there will be greater clarity on the long-term value of the rupee. It remains to be seen how developers will push sales for this high-value segment.
“You will see some (buying) resistance from March in this segment unless the stock market reaches new highs. If this doesn’t happen, I don’t see the same tempo continuing,” said Mr Vakil.
Despite a more-than-expected hike in the Cash Reserve Ratio (CRR), banks today ruled out any immediate hike in lending rates
Retail and corporate borrowers can breathe easy as bankers today said that an immediate hike in lending rates is unlikely even as the RBI tightened money supply by raising the CRR by 75 basis points, reports PTI.
"There may not be an immediate hike in the lending rates as liquidity at the moment is sufficient. We need to see how the liquidity conditions pan out. Going forward, as the credit off-take picks up, there may be an increase in rates," State Bank of India’s chief financial officer S S Ranjan told PTI.
IDBI Bank director Sushil Munhot echoed his sentiments. "I doubt if there would be a hike in interest rates immediately as there is enough liquidity in the system,” he said.
According to Corporation Bank executive director Asit Pal, there would not be any change in prime lending rate as there is sufficient liquidity in the system and credit off-take is also muted at this point of time. However, Mr Pal said that there could be some spike in inter-bank call rate.
Shubhada Rao, chief economist at Yes Bank, said that rate hikes would depend on the overall growth dynamics. "Rate hikes are unlikely in the immediate horizon as economic growth is still on the agenda. I don't see banks upping their interest rates—at least, not yet," Mr Rao said, adding that liquidity was comfortable and would remain comfortable even after the two-tranche CRR hike announced today.
In its third quarter monetary policy review, the RBI raised CRR by 75 basis points to 5.75% to mop up Rs36,000 crore from the system. However, the apex bank retained short-term lending and borrowing rates at 4.75% and 3.25%, respectively.