NEW DELHI: The government has slashed excise duties on automobiles, consumer durables as well as equipment and machinery used to build factories, hoping to cheer consumers and stimulate manufacturing, which has contracted for the first time since liberal economic reforms began over two decades ago.

Finance Minister P Chidambaram aims to revive the spirits of industry, which is battling high interest rates and sagging demand. He put the spotlight on the manufacturing sector and said the situation demanded interventions that cannot wait for the regular Budget. “In particular, the manufacturing sector needs an immediate boost,” he said while presenting the interim budget. Manufacturing is estimated to have contracted 0.2% in the first nine months of the current fiscal, the first fall since 1991-92. It fell about 2% in the December quarter.

“Manufacturing is the Achilles’ heel of the Indian economy. The deceleration in investment in manufacturing is particularly worrying,” he said in his budget speech. The minister also called for building “a huge quantity” of new infrastructure and said the public-private partnership (PPP) must be used more widely.

The gainers include Sports Utility Vehicles, often targeted as fuel-guzzlers, which the rich drive with subsidised diesel. Excise duty on SUVs will fall from 30% to 24%, reducing the levy by one-fifth. Other vehicles would also get significant tax concessions. Automobile manufacturers, who are struggling with a 10% drop in sales, will pass on the benefit to buyers. The duty cuts for consumer durables will be a big relief for manufacturers as the sector fell 16% in December and nearly 13% in nine months as demand remained weak.

To stimulate capital goods, the sector that is usually the first to decline as companies defer new investment and among the last to revive, the interim budget cut the excise duty from 12% to 10%. The budget also aims to encourage domestic manufacture of mobile phones, soaps, certain chemicals, road building machines and paper for printing currency by tweaking tax rates on local and imported items for these sectors. Sanjiv Goenka, chairman of RP-Sanjiv Goenka Group, welcomed the cuts in excise duty. “A reduction in excise duties on capital goods is expected to reduced cost of power and transmission projects, it is a positive and welcome step for the sector,” he told ET.

However, R Shankar Raman, CFO of L&T, said much more was needed to revive distressed sectors such as capital goods which saw output drop 3% in December. “Achieving targeted revenue growth in a sluggish economy will be a challenge in 2014-15. Excise duty reduction for capital goods, while being a positive, has a limited shelf life till perhaps June 2014.

Measures to boost the health of the manufacturing sector, in general, and capital goods, in particular, would require sustained initiatives over the next several years,” he said. Vishwas Udgirkar, Senior Director, Deloitte, said the interim budget had highlighted the importance of the infrastructure and PPP for continuing India’s growth story. “While leveraging the PPP model is essential for infrastructure development, it is hoped that the new government also gives due emphasis on learning from past experiences so that the issues faced in the last few years can be avoided.”

CII President Kris Gopalakrishnan said the manufacturing sector has performed poorly for a year. “The reduction in excise duty on sectors such as automobiles, capital goods and consumer electronics is indeed welcome, as this will help revive demand in these sectors,” he said.