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Union Budget - Analysis
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CRIS INFAC ANALYSIS, FEBRUARY 28, 2005
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Foreword 1
Economy
Highlights 4
Detailed economic analysis 6
Industry
Overall sectoral impact 18
Overall company impact 24
Auto ancillaries 30
Capital goods 32
Cars and utility vehicles 34
Cement 36
Chlor alkalies 38
Cigarettes 40
Commercial vehicles 42
Consumer durables 44
Cotton and cotton yarn 46
Fertilisers 48
Hotels 50
Information technology 52
Man-made fibres 54
Non-ferrous metals 56
Oil and gas 58
Paints 62
Paper 64
Personal care and detergents 66
Petrochemicals: Basic and polymers 68Petrochemicals: Downstream 70
Pharmaceuticals 72
Shipping 74
Steel 76
Sugar 78
Tea and coffee 80
Telecom cables 82
Continued...
Contents
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Contents...continued
1) All domestic prices are ex-factory prices, unless indicated otherwise.
2) All international prices are cif prices, unless indicated otherwise.
3) Wherever the domestic prices are ex-factory prices, the landed costs do not include CVD. Wherever the domestic prices
are market prices, the landed costs include CVD.
4) Landed costs, customs and excise duties for 2004-05 include the education cess of 2 per cent.
Data notes
Telecom equipments 84
Telecom services 86
Tractors 88
Two-wheelers 90
Tyres 92
Diversified companies 94
InfrastructurePower 100
Port 102
Roads 103
Other infrastructure 105
Banking and financial sector
Banking and financial sector 108
Capital markets
Debt markets 112
Equity market 117
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It was quite clear before the Budget that Mr Chidambaram would have to deal with a number of
conflicting objectives. Increasing spending on rural development and infrastructure, in general, would
have to be tempered by the need to adhere to the fiscal responsibility targets. Tax reforms would
also be subject to the same constraint. The new awards by the Finance Commission would have to
be factored into the calculation. When all of these limits were recognised, how much room would
he actually have to manoeuvre?
Obviously, not a lot, but as things turned out, the leeway was used with a reasonable degree of
effectiveness. Tax reforms are something that are controlled by his ministry and are virtually certain
to be implemented as presented in the Budget. The Budget has to be judged to a large extent by
what has been done on this front.
On direct taxes, there has been a significant streamlining of the personal tax regime. The anomalies
have been ironed out, and the brackets have been re-structured. Section 88 exemptions, which gave
a tax rebate for savings channelised into post office and public provident schemes and infrastructure
bonds, have been eliminated. This is a very positive move, because other than the infrastructure bonds,
these savings were not really going into any kind of capital formation. This elimination has been
offset by a blanket exemption of Rs 100,000 on income for savings, presumably including pensionand other long-term instruments, which are more likely to be deployed in the creation of fixed assets.
The corporate tax rate has been reduced from 35 per cent to 30 per cent, without any elimination
of exemptions. This is clearly good news in the short term for corporate earnings, but we must remember
that the logic of tax rate reductions is tied to the phasing out of exemptions. Given the expected
buoyancy in earnings this year, the rate reduction should not result in a large revenue loss, if any,
but in the event of an economic downturn, the lower rates with persistent exemptions might upset
the fiscal calculations significantly.
It should be reasonable to expect that the exemptions will be eliminated sooner or later and, as a
consequence, the long-term prospect is for the effective tax rate to go up rather than down for many
corporates. Ultimately, an optimal tax rate for a zero exemption scenario has to be worked out and
the whole transition accomplished as smoothly as possible. Better sooner rather than later.
There are big spending initiatives on the social and infrastructure sectors, but clearly, the committed
resources have not kept pace with the aspirations. In fact, aggregate plan spending in this Budget
is actually lower than was budgeted last year, although it represents a Rs 6,000 crore increase over
the revised estimates. The slack in spending plans is, ultimately, what gives the government some
room to keep the deficit in check.
ForewordA delicate balance
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ForewordThe one sector that is proven to have delivered is highways. The Budget has wisely committed an
extra Rs 2,800 crore to this programme, taking the total government spending up to Rs 9,200 crore.
This will clearly sustain the momentum to industrial demand and employment that the programme has
provided over the last 3-4 years. It is sensible to place one's bets on tired and tested horses.
Overall, this is a Budget that finds the balance between fiscal and political compulsions. On many
fronts, it relies on the efficiency of various ministries and departments to deliver. But, that has always
been the case and is a broader problem for the government as a whole to address. The finance minister
cannot be expected to take the entire burden of the government on his shoulders.
Dr Subir Gokarn
Chief Economist, CRISIL
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HighlightsGrowth
The performance of industry and services is expected to remain buoyant during 2005-06. The indications
of a pick-up in the investment activity augur well for the growth prospects of industry in the coming
year, and services are expected to continue with their high growth performance. Overall, we expect
India's GDP to grow in the range of 6.75-7.00 per cent during 2005-06.
Inflation
This Budget will not have much impact on inflation. Indirect taxes have been estimated to be revenue
neutral, so the prices of inputs, especially petroleum and diesel, will not be impacted much. Also,
the inflation scenario is far more dependent on factors such as domestic capacity utilisation and global
commodity prices. We expect the inflation rate to be at about 5 per cent during 2005-06.
Fiscal scenario
This remains the area of concern. The government has not been able to meet the rolling targets of
2005-06 presented in the last year's Budget and has put the Fiscal Responsibility and Budget Management
Act (FRBM) on the back burner for the time being. In the 2005-06 Budget, the government expects
the fiscal deficit to GDP ratio to be 4.3 per cent. Our assessment is that the revenue estimates for
2005-06 are quite optimistic and we expect a revenue shortfall of around Rs 8,600 crore to Rs 12,400
crore. Consequently, we expect the fiscal deficit to be 4.5-4.7 per cent of GDP against the target of
4.3 per cent.
Interest rates
Driven by higher market borrowings of Rs 8,600-12,400 crore in conjunction with higher global interest
rates, continuance of wider coverage of the service tax net, revenue from dividends and profits and
interest cost savings, we expect the benchmark ten-year yield at 7.25 per cent by the end of March
2006.
Equity markets
Armed with tax rationalisation measures and the focus on infrastructure development, the Budget is
clearly a reform-oriented one. Lowering of corporate tax and custom tariffs will boost the earnings
of the corporates. This, together with the exemption on savings of Rs 100,000, will help channelise
the savings to the markets and will, thus, add a fillip to the market sentiment. We thus see the
Budget as substantially equipped to support the strong market sentiment.
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HighlightsExchange rates
While the Budget does not directly impact the exchange rate, the introduction of a special purpose
vehicle (SPV), which will utilise foreign exchange reserves for funding infrastructure projects, may ease
the pressure of appreciation on the rupee if the scheme increases the demand for forex. At current
levels, however, it will only absorb $2 billion out of the reserve of $133 billion - which is of hardly
any significance. More importantly, the reduction in import duties will increase the demand for forex
and ease the upward pressure. The rupee is expected to be stable around the Rs 44/$ mark during
2005-06.
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Detailed economic analysisI. Economic backdrop
The economic setting for the making of Budget 2005-06 could not have been better. The year 2004-
05 started with the spectre of drought, spiralling inflation and firming up of crude prices. But the
scenario has completely changed towards the end of the year. With inflation down to 5 per cent and
growth estimated at 6.9 per cent, the year is ending with good news on the growth and inflation
fronts. After initial jitters, the Sensex too has zoomed, buoyed by strong growth and foreign institutional
investor (FII) inflows. India's long-term currency rating has recently been notched up by S&P to BB+.
Improved growth scenario
The fears of the initial monsoon failure scaling down the overall GDP growth have been completely
warded off by the robust performance of the industrial and services sectors, which grew at 7.8 per
cent and 8.9 per cent, respectively, in 2004-05. Agriculture is the only sector to have witnessed growth
deceleration. What is noteworthy is that the poor performance of agriculture had no perceptible impact
on industrial activity, indicating a gradual insulation of industry from the vagaries of monsoons. Also,
the high crude prices failed to dampen industrial activity. The indications of a pick-up in investment
activity augur well for the growth prospects in the coming year. The overall GDP growth of 6.9 per
cent over a high base of 8.5 per cent is quite commendable. Buoyed by the recent growth patterns,
the Economic Survey notes a possible ratcheting up of the trend rate of growth of the economy,
from around 6 per cent to about 7 per cent per year. Given that the current growth pick-up is accompanied
by the upswing in saving and investment rates, the scenario is reminiscent of the growth performance
during the boom phase of 1994-95 to 1996-97.
Inflation moderates but interest rates firm
Inflationary pressures started building up in the beginning of this year, and by July 2004 inflation
had crossed 8 per cent. Inflation in the first 10 months of 2004-05 stood at 6.7 per cent. The price
rise was spread across all the three major categories, namely primary articles, manufactured products
and the fuel group. The recent downturn in inflation notwithstanding, the average inflation for 2004-
05 is expected to be 6.5 per cent. The current bout of inflation was primarily a cost-push phenomenon
led by a sharp upturn in petroleum and metal prices. Duty reduction and improvement in the agricultural
scenario, supported by a favourable base effect, has tamed inflation to around 5 per cent now. The
higher inflationary pressures translated into higher interest rates. The 10-year G-sec rates rose by 100
basis points in the current fiscal.
External scenario
Both exports and imports have maintained their buoyancy during April-January 2004-05. With exports
growing at 25 per cent and imports at 35 per cent the trade deficit widened to over $22 billion. The
ballooning of the import bill was on account of a sharp rise in crude prices and a genuine demandfor non-oil imports stemming from a pick-up in industrial activity. The current account position is,
however, comfortable due to a positive balance on trade in services. The foreign exchange reserves,
at $132 billion in mid-February, can support 15.5 months of imports.
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Detailed economic analysisBudget had pointed out a revenue shortfall of Rs 20,000 crore, which was later revised to Rs 12,000
crore in December.
Table 1: Fiscal marksmanship
Fiscal
deficit
Revenue
deficit
Plan
expenditure
Non-plan
expenditure
Total
expenditure
Gross tax
revenue
Industrial
growth
1999-00 31 24.8 -1.1 7.2 5 2.5 6.6
2000-01 6.8 10.1 -6.2 -3 -3.8 -2.5 5
2001-02 21.2 27.1 6.4 -5.1 -3.4 -17.5 2.7
2002-03 -3.1 13.1 -1.8 -2.7 -2.4 -8.3 5.8
2003-04 -19.8 -12.5 1.1 9.8 7.4 1.1 6.9
2004-05 1.3 11.8 -5.6 10.9 5.9 -3.7 7.9
Note
Figures for 2004-05 have been computed from revised estimates.
Source: Budget 2005-06
The deficit targets for 2005-06 have been specified a notch above what was anticipated in the FRBM,
thereby implying some dilution of the original FRBM targets. Table 2 presents the key budgetary arithmetic
for 2005-06.
Table 2: Budget at a glance 2005-06 (Rs crore)
2003-04 2004-05 2004-05 2005-06
Actuals BE RE BE
1. Revenue receipts 263,878 309,322 300,904 351,200
2. Tax revenue (net to centre) 186,982 233,906 225,804 273,466
3. Non-tax revenue 76,896 75,416 75,100 77,734
4. Capital receipts (5+6+7) 207,490 168,507 204,887 163,144
5. Recoveries of loans 67,265 27,100 61,565 12,000
6. Other receipts 16,953 4,000 4,091
7. Borrowings and other liabilities 123,272 137,407 139,231 151,144
8. Total receipts (1+4) 471,368 477,829 505,791 514,344
9. Non-plan expenditure 349,088 332,239 368,404 370,847
10. On revenue account 283,502 293,650 296,396 330,530of which
Interest payments 124,088 129,500 125,905 133,945
12. On capital account 65,586 38,589 72,008 40,317
13. Plan expenditure 122,280 145,590 137,387 143,497
14. On revenue account 78,638 91,843 89,673 115,982
15. On capital account 43,642 53,747 47,714 27,515
16. Total expenditure 471,368 477,829 505,791 514,344
17. Revenue expenditure 362,140 385,493 386,069 446,512
18. Capital expenditure 109,228 92,336 119,722 67,832
19. Revenue deficit 98,262 76,171 85,165 95,312
As a percentage of GDP 3.6 2.5 2.7 2.7
20. Fiscal deficit 123,272 137,407 139,231 151,144
As a percentage of GDP 4.5 4.4 4.5 4.3
21. Primary deficit -816 7,907 13,326 17,199
As a percentage of GDP 0 0.3 0.4 0.5
Source: Budget 2005-06
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Detailed economic analysis
III. The revenue arithmetic
The gross revenue targets in 2004-05 fell short of the Budget estimates by Rs 11,712 crore. Are the
revenue targets set for 2005-06 achievable?
Revenue targets in 2005-06
The Budget assumes a growth of 20.9 per cent in gross revenues in 2005-06BE over a high growth
of 20.3 per cent in 2004-05. This translates into an increase in the tax/GDP ratio to 10.5 per cent
in 2005-06 from 9.8 per cent in 2004-05. The implicit tax buoyancy is about 1.6. Table 4 documents
the share of major taxes in the gross tax revenues, their performance in 2004-05 and expectation in
2005-06BE.
Table 3b: Rolling fiscal indicators set in 2004-05
Budget estimates
2004-05 2005-06 2006-07
Revenue deficit as a percentage of GDP 2.5 1.8 1.1
Fiscal deficit as percentage of GDP 4.4 4 3.6
Gross tax revenue as a percentage of GDP 10.2 11.1 12.1
Total outstanding liabilities at the end of the
year as a percentage of GDP for the year
68.5 68.2 67.8
Source: Medium-term fiscal policy statement, Union Budget 2004-05
Targets for
Table 4: Tax revenues of the central government
Tax heads % Share
(2004-05) 04-05/03-04 05-06BE/04-05
Gross tax revenue 100 20.3 20.9
Excise 32.9 11 20.7
Corporate 27.1 30.6 33.2
Customs 18.4 15.7 -5.5
Income tax 16.6 23.1 30.1
Service 4.6 79.3 23.7Other taxes 0.3 -54 2.7
Net tax revenue (centre) 73.8 20.8 21.1
Source: Budget 2005-06
% Growth
The revenue buoyancy projected in 2005-06 relies heavily on the performance of corporate and income
tax. Significant increases of 33.2 per cent and 30.1 per cent have been budgeted in corporate and
income tax during 2005-06. The overall revenue receipts (net to the Centre) are budgeted to grow
by 21.1 per cent in 2005-06 as against the observed growth of 20.8 per cent in the previous year.
No target has been set for disinvestment receipts.
The overall tax buoyancy has improved significantly in the last 2-3 years. An important reason for
this is the revival of industrial growth on which the tax collections of the government critically depend.
Box 1 examines the recent shifts in tax buoyancy and its relation to the industrial growth patterns.
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Detailed economic analysisBox 1: Tax buoyancy and industrial growth
While reviewing the patterns in the overall tax buoyancy in the last couple of years, this section
attempts to examine the relationship between the buoyancy in tax collection and the industrial
activity. The following figure charts the changes in tax buoyancy (ratio of growth in tax collection
to GDP growth) against industrial growth based on Index of Industrial Production (IIP). We have
divided the period since 1993-94 into three sub periods: 1993-94 to 1996-97 (period of high growth)
followed by 1997-98 to 2001-02 (period of downturn) and ending with another recovery phase,
2002-03 to 2004-05.
Figure 1: Tax buoyancy and industrial growth
Source: CRISIL estimates
The overall tax buoyancy moved more or less in tandem with the industrial performance. It dipped
during the period of downturn and shot up again during the recovery period. However, the overall
tax buoyancy hit a high of 1.5 during period III, a sharper acceleration than dictated by the
acceleration in industrial growth. What had contributed to such an improvement in tax collection?
As we looked into performance of specific tax groups, buoyancy in direct taxes turned out to
be much higher than buoyancy in indirect taxes and direct tax buoyancy did not see a dip even
during the lean phase of 1997-98 to 2001-02. However, the trend over time reveals that the performance
of indirect taxes (consisting of customs and excise) is very closely related to industrial performance
- buoyancy in industry tends to improve the customs and excise duty collection.
But the relatively high growth in tax collection during the past couple of years actually came
about because of surge in corporate tax collection. Corporate tax buoyancy has improved substantiallyduring the ongoing industrial recovery - buoyancy in corporate taxes has moved up from 1.5
during 1997-98 to 2001-02 to 2.8 during 2002-03 to 2004-05. Income tax buoyancy, on the other
1.2
1.5
0.7
0.0
0.3
0.6
0.9
1.2
1.5
1.8
93-94 to 96-97 97-98 to 01-02 02-03 to 04-05
TaxBuoyancy
0
1
2
3
4
5
6
7
8
9
10
Indsutrialgrowth
Tax Buoyancy Industrial Growth
Continued...
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Detailed economic analysis...continued
hand, does not show any linkages with the industrial performance. The income tax buoyancy was
1.5 during the first high growth phase, went up slightly to 1.6 during the following lean phase
and came down to 1.4 during the industrial recovery onset since 2002-03.
Table 5: Tax buoyancy
Indirect tax
Income tax Custom + Excise
1993-94 to 1996-97 1.2 1.5 1.1
1997-98 to 2001-02 0.7 1.6 0.6
2002-03 to 2004-05 1.5 1.4 0.9
Source: CRISIL estimates
1.4
1.5
2.8
Tax buoyancy
Gross tax Direct tax
Corporate tax
The other important factor behind the high tax buoyancy is the widening of the tax base by inclusion
of new services into the tax net. The buoyancy in gross tax collection would fall to 1.4 during
2002-03 to 2004-05 from 1.5, if we exclude services tax from it. Though still contributing a very
small amount to total tax collection, the services tax elasticity with respect to services sector GDP
stood at 6.4 during 2002-03 to 2004-05. This shows that despite the recent attempts at wideningthe tax base there is excessive reliance of the exchequer on industry.
To sum up, there is no denying that tax collection is linked to the industrial performance, as
the overall tax buoyancy tends to pick up during high industrial growth phase. And the ongoing
recovery has witnessed much higher tax buoyancy than during 1993-94 to 1996-97. Part of this
can be explained by the structural change in tax collection - though still around 4.5 per cent
of the overall gross tax collection, services tax revenue has improved over the years (the share
was not even 1 per cent during the mid-1990s).
To examine the veracity of tax revenues, we link it with the implicit GDP growth for industry in the
Budget.
Growth assumptions
The Budget assumes a nominal GDP growth of 13.6 per cent for 2005-06. Under the assumption of
5.0-5.5 per cent inflation, this translates into a high real growth of over 8.0 per cent. Given the buoyancy
in the industrial and services sector, and under the assumption of normal monsoons, this could be
achieved. We expect real GDP growth at 6.9 per cent in 2005-06 if the monsoons are normal. Is the
growth target set in the Budget over-optimistic?
Neither the Budget nor the three accompanying documents provide sectoral growth patterns. It is important
to know the sectoral estimates of GDP to take a call on the revenue buoyancy in 2005-06. Given
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Detailed economic analysisgrowth deceleration in agriculture in 2004-05, growth in agricultural GDP in 2005-06 can be assumed
at 3 per cent. Assuming that the buoyancy in services will continue, 8.3 per cent growth is feasible.
The industrial growth required to deliver 8 per cent real GDP growth would be around 11 per cent.
Table 6 documents the expected shortfall in gross tax revenues under alternate assumptions of industrial
growth. The estimates of gross tax revenues (except the revenues from the services sector) have been
computed using the ratio of tax collections to nominal industrial GDP observed during 2003-04 and
2004-05. The service sector revenues have been assumed at the same level as budgeted.
If the average tax/industrial GDP observed in 2004-05 is assumed, we get a revenue shortfall of Rs
12,439 crore and Rs 8,689 crore for industrial growth of 7 per cent and 8 per cent, respectively. The
revenue shortfall factors in the positive revenue impact of direct tax proposals of Rs 6,000 crore.
Assuming the expenditure targets are met, the revenue shortfall will lead to a slippage of the fiscal
deficit from 4.3 per cent to 4.5-4.6 per cent of GDP.
Table 6: Tax revenues and industrial growth 2005-06
Industrialgrowth
Industrialinflation
Nominalindustrial
growth
Grosstax
revenue
(EST)
Grosstax
revenue
(BE)
Expectedshortfall
7 5.5 12.5 357,586 370,025 12,439
8 5.7 13.7 361,336 370,025 8,689
9 6 15 365,399 370,025 4,626
Source: CRISIL Simulations
2005-06
IV. Expenditure drivers
Expenditure patterns
A higher rise in Plan expenditure (4.45 per cent growth) vis--vis non-Plan expenditure (0.66 per cent)
has been budgeted in 2005-06. The overall expenditure (Plan and Non-Plan) on health and education
has gone up by more than 22 per cent and 36 per cent, respectively, in 2005-06 BE. While Plan allocations
have increased sharply (by 38 per cent), non-Plan expenditure has gone up by only 3 per cent on
health and education. As per the National Common Minimum Programme (NCMP), the spending on
education and health is to be raised to at least 6 per cent and 2-3 per cent of GDP, respectively,
over the next few years. Though the overall expenditure on health and education has increased, it
is still less than what was promised in the NCMP.
It was also mentioned in the NCMP that subsidies are not to be reduced but targeted better, with
immediate effect. Defence expenditure, another important item under non-Plan expenditure, has been
budgeted to increase by only 8 per cent.
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Detailed economic analysisAs per the Twelfth Finance Commission recommendations, the share of the states in the net proceeds
of shareable central taxes shall be 30.5 per cent during 2005-10, inclusive of additional excise duty
in lieu of sales tax. The total outgo to the states on this account works out to Rs 6,13,112 crore
as compared with the last Finance Commission where it was Rs 3,76,318 crore. The share of the states
in central tax increased by only 2.9 per cent and 8.5 per cent in 2001-02 and 2002-03, respectively.
In the present Budget, the share has increased to 21 per cent. The gross hit to the Central government
has been estimated at Rs 26,000 crore in 2005-06.
One important and new aspect of expenditure in the present budget is the value added tax (VAT),which has been proposed to be introduced with effect from April 1, 2005. The Central government
has agreed to compensate the states, according to an agreed formula, (Central government will provide
100 per cent compensation to the states in 2005-06, 75 per cent in 2006-07 and 50 per cent during
2007- 08 for the loss, if any, on account of the introduction of VAT) in the event of any revenue
loss. However, no provision for the same has been made in the Budget.
The government has increased allocation for the national food for work programme, mid-day meal scheme,
Sarva Shiksha Abhiyan, etc.
Plan outlay
The NCMP aimed at increasing expenditure on agriculture and rural development, infrastructure, social
sectors and employment generation. To fund the Plan outlays, there has been higher reliance on
internal and extra budgetary resources (IEBR) than on budgetary support. At the aggregate level, the
IEBR for the above-mentioned areas has been increased by 62 per cent as compared to a 33 per
cent rise in the budgetary allocation to Plan outlays.
The Plan expenditure for economic services and social services has been raised by 33 per cent and
35 per cent, respectively. As per NCMP, the public investment in agriculture, rural infrastructure and
irrigation will be increased. Within economic services, Plan expenditure for agriculture and allied activities,
rural development, irrigation and flood control has been increased sharply, along with the Plan expenditure
for industry & minerals, communication, science, technology and environment, and general economic
services. Increased Plan expenditure in agriculture and allied activities, rural development and irrigation
& flood control reflects the government's intention to fulfil promises made in the NCMP.
The Plan expenditure on social services has risen by a faster rate than economic services. Plan expenditures
for education and health have been budgeted to increase by 47 per cent and 25 per cent, respectively.
The central Plan outlay for infrastructure has been budgeted to increase by 52 per cent. Within infrastructure,the sharpest rise of about 200 per cent has been witnessed in road transport and shipping.
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Detailed economic analysis
V. Debt sustainability
A marginal slippage in fiscal deficit in 2004-05 is attributable to a number of factors - high industrial
growth, rise in corporate taxes due to a surge in corporate profits, and expenditure compression (on
the Plan account), together with a high base of national income.
Another welcome development has been the stabilisation or relatively slow growth in the debt/GDP
ratio in the last 2 years. The internal liabilities of the Central government increased sharply from 49.7
per cent of GDP in 1999-2000 to 60.9 per cent of GDP in 2002-03. They remained at 61.7 per cent
and 62.3 per cent of GDP in 2003-04 and 2004-05, respectively. For 2005-06, the internal debt/GDP
ratio is budgeted at 61.7 per cent. The stabilisation of the internal debt ratio (albeit at a high level)
is due to positive differential of growth rates over interest rates since 2003-04. While the average
cost of Central government debt has come down from 10 per cent in 99-20/02-03 to 8.8 per cent in
03-04/04-05, nominal GDP growth has gone up from 9.1 per cent to 12.3 per cent in the corresponding
period. This, together with the low deficit on the primary account, has permitted the stabilisation of
the internal debt/GDP ratio, which is budgeted at 61.7 per cent in 2005-06.
The declining trend of external liabilities in relation to GDP has continued in 2004-05 and the same
is expected in 2005-06. The stabilisation of debt/GDP, together with decreasing interest cost, has moderated
the growth in interest burden. Interest payments have come down from 4.8 per cent of GDP in 2001-
02 to 4 per cent in 2003-04. As a percentage of revenue receipts, they have come down from 73
per cent to 66 per cent in the corresponding period.
Table 7. Plan expenditure by key heads of development
2003-04 2004-05 RE 2005-06BE 2004-05 RE 2005-06BE
Economic services 43,426 46,704 62,152 7.55 33.08
Agriculture and allied activities 3,519 4,775 6,361 35.69 33.21
Rural development 11,369 8,589 11,494 -24.45 33.82
Irrigation and flood control 271 365 524 34.69 43.56
Energy 4,323 4,402 5,197 1.83 18.06
Industry and Minerals 2,850 3,472 4,841 21.82 39.43
Transport 14,701 17,020 21,614 15.77 26.99
Communication 224 276 507 23.21 83.7
Science, technology and environment 4,170 5,294 7,075 26.95 33.64
General economic services 1,999 2,511 4,539 25.61 80.76
Social services 28,021 35,404 47,665 26.35 34.63
Education art and culture 7,839 10,106 14,820 28.92 46.65
Health and family welfare 5,564 6,944 8,711 24.8 25.45
Water supply, sanitation, housing and urban
development
6,802 7,930 9,029 16.58 13.86
Welfare of SC/ST and other backward classes 1,128 1,250 1,490 10.82 19.2
Labour and labour welfare 118 157 208 33.05 32.48
Social welfare and nutrition 2,173 2,423 3,819 11.5 57.61
Source: Budget documents
Rs crore Growth
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Detailed economic analysisThe above positive developments, however, do not call for complacency. Although the ills associated
with high deficits have not manifested themselves in terms of rising interest rates, inflation and pre-
emption of private investment, now that private investment has perked up, the need to keep debt
and deficit under check gains significance. The Economic Survey notes that in 2004-05 there has been
a significant deceleration in investments in government securities by commercial banks following a
pick-up in demand for credit from the commercial sector and lower market borrowings by the Central
government. Between April 2004 and January 2005 the investments of commercial banks in Central
and state government securities increased by 4.9 per cent as against 20.1 per cent during the corresponding
period of the previous year. Thus, a scenario of high government borrowing can result in pre-emption
of private investment in future. Further, high deficits and debt have reduced the ability of the government
to spend in priority areas like infrastructure, health, education and employment guarantee.
Without a concerted effort, the gains in terms of a relatively better fiscal situation in 2003-04 and
2004-05 will prove to be shortlived. The FRBM Act was enacted and fiscal policy rules were notified
to put a legislative ceiling on deficits. The FRBM targets have not been belied by the fiscal outcome
of 2004-05. The proposed trajectory of debt suggests that government will have to generate a primary
surplus to bring down the debt/GDP. The trajectory of primary deficit/surplus has, however, not been
explicitly stated in the Medium Term Fiscal Policy Statement.
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Industry Effect
Overall sectoral impact
Auto ancillaries Marginally positive
The reduction in the peak customs duty from 20 per cent to 15 per cent will reduce the input costs
of auto ancillary companies who import sub-components for use in their final products, such as MICO
and Sona Koyo Steering Systems. The reduction in the peak duty on aluminium will marginally reduce
the input costs of auto ancillary and casting & forging companies such as Bharat Forge and Rico
Auto, which is likely to be passed on to original equipment manufacturers (OEMs).
The reduction in the customs duty on copper will marginally reduce the input cost of companies
manufacturing electrical components such as wire harnesses; for e.g., Motherson Sumi. The reductionin the customs duty on lead from 15 per cent to 5 per cent will reduce the input costs of automotive
battery manufacturing companies such as Exide and Amara Raja Batteries.
The extension of 150 per cent deduction on in-house R&D till March 2007 will benefit companies
such as MICO, PRICOL and Sundaram Brake Linings.
Banking Positive
The proposed amendment to the Banking Regulation Act, allowing banks to issue preference shares,
is a positive, as it will provide them with another source of capital, which will help them in meeting
obligations under Basel II.
The proposed removal of floor and caps on SLR and CRR requirements will give more autonomy tothe Reserve Bank of India in effective management of the banking system.
Allowing banks to appoint micro finance institutions (MFI) as banking correspondents will provide
transaction services will help banks in increasing credit flow to small sectors and meet priority sector
targets.
The proposal to levy a 0.1 per cent tax on withdrawal of cash on a single day of Rs. 10,000/- or
more will not have any significant impact.
The amendment to the definition of `securities' under the Securities Contracts (Regulation) Act, 1956
to include legal framework for trading of securitised debt will help deepen the securitisation market(asset-backed securitsation & mortgage-backed securitisation) in India. This is likely to benefit HFCs
and NBFCs.
The proposal to allow deduction of up to Rs 1 lakh on repayment of principal amount of housing
loan will positively affect housing finance.
Capital goods Neutral
The cut in peak duty from 20 per cent to 15 per cent will translate into higher competition from
imports. The cut in customs duty on textile machinery from 20 per cent to 10 per cent will affect
domestic players like LMW. The budgetary allocation of Rs 11 billion for rural electrification programmes
will benefit transformer manufacturers; however, an expected lag in implementation will not result in
immediate benefits. The cut in customs duties on copper, aluminium and alloy steel from 15 per centto 10 per cent will have a marginal positive impact. The rise in excise duty on steel, from 12 per
cent to 16 per cent, will not have any impact, as it is modvatable. Overall, the impact of these measures
will be neutral on the sector.
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Industry Effect
Overall sectoral impact
Cars and utility vehicles Marginally positive
The reduction in peak customs duty, from 20 per cent to 15 per cent, will lower the prices of imported
components. This reduction will bring down the prices of premium segment cars, which have higher
import content. The cut in the customs duty on aluminium, from 15 per cent to 10 per cent, will
marginally decrease the cost of production for cars and utility vehicle manufacturers. These measures
will increase the margins of players, as the savings in costs will be retained.
The extension of 150 per cent deduction, in terms of in-house R&D expenses, upto March 31, 2007,
will benefit companies such as M&M and Tata Motors.
Cement Marginally positive
The cement industry is set to benefit from the government's focus on irrigation, urban infrastructure
and roads. The cut in the customs duty on pet coke will encourage the use of alternative fuels.
Shree Cements and Gujarat Ambuja have a headstart in the use of alternative fuels and are set to
benefit the most. Mini-cement plants will be affected more by the hike in the excise duty on clinker.
However, the larger players (who purchase clinker) pay a higher excise duty on cement, and hence,
will be able to offset the increase.
The proposal to allow deduction of up to Rs 1 lakh on repayment of principal amount of housing
loan will boost housing demand and thereby cement consumption.
Chlor alkalies Marginally negative
The cut in peak customs duty rates, from 20 per cent 15 per cent, will marginally affect the caustic
soda and soda ash industry. Although the current domestic prices of both products are at a discount
to the landed cost, prices are expected to fall marginally.
As a large number of caustic soda manufacturers use captive power plants, which primarily use furnace
oil as fuel, the cut in customs duty from 20 per cent to 10 per cent on FO/LSHS will lower their
manufacturing costs marginally.
Overall, the impact of the above measures is marginally negative for the industry.
Cigarettes Neutral
An additional excise duty has been imposed on cigarettes at specific rates ranging from Rs 15 to
Rs 180 per thousand cigarettes. The increase is unlikely to affect cigarette companies, as they will
be able to pass on the hike to consumers.
Commercial vehicles Neutral
The reduction in the excise duty on tyres will reduce the operating costs of transport operators in
terms of lower tyre prices in the replacement market. The reduction in the peak duty on aluminium
is likely to marginally reduce the input costs for commercial vehicle OEMs. The extension of 150 per
cent tax deduction in in-house R&D expenses till March 2007 will benefit companies such as Eicher
Motors, Tata Motors and Ashok Leyland.
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Industry Effect
Overall sectoral impact
Consumer durables Positive
The expected rise in the disposable income of consumers (following the change in tax brackets and
norms) is expected to induce consumer durable demand.
The reduction in the customs duty on CPTs is expected to lower input costs which is likely to have
a marginally positive impact on CTVs (particularly the flat and large-sized CTV segments). Players
are expected to pass on a part of the cost benefits to consumers. Mirc Electronics, LG and Samsung
will benefit owing to increased demand. AC players are expected to pass on the reduction in excise
benefits to consumers. This will result in higher demand, as ACs have displayed significant price
elasticity in the past.
The reduction in the customs duty on consumer durables will have a negligible impact on the domestic
industry.
Cotton and cotton yarn Positive
The CENVAT exemption route has been maintained for natural fibres, including cotton, which is a
positive for the industry. The customs duty on specific textile machinery has been cut from 20 per
cent to 10 per cent; this will benefit the entire cotton textile sector. The de-reservation of 30 textile
products, including hosiery, from among 108 items, will boost the cotton knitwear sector. The textile-
processing sector will also benefit from the 10 per cent capital subsidy. The Rs 250 billion Technology
Upgradation Fund (TUF) scheme has been continued with an additional allocation of Rs 4.35 billion,
which will benefit the cotton yarn industry.
Fertilisers Marginally positive
Although the budget contained no direct provisions relating to the fertiliser industry, the increased
thrust on irrigation, higher farm sector credit and various other measures for the agricultural sector
augur well for the industry. The Budget has provided an allocation of Rs 162.5 billion as the fertiliser
subsidy for 2005-06 as against the provision of Rs 126.62 billion for 2004-05. This increase is expected
to cover the subsidy arrears for 2004-05.
Hotels Neutral
No impact on the sector.
Information technology
Software Neutra l
The government has introduced the National Urban Renewal Mission, to renew the infrastructure of
seven mega cities with a population of over 1 million. The deteriorating infrastructure in most Tier
1 and Tier 2 cities has been a cause for concern for various players within the IT and ITeS industry.
The above initiative is expected to benefit the IT sector in the long term.
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Industry Effect
Overall sectoral impact
Information technology
Hardware Marginally positive
The reduction of customs duties on all Information Technology Agreement (ITA)-bound items to zero
per cent from the current 10 per cent, as well as the abolition of customs duties on capital goods
and inputs required to manufacture these items will benefit assemblers, domestic hardware manufacturers
such as HCL Infosystems, Wipro, Zenith Computers, and players such as Dell, IBM and HP.
This benefit is, however, partially offset by the imposition of a CVD of 4 per cent on all imports
of ITA-bound items and their inputs, which attract zero duty. Credit for the CVD is available against payment of excise duty.
Man-made fibres Marginally negative
The reduction in excise duty on polyester filament yarn (PFY) from 24 per cent to 16 per cent will
be positive for the industry, as it will help revive PFY demand, which had turned uncompetitive vis-
-vis cotton yarn. There has been no rationalisation of excise duties on other man-made fibres.
The cut in customs duties on POY and PSF will bring down the landed costs and force domestic
producers to lower prices to match the landed costs. The overall negative impact on margins will,
however, be offset to some extent, as the duties on the feedstocks, PTA, DMT and MEG, have also
been brought down to 15 per cent. The duty cut on synthetic fabrics from 20 per cent to 15 percent will lead to increase in synthetic fabric imports. The overall impact will be marginally negative
for the industry.
Non-ferrous metals Marginally negative
The budget measures will have a negative impact on the non-ferrous metal (NFM) industry as the
import duties on aluminium, copper and zinc have fallen to 10 per cent from 15 per cent. However,
in the case of copper and zinc, the impact on margins in 2005-06 will be neutralised by the favourable
changes in global demand-supply dynamics. However, the margins of aluminium players are expected
to decline by 300 basis points. Hindalco will be affected the most, with overall operating margins
expected to decline by around 270 basis points. Nalco will be the least affected, because it has a
high share of alumina sales in its product mix.
Oil and gas Negative
The customs duty cut in crude oil (from 10 per cent to 5 per cent) and peak customs duty cut
on petroleum products (20 per cent to 10 per cent) has resulted in lower tariff protection for the
refining players (from 3.1 per cent to 2.6 per cent). The resultant lower gross refining margins will
result in oil marketing companies (oil marketing companies - OMCs, such as IOC, BPCL and HPCL)
seeing their operating profits take a hit of Rs 6.6 billion. The decline in customs duty on products
will have a positive impact on MS/HSD marketing margins (Rs 24 billion) and subsidy under-recovery
on LPG/SKO (Rs 11.3 billion). The zero excise duty on LPG (down from 8 per cent) and SKO (down
from 12 per cent) would result in lower subsidy under-recovery for the OMCs, to the extent of Rs
17 billion. However, the increase in excise duty on MS and HSD would have a major negative impact
on the marketing margins on these products, as these are not likely to be passed on to the end
consumers. We estimate that the OMCs will take a collective hit of Rs 75 billion. Overall, the three
major integrated OMCs are estimated to take an annual hit of Rs 29.4 billion while ONGC will see
its operating profits take a hit of Rs 1.5 billion.
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Industry Effect
Overall sectoral impact
Other infrastructure Positive
The Union Budget 2005-06 lays significant thrust on the overall development of infrastructure. The
Budget proposes to set up a special purpose vehicle (SPV) to the extent of Rs 100 billion, to fund
roads, ports, airports and tourism projects, which will be governed by the inter-institutional group.
In addition to this, foreign exchange reserves will be used to fund infrastructure projects. The government's
continued commitment to provide equity (Rs 140.4 billion) and debt support (Rs 35.54 billion) to public
sector enterprises in 6 infrastructure sectors, including railways and aviation, will benefit these sectors.
The passage of the proposed bill for regulating SEZs could boost private investment and help in
the speedy implementation of SEZ projects.
Paints Marginally positive
The reduction in peak import duty would improve operating margins by about 30 basis points.
Paper Marginally negative
The reduction in the import duty on paper, from 20 per cent to 15 per cent, will adversely affect
higher-end coated paper manufacturer, BILT. Other paper manufacturers are likely to be marginally affected
owing to the reduced differential between landed costs and domestic prices.
Personal care and detergents Positive
The reduction in peak import duty on raw materials will benefit the industry. The magnitude of theimpact would differ across players, depending on the extent of imports. The increase in disposable
income, following change in the direct tax structure, will aid more penetration and upgradation to more
value-added products.
Petrochemicals: Basic and Polymers Negative
The customs duty on naphtha has been retained at 5 per cent, while the duties on basic petrochemicals
and polymers have been reduced to 5 per cent and 10 per cent, respectively. Thus, the effective
duty protection (naphtha-polymer) for integrated polymer producers (RIL, IPCL, Haldia Petrochem and
GAIL) has come down from 10 per cent to 5 per cent. For non-integrated producers (Finolex, Chemplast
and DCW), though the duty differential is maintained, margins will be impacted negatively, as the
reduction of the duty on raw materials will not completely offset the impact of the duty cut on higher-priced end products. Domestic producers will also face greater competition from cheaper imports. Further,
the reduced duty differential between naphtha and basic products (not converted into polymers and
sold domestically, such as benzene and toluene) will also affect player margins negatively. Overall,
the duty cuts will have a negative impact on the industry.
Petrochemicals: Downstream Marginally negative
The government has cut customs duty from 20 per cent to 15 per cent on downstream petrochemical
products. However, it has also reduced customs duty on raw material (benzene, ethylene, naphtha)
from 10 per cent to 5 per cent. Although the duty differential is maintained at 10 per cent, the reduction
in raw material duty will not completely offset the decline in duty on higher priced end products.
It will thus have a marginally negative impact on downstream petrochemical companies like Thirumalai
Chemicals (phthalic anhydride), Tamilnadu Petroproducts (LAB), HOCL and Schenectady Herdillia (phenol/
acetone), PCBL (carbon black) and Vinyl Chemicals (VAM). Domestic producers will also face higher
competition from imports. However, end user industries like paints, plasticisers, detergent and tyre
manufacturers are expected to benefit with reduction in duties and hence, product prices.
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Industry Effect
Overall sectoral impact
Pharmaceuticals Marginally positive
The government has increased its focus on healthcare by increasing the allocation from Rs 84.2 billion
to Rs 102.8 billion under the National Rural Health Mission. The focus is on increasing the supply
of medicines and training medical personnel. The last date to avail of 150 per cent tax deductions
for research companies as well as 100 per cent deduction of profits of companies carrying on scientific
research and development and approved by the Department of Scientific and Industrial Research has
been extended to March 31, 2007. Besides, the government has announced reduction in imports duty
on a list of nine capital goods. It has announced formation of a corpus fund of Rs 5 billion called
the SME Growth Fund through the Small Industries Development Bank of India (SIDBI) to provideequity support for small and medium units in pharmaceuticals and biotech firms. Thus the overall impact
has been marginally positive.
Ports Neutral
The budget contains no specific measures for the ports sector. The establishment of a special purpose
vehicle to finance infrastructure projects such as ports will, however, serve to boost investments in
the sector. The imposition of service tax on dredging services will result in a marginal increase in
capital and operating costs for ports.
Power Marginally positive
The government has indicated that in 2005-06 it will provide equity support to the tune of Rs 140.40 billion and loans amounting to Rs 35.54 billion to central public sector undertakings in select sectors,
including power. This will help companies such as NTPC, NHPC and PGCIL in their capacity augmentation
plans. The reduction of customs duties on capital goods would primarily benefit medium and small-
scale power projects through lower project costs.
The government has announced a budgetary support of Rs 11 billion for 2005-06 under the Rural
Electrification Distribution Backbone programme for installing at least one 33/11KV substation in every
block, for electrification of 1,25,000 villages in the next 5 years. This is a positive indicator of the
government's overall commitment to reform the sector.
The cess of Rs 1.5 per litre on light diesel oil would increase generation costs by around 8 per
cent for captive power plants that consume the same.
Roads Positive
The Union Budget 2005-06 has provided a significant fillip to the roads sector, given its higher focus
on the infrastructure sector. The rise in allocations for the National Highway Development Programme
(NHDP) from Rs 65.14 billion in FY05 to Rs 93.20 billion in FY06 will result in more funds for the
programme. The focus on NHDP phase III will result in speedy implementation of the project.
An outlay of Rs 55 billion under the National Urban Renewal Mission, a special purpose vehicle (SPV)
to finance infrastructure projects with Rs 100 billion borrowing limit and a provision of Rs 15 billion
for viability gap funding for infrastructure projects, will boost the roads sector.
Shipping Neutral
No impact on the sector.
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Industry Effect
Overall sectoral impact
Steel Marginally negative
The excise duty on steel products has been increased to 16 per cent from 12 per cent. The excise
duty on steel is cenvatable for a majority of the steel consumers of flat products and will, hence,
will be passed on. Thus the impact on margins will be neutral.
However, the increase will be difficult to pass on in case of GP/GC steel and long products. SAIL,
Tata Steel (for long products) and GP/GC manufacturers will be partially affected; the least impact
will be on JISCO.
Lower duties on stainless steel will have a neutral impact because the landed cost (after the duty
reduction) is higher than the current domestic prices.
One factor that will mitigate the negative impact is the reduction in the duties on coking coal (with
more than 12 per cent ash content), refractories and ferro alloys, which will marginally lower the input
costs for the industry.
Sugar Positive
The proposed financial package for the revitalisation of the sugar industry, entailing a moratorium
of 2 years on the payment of both principal and interest, is expected to largely benefit those mills
in Maharashtra and South India, that are in financial distress. For the stronger mills, which have availed
of loans from the Sugar Development Fund (SDF), the reduction in the rate of interest on all outstanding
SDF loans is viewed as a positive. The reduction in the basic customs duty on molasses and industrial
alcohol from 15 per cent to 10 per cent is expected to be marginally negative for the industry.
Tea and Coffee Positive
The removal of surcharge of Re 1 per kg of tea will benefit the industry. The proposal to reframe
the price stabilisation fund and improve replantation and rejuvenation activity will benefit the industry
in the long term.
Telecom cables Negative
The abolition of the basic customs duty on jelly-filled telecom cables (15 per cent in 2004-05) and
optical fibre cables (20 per cent in 2004-05) under the Information Technology Agreement (ITA) is
a negative for the industry. Price realisations will decline, as competitive pressures will force Indian
producers to lower prices to compete with cheaper imports. The reduction in the customs duty on
raw materials like copper and optic fibre partly offsets the zero duty on finished products.
The pressure on the margins of domestic producers is expected to increase.
Telecom equipment Marginally negative
The customs duty on specified finished products and the capital goods required to manufacture these
products have been abolished; earlier a customs duty of 10-15 per cent was levied on these items.
The change in the customs duty on finished products will have a negative impact on domestic players,
although the abolition of duties on capital goods will mitigate the negative impact.
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Telecom services Negative
The continuation of the exemption presently available to telecom service providers for the import of
specified telecom network equipment and parts thereof is a positive for the sector. Zero import duty
on mobile and fixed wireless handsets to lower entry cost for customers.
The benefits under section 80 IA, wherein a telecom operator was entitled to 100 per cent exemption
on taxable profit for 5 years and 30 per cent exemption for the next 5 years during the initial 15
years from the date of commencement of commercial operations, have not been extended. This will
reduce the return on future capital investments in the industry.
Tractors Marginally positive
The overall thrust of the government on the agricultural sector, in terms of irrigation, agricultural
credit, crop insurance and schemes for the agri-marketing sector, augurs well for the long-term demand
growth in the industry.
The increase in the excise duty on steel from 12 per cent to 16 per cent is likely to be passed
on by the tractor manufacturers as the excise duty on inputs is not cenvatable for tractors (since
the agricultural tractors are exempt from excise duty).
The imposition of a 16 per cent excise duty on road tractors (of engine capacity more than 1,800
cc) for road trailers is not expected to impact the industry, considering its miniscule volumes when
compared with agricultural tractors.
Two-wheelers Marginally positive
The reduction in personal tax rates will increase household disposable income, which is a positive
for two-wheeler demand.
Tyres Positive
Customs on tyres and its raw materials - synthetic butadiene rubber, poly butadiene rubber and carbon
black - has been reduced from 20 per cent to 15 per cent. The domestic prices of raw materials
are aligned with landed costs, thus reducing the material costs. So the operating margins may improve
from 7.5 per cent to 10 per cent. The customs duty cut on tyres will not intensify the import threat
from China and South Korea, as they already enjoyed a preferential 15 per cent duty under the Bangkok
Agreement. The abolition of the specific excise duty of 8 per cent on tyres would have a neutral
impact, as the benefits are expected to be passed on.
Industry Effect
Overall sectoral impact
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Overall company impact
Continued...
Company Impact Industry
ABB Ltd. Capital goods
ACC Ltd. Cement
Aksh Optifibre Ltd. Telecom cables
Alfa Laval (India) Ltd. Capital goods
Andhra Pradesh Paper Mills Ltd. Paper
Apollo Tyres Ltd. Tyres
Arvind Mills Ltd. Cotton textiles
Ashok Leyland Ltd. Commercial vehicles
Asian Hotels Ltd. Hotels
Asian Paints India Ltd. Paints
Aurobindo Pharma Ltd. Pharmaceuticals
Bajaj Auto Ltd. Two wheelers
Bajaj Hindusthan Ltd. Sugar
Ballarpur Industries Ltd. Paper
Balrampur Chini Mills Ltd. Sugar
Bannari Amman Sugars Ltd. Sugar
Berger Paints India Ltd. Paints
Bharat Forge Ltd. Auto ancillaries
Bharat Heavy Electricals Ltd. Capital goods
Bharat Petroleum Corpn. Ltd. Oil and gas
Bharat Sanchar Nigam Ltd. Telecom services
Bharti Televentures Ltd. Telecom services
Bhushan Steel & Strips Ltd. Steel
Biocon India Ltd. PharmaceuticalsBirla Ericsson Optical Ltd. Telecom cables
Bombay Dyeing Ltd. Diversified
Bongaigon Petrochemicals Ltd. Oil and gas
Carrier Aircon Ltd. Consumer durables
Ceat Ltd. Tyres
Century Enka Ltd. Man-made fibres
Century Textiles Ltd. Diversified
Chambal Fertilisers & Chemicals Ltd. Fertilisers
Chemplast Sanmar Ltd. Petrochemicals: Basic and Polymers
Chennai Petroleum Corpn. Ltd. Oil and gas
Cipla Ltd. Pharmaceuticals
Colgate-Palmolive (India) Ltd. Personal care and Detergents
Coromandel Fertilizers Ltd. Fertilisers
Crompton Greaves Ltd. Capital goods
Dabur India Ltd. Personal care and Detergents
DCW Ltd. Petrochemicals: Basic and Polymers
D-Link(India) Ltd. Information technology
Dr Reddy's Laboratories Ltd. Pharmaceuticals
Eicher Motors Ltd. Commercial vehicles, Tractors
EID Parry Ltd. Sugar
EIH Ltd. Hotels
Escorts Ltd. Tractors
Essar Shipping Ltd. Shipping
Essar Steel Ltd. Steel
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Overall company impact...continued
continued...
Company Impact Industry
Finolex Cables Ltd. Telecom cables
Finolex Industries Ltd. Petrochemicals: Basic and Polymers
Garden Silk Mills Ltd. Man-made fibres
Gas Authority of India Ltd. Oil and gas
George Williamson (Assam) Ltd. Tea and Coffee
GlaxoSmithkline Pharmaceuticals Ltd. Pharmaceuticals
Godfrey Phillips India Ltd. Cigarettes
Goetze India Ltd. Auto ancillaries
Goodlass Nerolac Paints Ltd. Paints
Goodricke Group Ltd. Tea and CoffeeGoodyear India Ltd. Tyres
Grasim Industries Ltd. Diversified
Great Eastern Shipping Co Ltd. Shipping
GTN Textile Ltd. Cotton textiles
Gujarat Alkalies and Chemicals Ltd. Chlor alkalies
Gujarat Ambuja Cement Ltd. Cement
Gujarat Heavy Chemicals Ltd. Chlor alkalies
Gujarat Narmada Valley Fertilizers Company Ltd. Fertilisers
Gujarat State Fertilisers C ompany Ltd. Fertilisers
Haldia Petrochemicals Ltd. Petrochemicals: Basic and Polymers
Harrisons Malayalam Ltd. Tea and Coffee
HCL Infosystems Ltd. Information technology
Hero Honda Motors Ltd. Two wheelers
Himachel Futuristic Communications Ltd. Telecom equipment
Hindalco Industries Ltd. Non-ferrous metals
Hindustan Copper Ltd. Non-ferrous metals
Hindustan Lever Ltd. Personal care and Detergents
Hindustan Motors Ltd. Cars and Utility vehicles
Hindustan Organic Chemicals Ltd. Petrochemicals: Downstream
Hindustan Petroleum Corpn. Ltd. Oil and gas
Hindustan Zinc Ltd. Non-ferrous metals
Hitachi Home & Life Solutions (India) Ltd. Consumer durables
Honda SIEL Cars India Ltd. Cars and Utility vehicles
Hotel Leelaventure Ltd. Hotels
Hutchison Max Telecom Ltd. Telecom servicesHyundai Motors India Ltd. Cars and Utility vehicles
IBP Co. Ltd. Oil and gas
ICI India Ltd. Paints
India Cement Ltd. Cement
India Glycols Ltd. Petrochemicals: Downstream
Indian Hotels Company Ltd. Hotels
Indian Oil Corpn. Ltd. Oil and gas
Indian Petrochemicals Corpn. Ltd. Petrochemicals: Basic and Polymers
Indian Rayon & Industries Ltd. Diversified
Indo Gulf Fertilisers Ltd. Fertilisers
Indo Rama Synthetics (India) Ltd. Man-made fibres
Infosys Technologies Ltd.
Information technologyIspat Industries Ltd. Steel
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Overall company impact...continued
continued...
Company Impact Industry
ITC Ltd. Cigarettes
ITI Ltd. Telecom equipment
JBF Industries Ltd. Man-made fibres
Jindal Stainless Ltd. Steel
JISCO/JVSL Steel
JK Industries Ltd. Tyres
Kalyani Brakes Ltd. Auto ancillaries
Kesoram Industries Ltd. Diversified
Kochi Refineries Ltd. Oil and gas
Lakshmi Machine Works Ltd. Capital goodsMadras Cements Ltd. Cement
Madras Refineries Ltd. Oil and gas
Mahavir Spinning Mills Ltd. Cotton textiles
Mahindra & Mahindra Ltd. Cars and Utility vehicles, Tractors
Malwa Cotton Spinning Mills Ltd. Cotton textiles
Maruti Udyog Ltd. Cars and Utility vehicles
Matrix Laboratories Ltd. Pharmaceuticals
Mercator Lines Ltd. Shipping
Mahanagar Telephone Nigam Ltd. Telecom services
MIRC Electronics Ltd. Consumer durables
Moser Baer India Ltd. Information technology
Motor Industries Co. Ltd. Auto ancillaries
MRF Ltd. Tyres
Munjal Showa Ltd. Auto ancillaries
Nahar Exports Ltd. Cotton textiles
National Aluminium Co. Ltd. Non-ferrous metals
National Hydro Electric Power Corp. Ltd. Power
National Thermal Power Corp. Ltd. Power
Nicholas Piramal India Ltd. Pharmaceuticals
Nirma Ltd. Personal care and Detergents
Numaligarh Refinery Ltd. Oil and gas
Oil and Natural Gas Corpn. Ltd. Oil and gas
Oswal Chemicals and Fertilisers Ltd. Fertilisers
PCS Technologies Ltd. Information technology
Pfizer Ltd. PharmaceuticalsPhilips Carbon Black Ltd. Petrochemicals: Downstream
Power Grid Corporation of India Ltd. Power
Pudumjee pulp and paper Ltd. Paper
Punjab Alkalies and Chemicals Ltd. Chlor alkalies
Punjab Tractors Ltd. Tractors
Ranbaxy Ltd. Pharmaceuticals
Rashtriya Chemicals and Fertilisers Ltd. Fertilisers
Raymond Ltd. Diversified
Reliance Energy Ltd. Power
Reliance Industries Ltd. Diversified
Reliance Infocomm Ltd. Telecom services
Sanghi Polyester Ltd.
Man-made fibresSatyam Computer Services Ltd. Information technology
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Overall company impact...continued
Company Impact Industry
Schenectady Herdillia Ltd. Petrochemicals: Downstream
Seshasayee Paper and Boards Ltd. Paper
Shipping Corporation of India Ltd. Shipping
Shree Cements Ltd. Cement
Shyam Telecom Ltd. Telecom equipment
Sona Koyo Steering Systems Ltd. Auto ancillaries
Southern Petrochemical Industries Corporation Ltd. Fertilisers
Steel Authority of India Ltd. Steel
Sterlite Industries (India) Ltd. Non-ferrous metals
Sterlite Optical Technologies Ltd. Telecom cablesSundaram Fasteners Ltd. Auto ancillaries
Supreme Petrochem Ltd. Petrochemicals: Basic and Polymers
TAFE Ltd. Tractors
Tamil Nadu Newsprint & Papers Ltd. Paper
Tamil Nadu Petroproducts Ltd. Petrochemicals: Downstream
Tata Chemicals Ltd. Diversified
Tata Coffee Ltd. Tea and Coffee
Tata Iron & Steel Co. Ltd. Steel
Tata Motors Ltd. Cars and UVs, Commercial vehicles
Tata Power Company Ltd. Power
Tata Tea Ltd. Tea and Coffee
Tata Teleservices Ltd.
Telecom servicesThirumalai Chemicals Ltd. Petrochemicals: Downstream
TVS Motor Company Ltd. Two wheelers
Ultratech Cement Ltd. Cement
Videocon Appliances Ltd. Consumer durables
Videocon International Ltd. Consumer durables
Videsh Sanchar Nigam Ltd. Telecom services
Vindhya Telelinks Ltd. Telecom cables
Vintron Informatics Ltd. Information technology
VST Industries Ltd. Cigarettes
West Coast Paper Mills Ltd. Paper
Whirlpool of India Ltd. Consumer durables
Wipro Ltd. Information technology
Wockhardt Ltd. Pharmaceuticals
Zenith Computers Ltd. Information technology
Zuari Industries Ltd. Fertilisers
Source: CRIS INFAC
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Auto ancillariesDomestic growth to slow down, surge in exports to continue in 2005-06
The auto ancillary industry is estimated to have grown by around 20 per cent in the first 9 months of 2004-05
in terms of value of production as compared with the same period last year. The growth was led by the strong
domestic growth posted by almost all the segments of the automobile industry and high growth in exports.
The passenger cars and utility vehicles segment grew by 27 per cent, commercial vehicles by 30 per cent, two-
wheelers by 14 per cent and tractors by 40 per cent in the first 9 months of 2004-05. For the full year of 2004-
05, the auto ancillary industry is expected to grow by 18-20 per cent, while exports are seen growing by 25-30
per cent.
In 2005-06, the auto ancillary industry is likely to post a relatively lower growth of 12-13 per cent. The lowergrowth will be due to the reduced growth rate in almost all the automobile segments. However, exports are
expected to continue the strong growth momentum in 2005-06 at 20-25 per cent. This will be led by the
continued thrust on exports by domestic manufacturers as well as increase in outsourcing of components
from India by global OEMs and Tier-I vendors.
Operating profit margins slipped marginally in the first 9 months of 2004-05, owing to a rise in input costs; the
margins are expected to remain under marginal pressure in 2005-06 as well, as CRIS INFAC expects average
steel prices to remain firm in 2005-06. But net profits of players have risen, on account of higher growth in net
sales and lower capital charges in the first 9 months of 2004-05; the net profits are expected to improve further
in 2005-06.
Auto ancillaries: Tariffs
(per cent) Customs Excise
2004-05 2005-06 2004-05 2005-06
Parts of four-wheelers 20.4 15.3 16.3 16.3
Parts of two-wheelers 20.4 15.3 16.3 16.3
Parts of IC engines 20.4 15.3 16.3 16.3
IC engines 20.4 15.3 16.3 16.3
Transmission shafts, gears and gear boxes 20.4 15.3 16.3 16.3
Auto gaskets/brake linings 20.4 15.3 16.3 16.3
Catalytic convertors 5.1 5.1 16.3 16.3GP/GC steel 5.1 5.1 12.2 16.3
HR steel 5.1 5.1 12.2 16.3
Aluminium 15.3 10.2 16.3 16.3
Copper 15.3 10.2 16.3 16.3
Lead 15.3 5.1 16.3 16.3
Nickel 5.1 5.1 16.3 16.3
HR: Hot rolled; GC: Galvanised coil; GP: Galvanised plate; IC: Internal combustion
Source: CRIS INFAC
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Auto ancillariesBudget measures marginally positive for the auto ancillary sector
Impact factors
A. The reduction in the peak customs duty on components will benefit companies that import sub-components
for manufacturing their final product, such as MICO and Sona Koyo Steering Systems.
B. The reduction in the peak customs duty on aluminium will marginally reduce the input costs of auto ancillaries
in terms of lower prices. The cut in the peak customs duty on copper will marginally reduce the input costs of
companies manufacturing electrical components such as wire harnesses. The reduction in the customs dutyon lead to 5 per cent will reduce the input costs of automotive battery manufacturing companies such as Exide
and Amara Raja Batteries. The benefit of the above measures will be passed on to the original equipment
manufacturers.
C. The increase in the excise duty on steel will not have any impact on the costs of auto ancillary manufacturers,
as the same is modvatable.
D. The extension of the 150 per cent tax benefit for in-house R&D will marginally benefit auto ancillary companies
undertaking research and development.
Company Impact Impact factors
Bharat Forge Ltd. D
Goetze India Ltd. B, D
Kalyani Brakes Ltd. B, D
Motor Industries Co. Ltd. A, D
Munjal Showa Ltd. A
Sona Koyo Steering Systems Ltd A, D
Sundaram Fasteners Ltd. A
Source: CRIS INFAC
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Capital goodsDemand to remain robust in medium term
The demand growth momentum in capital goods is expected to continue in 2005-06, driven by pick-up in
industrial activity, fresh investments in sectors like power equipment, metals, oil and gas and petrochemicals
and the continued spending thrust on infrastructure. Over the past 2 years, the demand for capital goods has
risen due to a rise in corporate profitability, leading to greater investment activity in the industry.
Unlike the negative growth rates seen in 2001-02, the sector grew by over 13 per cent in 2003-04 and 14 per cent
in 2004-05, driving industrial growth. The Index of Industrial Production (IIP) averaged 2.7 per cent in 2001-02,
6.9 per cent in 2003-04 and 8.1 per cent in the first half of 2004-05.
This is evident in the bulging order book for companies catering to these sectors. The players' export thrust,
to weather the downturn in domestic markets, has continued and the contribution of export revenues has been
steadily improving. We expect this trend to continue in the medium term. There are substantial capex plans
outlined by major players (ABB, Seimens, BHEL), due to the need to expand capacities to meet these orders
(the asset turnover ratios reflect higher capacity utilisation levels).
Competition in this sector is expected to intensify since the reduction, in January 2004, of peak customs duty
to 20 per cent, which has made imports cheaper. Capital goods imports grew by 31 per cent in 2003-04 vis--vis
24.7 per cent in 2002-03.
The profitability of domestic manufacturers has improved over the past 2 years after having hit a low in 2001-
02. We expect margins to be marginally affected in 2004-05 before stabilising in 2005-06 in spite of the improved
demand outlook on account of the increased competition from imports and rise in the prices of raw materials,
namely steel, aluminium and copper
Capital goods: Tariffs
(per cent) Excise
2004-05 2005-06 2004-05 2005-06
General machinery 20.4 15.3 16.3 16.3
Textile machinery 20.4 10.2 16.3 16.3
Textile machinery (Specified items) 5.1 5.1 16.3 16.3
Machine tools 20.4 15.3 16.3 16.3
CNC systems 20.4 15.3 16.3 16.3
Milking and dairy machinery 20.4 15.3 0.0 0.0High speed steel/alloy steel 15.3 10.2 12.2 16.3
Steel plates 5.1 5.1 12.2 16.3
Seamless steel tubes 20.4 15.3 16.3 16.3
Project imports
Fertilisers 5.1 + 10 CVD 5.1 + 10 CVD - -
Refining of crude petroleum 5.1 + 10 CVD 5.1 + 10 CVD - -
Coal mining 5.1 + 10 CVD 5.1 + 10 CVD - -
Captive power plants of 5 MW and above 20.4 + 16 CVD 15.3 + 16 CVD - -
Power generation project 5.1 + 10 CVD 5.1 + 10 CVD - -
(excluding captive power plants)
Power transmission projects of 66 KV and above 5.1 + 10 CVD 5.1 + 10 CVD - -
LNG regassification plants 5.1 + 10 CVD 5.1 + 10 CVD - -Other industrial plants or projects, including oil and gas 20.4 + 16 CVD 15.3 + 16 CVD - -
CVD: Countervailing duty
Note
1) Custom duty on steel plates revised from 10 to 5 per cent in August 2004
Source: CRIS INFAC
Customs
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Capital goods
Impact factors
A. The reduction in the peak customs duty from 20 per cent to 15 per cent will result in increased competition
from imports. This will have a marginally negative impact on domestic companies; but domestic companies
with strong technology platforms and relationships will be able to weather increased competition to an extent.
The reduction in the customs duty on specified textile machinery from 20 per cent to 10 per cent will have a
negative impact on domestic textile machinery manufacturers.
B. The reduction in customs duty from 15 per cent to 10 per cent on alloy steel, aluminium and copper will have
a marginally positive impact on raw material prices.
C. Increase in excise duty on iron and steel from 12 per cent to 16 per cent will not have any impact, as it will be
modvatable.
D. The budgetary allocation of Rs 11 billion for rural electrification programmes will benefit transformer
manufacturers; however, with an expected lag in implementation, we do not expect immediate benefits.
Customs duties cut on product and raw materials
Company Impact Impact factors
ABB Ltd. A,B,C,D
Alfa Laval (India) Ltd. A,B,C
Bharat Heavy Electricals Ltd. A,B,C,D
Crompton Greaves Ltd. A,B,C,D
Lakshmi Machine Works Ltd. A,B,C
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Cars and utility vehiclesGrowth to be lower in 2005-06
Domestic passenger car sales rose by 22 per cent, while domestic utility vehicle (UV) sales increased by 20 per
cent in the first 9 months of 2004-05. Passenger cars and UVs are expected to grow at 17-18 per cent and 16-17
per cent respectively in 2004-05. The strong growth in sales was due to strong growth in family incomes,
higher aspiration levels of customers, price reductions and new models/variants launched by companies,
lower EMIs due to stable interest rates and higher tenures. The cut in EMIs also spurred tour operators to
replace old vehicles in their fleet.
The growth of passenger cars is likely to be lower at 10-11 per cent in 2005-06, due to increase in prices of cars
(owing to rise in input price), Euro III norms, and stable interest rates. The mid-size segment and compactsegment will continue to see growth, while the mini segment may see a fall in sales. Similarly, the growth in
utility vehicles is likely to be lower, at 4-5 per cent, mainly due to expectations of stable consumer finance
interest rates, which drove growth in the previous fiscal.
The operating margins of car and UV manufacturers have improved marginally, owing to strong demand
growth and higher capacity utilisation. Going forward, the operating margins are expected to increase slightly
in 2005-06, on the back of higher realisations, due to change in product mix in favour of compact and mid-size
segment cars. Net profits have grown substantially in the first 9 months of 2004-05, on account of higher
volumes and lower interest cost, and are expected to improve further in 2005-06.
Cars and utility vehicles: Tariffs
(per cent)
2004-05 2005-06 2004-05 2005-06
New cars
-CKDs 20.4 15.3 24.5 24.5
-SKDs 61.2 61.2 24.5 24.5
-CBUs 61.2 61.2 24.5 24.5
Second hand cars 107.1 102.0 24.5 24.5
Utility vehicles
-6-12 seater1 20.4 15.3 24.5 24.5
-12 seater and above1 20.4 15.3 16.3 16.3
Steel items 5.1 5.1 12.2 16.3
Engines and engine parts 20.4 15.3 16.3 16.3
Other components 20.4 15.3 16.3 16.3
CKDs: Completely knocked down units; SKDs: Semi-knocked down units;
CBUs: Completely built units1 Excluding driver
Source: CRIS INFAC
Customs Excise
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Cars and Utility vehicles
Impact factors
A. The cut in the import duty on used cars and utility vehicles from 105 per cent to 100 per cent will not have any
impact on the industry.
B. The reduction in the peak customs duty on components from 20 per cent to 15 per cent will lower the prices of
imported components. This reduction will bring down the prices of premium segment cars, which have a
higher import content. In addition, the cut in the customs duty on aluminium from 15 per cent to 10 per cent
will marginally lower the cost of production of cars and utility vehicles. The above measures will have a
positive impact on cars and utility vehicle manufacturers, as these benefits are likely to be retained by auto
original equipment manufacturers (OEMs), thereby increasing their margins.
C. The increase in the excise duty on steel from 12 per cent to 16 per cent and cut in the excise duty on tyres from
24 per cent to 16 per cent will not affect OEMs, as the excise on inputs are modvatable against the excise paid
by companies on their final product.
D. The extension of 150 per cent deduction up to March 31, 2007 in terms of in-house R&D expenditure will
benefit automobile OEMs.
E. The reduction in personal tax rates will increase household disposable income, which is a positive for car
demand.
Cost savings for cars & UV manufacturers to improve margins
Company Impact Impact factors
Hindustan Motors Ltd. B, D, E
Honda SIEL Cars India Ltd. B, D, E
Hyundai Motors India Ltd. B, D, E
Maruti Udyog Ltd. B, D, E
Tata Motors Ltd. B, D,