Budget 2012 Economy

7/29/2019 Budget 2012 Economy

1/19

I

Union Budget 2011-12: High on inclusive growth, low on reforms

The Union Budget 2011-2012 continues to stress on inclusive growth (increasing

allocation to social sector by 17% Y-o-Y to INR 1.61 tn), while having anunrealistically low assessment of fiscal deficit target. On the reform front although

the government has liberalized portfolio flows and indicated its intention to move

towards direct transfer of cash subsidy for kerosene/ LPG and urea, big-ticket

reforms such as FDI have largely been absent.

Revenue growth achievable; expenditure growth unrealistically low

Gross tax revenue growth at 18.5% Y-o-Y seems reasonable in the light of an

expanding excise duty base. However, disinvestment target of INR 400 bn may be

difficult to achieve given the market conditions.

Budgeted expenditure growth, however, looks significantly understated on

account of unrealistically low subsidy burden (given rising crude oil prices and

possible introduction of food security bill). Budgeted subsidy burden, which stands

at INR 1.44 tn, is likely to catapult by ~INR 450 bn in our assessment.

FY12 fiscal deficit/borrowing targets overly ambitious; slippages likely

We foresee slippages in the budgeted fiscal deficit target (4.6% of GDP), which as

per our estimate, may go as high as ~5% of GDP, thereby raising the net market

borrowing requirement beyond the budgeted INR 3.43 tn. Further, the budgeted

revenue deficit of 3.4% of GDP in FY12 is same as FY11, implying no consolidation

on revenue account. Assuming additional subsidy bill of ~INR 450 bn, revenue

deficit shoots up to ~3.9% of GDP, which is significantly higher than last year.

Budget supportive of consumption growth

With increased social sector spending combined with no major change in headline

tax rates, the Budget is supportive of consumption growth. Yet, sustained boost to

consumption will also be inflationary. Meanwhile, thrust on infrastructure in terms

of tax-free bonds and increase in budgetary allocation will help investment activity

in the economy.

However, the governments net market borrowing is likely to be higher than

stated. In such a scenario, either private investment activity will remain weak due

to rise in cost of capital in the economy or corporates will be forced to borrow

abroad, leading to further increase in Indias external debt (which has been on an

uptrend and currently is equal to Indias forex reserves). This adds to

macroeconomic vulnerability of the country.

Budget neutral for most sectors

The budget was neutral for most sectors, although there were pockets of positive

as well as negative announcements on the margin. Sectors which stand to benefit

include fertilisers (benefit of investment linked deduction extended to fertilizer

production) and FMCG (no increase in excise duty) while the imposition of MAT on

profits from SEZs is expected to impact both SEZ operators and units functioning

within them. Further, ad valorem export duty of 20% both on lumps and fines is

expected to be negative for iron ore exporters. Among others, no mention of

liberalization of FDI norms is a negative for the retail sector.

February 28, 2011

Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL , Thomson First Call, Reuters and Factset. Edelweiss Securities Limited

Edelweiss research team

Kapil Gupta

+91-22-4063 5406

[email protected]

Toshi Jain

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[email protected]

Dipojjal Saha

+91-22-6623 3377

[email protected]

India Equity Research | Economy

UNIONBUDGETREVIEW

Stated fiscal consolidation over ambitious


2/19

2 Edelweiss Securities Limited

Economy

Union Budget aims at sustaining inclusive growth and fiscal consolidation

The highlights of Union Budget 2011-2012 are continued stress on the inclusive growth

agenda, unrealistically low assessment of the subsidy burden, and near silence on

reforms such as liberalizing the foreign direct investment regime. We find budget

estimates of fiscal deficit at 4.6% of GDP in FY12 overly ambitious. Given the fact that

crude oil prices are ruling close to USD 100/barrel and that government is planning to

introduce the National Food Security Bill, the food and oil subsidy burden is likely to be

significantly higher than budgeted estimates.

However, the Budget makes good progress on a few other accounts. First, the

government has indicated its intention to move towards direct transfer of cash subsidy

for kerosene, LPG and urea to the BPL category in a phased manner. Second, the

government has taken measures to boost capital account by raising FIIs investment limit

in corporate bonds of infrastructure companies and allowing foreign investors to invest

directly into equity mutual funds. In addition, the government has increased allocation to

infrastructure spending to INR 2,140 bn during FY12, a ~23% jump over the previous

year.

Chart 1: Rupee comes from Chart 2: and goes to

Taxrevenue

53%

Non-taxRevenue

10%

Capitalreceipts

4%

Borrowingsand otherLiabilities

33%

Source: Budget documents, CMIE, Edelweiss research

Subsidyexp11%

Defence13%

Interestpymt

21%

Othernon-planrev. exp

13%

Non-plancapital

exp7%

PlanRevenue

exp29%

Plan capexp6%


3/19

Edelweiss Securities Limited 3

Economy

Table 1: Budget at a glance (INR bn)

FY09 FY10 FY11(BE) FY11(RE) FY12(BE)

Revenue receipts 5,403 5,728 6,822 7,838 7,899

Tax Revenue (net to Centre) 4,433 4,565 5,341 5,637 6,645

Non-tax revenue 969 1,163 1,481 2,201 1,254

Capital receipt 3,437 4,517 4,265 4,327 4,678

Recoveries of Loans 61 86 51 90 150

Other receipts 6 246 400 227 400

Borrowings and other liabilities 3,370 4,185 3,814 4,010 4,128

Total receipts 8,840 10,245 11,087 12,166 12,577

Non-plan expenditure 6,087 7,211 7,357 8,216 8,162

On revenue account of which, 5,590 6,579 6,436 7,267 7,336

Interest payments 1,922 2,131 2,487 2,408 2,680

On capital account 497 632 921 948 826

Plan expenditure 2,752 3,034 3,731 3,950 4,415

On revenue account 2,348 2,539 3,151 3,269 3,636

On capital account 405 495 580 681 779

Total expenditure 8,840 10,245 11,087 12,166 12,577

Revenue expenditure 7,938 9,118 9,587 10,537 10,972Capital expenditure 902 1,127 1,500 1,629 1,606

Revenue deficit 2,535 3,390 2,765 2,698 3,073

Fiscal deficit 3,370 4,185 3,814 4,010 4,128

Primary deficit 1,448 2,054 1,327 1,602 1,448

Revenue deficit (% of GDP) 4.5 5.2 4.0 3.4 3.4

Fiscal deficit (% of GDP) 6.0 6.4 5.5 5.1 4.6

Primary deficit (% of GDP) 2.6 3.1 1.9 2.0 1.6 Source: Budget documents, CMIE, Edelweiss research

Revenue growth achievable; expenditure growth unrealistically low

Revenue: The gross tax revenue growth of 18.5% Y-o-Y estimated in the Budget seemsreasonable. While headline rates in direct and indirect taxes have not changed, the

government has widened the tax base by withdrawing the excise duty exemption on

~130 items while tinkering with the excise duty rate for a few other items. Accordingly,

the implied tax buoyancy of ~1.3 looks realistic. Meanwhile, the non-tax revenue is

estimated at much lower INR 1.25 tn compared to INR 2.20 tn in FY11 in the absence of

3G auction revenues.

Within capital receipts, the governments disinvestment target of INR 400 bn seems

slightly aggressive given the current financial market conditions and the fact that last

year when market conditions were favourable the government was able to garner only

~INR 220 bn.


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Economy

Table 2: Tax Revenues (INR bn)

FY08 FY09 FY10 FY11(BE) FY11(RE) FY12(BE)

Gross tax revenue 5,931 6,053 6,245 7,467 7,869 9,324

y-o-y % 25.3 2.0 3.2 19.6 26.0 18.5

Income tax 1,026 1,060 1,323 1,281 1,491 1,720

y-o-y % 36.7 3.3 24.8 (3.2) 12.7 15.4

Corporate tax 1,929 2,134 2,447 3,013 2,964 3,600

y-o-y % 33.7 10.6 14.7 23.1 21.1 21.5

Custom 1,041 999 833 1,150 1,318 1,517

y-o-y % 20.6 (4.1) (16.6) 38.0 58.2 15.1

Excise 1,236 1,086 1,036 1,320 1,378 1,641

y-o-y % 5.1 (12.1) (4.6) 27.4 33.0 19.1

Service tax 513 609 584 680 694 820

y-o-y % 36.4 18.8 (4.1) 16.4 18.8 18.2 Source: Budget documents, CMIE, Edelweiss research

Table 3: Revenue and Expenditure


(Y-oY %) 24.7 (0.3) 6.0 19.1 36.8 0.8(% of GDP) 10.9 9.7 8.7 9.8 9.9 8.8

(Y-oY %) 25.3 2.0 3.2 19.6 26.0 18.5

(% of GDP) 11.9 10.8 9.5 10.8 10.0 10.4

(Y-oY %) 22.2 24.0 15.9 8.2 18.7 3.4

(% of GDP) 14.3 15.8 15.6 16.0 15.4 14.0

(Y-oY %) 22.7 19.9 18.5 2.0 13.9 (0.7)

(% of GDP) 10.2 10.9 11.0 10.6 10.4 9.1

(Y-oY %) 24.2 82.9 9.0 (17.8) 16.1 (12.5)

(% of GDP) 1.4 2.3 2.2 1.7 2.1 1.6

(Y-oY %) 13.8 12.4 10.9 16.7 13.0 11.3

(% of GDP) 3.4 3.4 3.3 3.6 3.1 3.0

(Y-oY %) 20.7 34.2 10.2 23.0 30.2 11.8(% of GDP) 4.1 4.9 4.6 5.4 5.0 4.9

Subsidy

Interest

Plan

Revenue

Gross tax revenue

Expenditure

Non-Plan


Expenditure: Budgeted expenditure growth stands at 3.3% Y-o-Y, which in much lower

than our expectation. This is largely due to unrealistically low subsidy burden of INR 1.44

tn, especially when crude oil prices are hovering around USD 100/barrel and the

government is planning to introduce the National Food Security Bill in FY12. Among

major subsidies, the budgeted petroleum subsidy of INR 236 bn looks possible only if the

government decides to liberalize diesel prices. In the absence of such reform, we expect

the governments oil subsidy bill to be ~INR 400 bn (assuming average crude price of

USD 90/barrel) and the total subsidy bill to be ~INR 1.88 tn for FY12.

Meanwhile, the government continued to carry forward its inclusive growth agenda by

increasing allocation to the social sector by 17% Y-o-Y to INR 1.61 tn. In fact, over the

past five years, social sector spending has advanced at a rapid pace with allocation to

Bharat Nirman and MGNREGA increasing ~25% and ~29% CAGR, respectively. While

this rapid growth in social sector spending is likely to keep rural demand healthy, it will

also put upward pressure on domestic prices.


5/19


Economy

Table 4: Major Subsidies INR bn


Total 709 1,297 1,414 1,162 1,642 1,436

Food 315 438 584 556 606 606

Fertilizer 305 766 613 500 550 500

Petroleum 29 29 150 31 384 236 Source: Budget documents, CMIE, Edelweiss research

Fiscal deficit/borrowing targets overly ambitious; slippages likely

The Union Budget indicates aggressive fiscal consolidation, taking the fiscal deficit down

to 4.6% of GDP in FY12 from 5.1% in FY11 assuming nominal GDP growth of 14% in

FY12. We are of the view that achieving such significant fiscal consolidation will be a tall

order unless the government decides to rationalize the existing subsidy regime.

Accordingly, we find expenditure growth to be unrealistically low. Taking into account our

expected subsidy burden of the government (~INR 1.88 tn), we estimate fiscal deficit at

~5% of GDP.

Further, budget estimates show a revenue deficit target of 3.4% of GDP in FY12 (same

as FY11), implying no consolidation on revenue account. In fact, if we assume a morerealistic subsidy burden of INR 1.88 tn, revenue deficit shoots up to ~3.9% of GDP,

which is significantly higher than last year. Notably, even with budget estimates, revenue

deficit as percentage of the fiscal deficit has increased from 67% in FY11 to 74% in FY12.

On assessing these fiscal and revenue deficit estimates against Thirteenth Finance

Commission recommendations, it stands out that while the government has been able to

meet fiscal deficit targets, progress on revenue deficit has been sluggish. We believe that

meaningful fiscal consolidation requires reducing revenue expenditure, particularly on

subsidies, and boosting tax revenues through expanding the tax base and higher

economic growth rather than relying on one-off non-tax revenue gains such as 3G

auctions or capital receipts such as disinvestment.

Chart 3: Govt. in line with Finance Commissions fiscal deficit targets

1.0

2.3

3.6

4.9

6.2

7.5

FY05

FY06

FY07

FY08

FY09

FY10

FY11(RE)

FY12(BE)

FY13

FY14

FY15

Fisca

lDe

fic

it/GDP(%) FM's medium

term targets



6/19


Economy

Chart 4: but lagging on revenue deficit targets

(1.0)

0.5

2.0

3.5

5.0

6.5

FY05

FY06

FY07

FY08

FY09

FY10

FY11(RE)

FY12(BE)

FY13

FY14

FY15

Revenue

De

ficit/GDP(%)

FM's Medium termtargets


Chart 5: Revenue deficit as % of fiscal deficit quite high

10.0

26.0

42.0

58.0

74.0

90.0

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11(RE

)

FY12(BE

)

(%)

Revenue deficit/Fiscal deficit

Source: Budget documents, CMI, Edelweiss research

Against the budgeted fiscal deficit of INR 4.13 tn for FY12, the governments net market

borrowing stands at INR 3.4 tn, which is significantly lower than market expectation.

Besides, the government has a cash drawdown of INR 200 bn in FY12. However, given

the upside risks to fiscal deficit, it is likely that the governments actually borrowing

during FY12 may be higher than the budgeted amount.


7/19


Economy

Chart 6: Net govt. borrowing may be revised higher

0.0

1.5

3.0

4.5

6.0

7.5

0

1,000

2,000

3,000

4,000

5,000

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12

(INRbn

)

Net Govt. Borrowing (INR bn) Net Govt. Borrowing/GDP(RHS)


Budget supportive of consumption growth

On the growth front, continued expenditure on social sector along with no major changes

on the tax front augurs well for consumption growth. At the same time, increased focus

on infrastructure will help boost investment activity in the economy. However, the

finance minister was largely silent on major pending reforms such as boost to FDI in the

economy that is required to achieve double-digit economic growth.

As regards private investment activity, what is most essential is the significant reduction

in the governments market borrowing to prevent crowding out of the private sector. As

mentioned earlier, we expect the governments net market borrowing to be much higher

than the stated INR 3.43 tn on account of higher than budgeted subsidy bill. In such a

scenario, either private investment activity will remain weak due to rise in cost of capital

in the economy or corporates will be forced to borrow abroad, leading to further increasein Indias external debt (which has been on an uptrend and currently is equal to Indias

forex reserves).

Chart 7: Fiscal consolidation aids private investments

0.0

1.4

2.8

4.2

5.6

7.0

0.0

3.2

6.4

9.6

12.8

16.0

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

(%)

(%)

Private corporate Inv/GDP Fiscal Deficit/GDP (RHS)



8/19


Economy

Chart 8: Financial balances* of various sectors in Indian economy

(10.0)

(5.0)

0.0

5.0

10.0

15.0

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

(%o

fG

DP)

Total Private Sector Balance Net Public sector Balance

Net External Balance

Fiscal

Consolidation

leading

toimprove

ment nexternalbalance

Fiscal

expansionresulting

in

deterioration in

externalbalance


Financial balances* reflect net borrowing/lending by sectors

On external account, not only Indias current account deficit has deteriorated but the

nature of funding the current account has also been a cause of concern. In the Union

Budget, the FM has tried to boost the capital account through raising FIIs investment

limit in corporate bonds of infrastructure companies and allowing foreign investors to

invest directly into equity mutual funds. However, no concrete step has been taken to

boost FDI and hence to address the key concern with regards to quality of funding of

current account deficit.

Direct taxes largely unchanged

There were very few changes announced on the direct taxation front. On the corporate

taxation aspect, the headline tax rate was kept unchanged while the surcharge was

reduced from 7.5% to 5.0%. Minimum Alternate Tax (MAT) is proposed to be increasedfrom 18.0% to 18.5% with SEZ developers and units operating within them also being

brought under the MAT ambit.

On the personal taxation front too there were minor changes. The exemption limit for

general category of individual tax payers was increased slightly from INR 160,000 to INR

180,000. This step is expected to provide a uniform tax relief of INR 2,000.

Table 5: Changes in personal tax slab

Old slab (INR) Tax rate New slab (INR) Tax rate

0-160,000 Nil 0-180,000 Nil

180,000- 500,000 10% 180,000- 500,000 10%

500,000-800,000 20% 500,000-800,000 20%

Above 800,000 30% Above 800,000 30% Source: Budget documents, CMIE, Edelweiss research

Budget neutral for most sectors

The budget was broadly neutral for most sectors, although there were pockets of positive

as well as negative announcements on the margin.

The fertiliser sector stands to benefit from the Budget announcement. The benefits of

investment linked deduction have been extended to fertiliser production, while capital

investment in fertiliser production is to be included under infrastructure sub-sector. This

is expected to facilitate low cost funds for incremental capex.


9/19


Economy

Within FMCG, excise duty on cigarettes has not been increased; this is a positive for

tobacco companies. Similarly for autos, excise duty on diesel cars was kept unchanged.

This is a key positive for Mahindra & Mahindra and partially for Tata Motors and Maruti as

the street was ascribing high probability to such a hike.

Meanwhile, the imposition of MAT on profits from SEZs is expected to impact the IT and

oil & gas sectors. However for both IT as well as oil & gas, the impact would be more on

the cash flow side rather than the P&L. On the other negatives, ad valorem export duty

of 20% both on lumps and fines is expected to have a negative bearing on iron ore

exporters. Among other sectors, there has been no mention of liberalization of FDI

norms, which is a negative for the retail sector.

Table 6: Impact of budget on sectors

Sector Industry/market wishlist Edelweiss expectation Announcement in the budget Impact on sector/company

Auto Excise duty- to keep it

unchanged

Roll back of duty cut is

unlikely in this budget

Maintained status quo Neutral

MGNREGA Increased allocation to the

scheme

Indexing NREGA wages to

CPI

Positive for tractors, two

wheelers and cars

No additional excise on diesel

cars

An outside possibility of

increasing excise duties

No hike in excise duty for

diesel cars

Positive for M&M and partially

for Tata Motors and Maruti as

the street was assigning highprobability to such hike

Additional incentives for green

cars

Support in concessional rate

of loans, benefits of

accelerated depreciation and

softer loans

Excise duty on hybrid/electric

vehicles to be reduced from

10% to 5%

Marginally positive for M&M

To set up National Mission for

hybrid and electric vehicles

Credit flow for farmers raised

from INR 3,750 bn to INR

4,750 bn in 2011-12

Positive for Tractors demand

Allocation of INR 2,140 bn for

infrastructure in 2011-12. This

is an increase of 23.3 per cent

over 2010-11 & amounts to

48.5% of total plan allocation

Positive for Tractors demand


10/19


Economy


BFSI Government

subsidy/concessions on

interest rates to be provided

on lending to SEBs, given

their weak financial health

Separate subsidy/fund to be

created to meet financing

requirement of SEBs

Nil

Limit of refinancing from IIFCL

to commercial bank loans forPPP projects in critical sectors

expected to be raised from

INR 60 bn

Last year also it was doubled,

but considering growth, thisyear as well limit could be

further raised

Nil

Tax break on longer tenor

deposits

Considering low deposit

mobilization and lending

skewed towards longer tenor

assets, tax break will provide

some relief to ALM

Nil

Net market borrowings

announced at

INR 3.43 tn, below

expectations of

around INR 4 tn

Though we will believe

borrowing number will be

revised upwards going into

FY12, sentimentally it will be

positive for banks, largely PSU

banks

Allocated INR 60 bn for PSU

banks' recapitalisation

Lower than recapitalisation in

FY11 and seems it does notinclude SBI's right issues

Banking licence guidelines to

be issued before the end of

this fiscal

Clarity to emerge as to who

all will be eligible for banking

licence

Equity fund for microfinance

institutions of INR 1 bn and

for women's self help groups

of INR 5 bn

Though the quantum is low, it

is sentimentally positive as it

categorically stated that MFIs

are critical for financial

inclusion

Interest subvention limit on

housing loans has been raised

from INR 1 mn to INR 1.5 mn

and priority sector lending

limit has been raised to INR

2.5 mn from INR 2 mn

Positive for low-ticket housing

financiers

Interest subvention to farmer

repaying loans on time

raised from 2% to 3%


Capital goods Import duty on power

equipment for mega power

projects; import duty, at 15-

20%, to provide a level-

playing field to domestic boiler

and TG manufacturers

Not expected, owing to strong

lobbying by utilities

While new mega or ultra mega

power project imports

continue to enjoy exempted

status in customs and excise

duty, domestic players

supplying equipment for

expansion of existing mega or

ultra mega power projects

were required to pay 10%

excise duty, which now stands

reduced to 2.5% (in line withconcessional basic customes

duty of 2.5% on imports)

Positive for domestic BTG

players like BHEL, LT etc.

Augmentation of cold storage

capacity to be fast tracked.

Investment now to be eligible

for viability gap funding from

Finance Ministry

This will increase investment

in the sector and is thus

positive for companies like

Voltas, which services this

market


11/19


Economy

Sector Industry/market wishlist Edelweiss expectation Announcement in budget Impact on sector/company

Cement Uniform rate of excise duty on

cement

No change expected Existing excise duty rates

replaced with composite rates

having an ad-valorem rate

and specific component.

Negative for prices below INR

190/bag and Neutral to

marginally positive for prices

above INR 190/bag

Abatement on excise duty

levied on MRP basis

No change expected No announcement Nil

Zero import duty on coal, pet

coke, gypsum and other

products

No change expected Customs duty on pet coke and

gypsum proposed to be

reduced to 2.5% from 5%

Marginally positive for Shree

Cements (~2-3% positive

impact on earnings) and

broadly neutral for the sector.

Fly ash to attract 1% excise

duty without Cenvat credit

facility

Marginally negative as fly ash

is just 2/3% of the cost of

production

5% excise duty on RMC with

1% concessional duty without

Cenvat Credit facility

Neutral as the industry will

pass on the increase to

consumers

Sector Industry/market wishlisht Edelweiss expectation Announcement in the budget Impact on sector/company

Construction Relaxation of ECB norms May happen due to liquidity

crunch

No announcement Neutral

Increase in central govt.outlay for roads and urban

infra

Likely to happen as infraremains a top priority for

govt.

Allocation for infra increasedto INR 2.14 trillion, which is

23.3% higher than current

year

Positive

Further clarity on

refinancing/takeout provisions

for IIFCL funding

Likely to happen, but may not

result in immediate benefits

No announcement Neutral

The FII limit for investment in

corporate bonds, with residual

maturity of over five years

issued by companies in

infrastructure sector, is being

raised to USD 25 bn from

USD 5 bn earlier

Positive


12/19


Economy


Fertiliser To provide boost to production

in agriculture space, benefits

of investment linked deduction

are extended to fertiliser

production

Positive

Capital investment in fertiliser

production to be includedunder infrastructure sub-

sector

Positive

Reiterated the proposal to

have direct transfer system of

cash subsidy to people with

regard to fertilisers, from the

current system of payment of

subsidies to fertiliser

companies, which is

dependent on the successful

implementation of the UID

project

Positive

Reiterated that the payment

of subsidy to fertiliser

companies would be paid in

cash and not in bonds

Positive

Though mentioned that

extension of the NBS regime

to cover urea is under active

consideration; however no

timeline has been given and

current uncertainty over urea

policy continues

Negative


13/19


Economy


FMCG Rural initiatives on income

generation

We expect this to continue Allocation under Rashtriya

Krishi Vikas Yojana to be

raised to INR 78.60 bn; to

index NREGA wage rates to

CPI

Positive for FMCG companies

Tax exemption limit We expect this to increase Tax exemption limit enhanced

from INR 1,60,000 to INR1,80,000 to give consumers

more disposable income

Positive for FMCG/Retail

companies

Excise duty for cigarettes We expect excise to increase

by 8-10% for cigarettes

No increase in excise duty Positive for tobacco

companies i.e. ITC, Godfrey

Philips and VST Industries. We

believe that since legal

business in cigarettes was

pressurized, govt. has likely

left legal cigarettes

untouched. Cheap, contraband

cigarettes were flourishing

(already ~9% of the industry)

MAT rate Increase may happen as it

could be a step towards direct

tax code

MAT raised to 18.5% of book

profits (from 18.0%);

surcharge on MAT has

reduced to 5% (from 7.5%earlier)

Marginally negative for FMCG

companies under MAT i.e.

Dabur, Emami, Marico and

Godrej Consumer| effectiveMAT rate has increased from

19.93% to 20.007% i.e. MAT

rate increase of ~8bps

Service tax on hotel

accomodation: Levied service

tax on hotel accommodation

in excess of declared tariff of

INR 1,000 per day with a

abatement of 50%, so that

the effective burden is only

5% of the amount charged

Marginally negative for ITC's

hotel business

Palm oil: INR 3 bn provided to

improve production of pulses

(to bring 60k hectares more in

edible oil plantations)

Positive for FMCG (HUL,

Marico, GCPL) companies

exposed to import of edible

oils

Cold storage projects : Cold

storage projects classified as

infrastructure sector

Positive for FMCG companies

in Foods category


14/19


Economy


Hospitality

and airlines

Airlines Increased service tax on

domestic and international

airfares by INR 50 and INR

250, respectively.

Negative for airlines

companies

Propose to tax travel by

higher classes on domestic

travel at the standard rate of

10% to bring it par with the

higher classes on the

international travel.

Hotels Hotel accommodation in

excess of declared tariff of

INR 1000 to get an abatement

of 50%, thereby keeping the

effective service tax impact to

be 5%.

Negative for hotel companies

Air-conditioned restaurants

serving liquor by a license toget an abatement of 70%,

keeping the service tax impact

at 3%.


IT Extension of the sunset clause

on tax exemption for software

technology parks under Sec.

10A / B, which is due to

expire in March 2011

Unlikely that the sunset clause

on tax exemption will be

extended

Exemption not extended Neutral, as the increase in

effective tax rate is already

factored by the street

MAT imposed on profits from

SEZ

Negative. However, it will

only have incremental cash

flow impact and no P/L

impact. Further, for

companies where the effective

tax rate is already higher (top-

4, Patni and Infotech) than

MAT rate (18.5%), there is no

cash flow impact

Marginal cash flow impact

seen on eClerx, Hexaware,

Mphasis and Rolta as effective

tax rates are only slightly

lower than MAT rate


15/19


Economy


Media FDI norms get liberalised for

some of the segments like

radio, DTH and cable

This may happen as the

recommendations have been

given by TRAI

None

Rationalisation and parity in

the service tax paid by TV and

radio broadcasters on

revenues accrued by themfrom ads

This seems unlikely, as this

demand has been pending for

many years

None

Provision for doubtful debt be

allowed as expense in MAT

profit calculation

Looks unlikely None

Tax exemption limit enhanced

from INR 1,60,000 to

1,80,000

Positive for DTH companies

Concessional basic Custom

Duty of 5 per cent and CVD of

5 per cent available to

newspaper establishments for

high speed printing presses

extended to mailroom

equipment.

Positive for print companies

Jumbo rolls ofcinematographic film fully

exempted from CVD by

providing full exemption from

Excise Duty.

Positive for movie producers


Metals &

Mining

Industry looking for increased

infra spending

Increased thrust on

infrastructure spending which

has been slow currently

Increase in import duty on HR

coil from 5% to 10%

No change No change Neutral

Increase in import duty on

ferro alloys from 5% to 7.5%

No change Reduced customs duty from

5% to 2.5%

Marginal positive for all steel

players, negative for ferro

alloy makers

Low probability: Increase in

export duty on fines from

current level of 5% to 15%

Ad valorem export duty of

20% both on lumps and fines

Negative for iron ore

exporters. Sesa Goa worst

impacted

Specifics regarding coal

regulator which was

introduced last year

No announcement

Fully exempt basic customs

duty on stainless steel scrap

Positive for Jindal Stainless/

JSL


16/19


Economy


Oil & Gas Cut in import duties on crude

from 5% currently to NIL

No change expected No change in excise and

import duties on crude and

petroleum production

This will lead to continuance of

higher under recoveries for

the PSUs

Impose MAT on SEZ

units/developers FY12

onwards

No impact on RILs EPS as

high cash taxes will be offset

by lower deferred taxes.

However, there will be a cashflow impact and RILs SOTP

will reduce by INR ~15/share

(~1.3%)

Import duty on petroleum

coke reduced from 5.15% to

2.58%

This will be marginally

negative for pet-coke

producing refineries. Overall,

the import duty protection on

an average Indian refinery will

fall from 1.11% to 1.02%.

Refining margins will fall by

~USD 0.08/bbl

GoI to directly provide cash

subsidies for kerosene and

LPG to people living below the

poverty line. Rollout expected

by March 2012

Positive for OMCs as this will

reduce the burden of under

recoveries. We believe the

implementation target is

aggressive. Only expect to berolled once the UID project

gathers pace, which is still a

long way ahead. UID only has

2.0 mn population covered till

date

Overall corporate tax rate

reduced from ~33.2% to

~32.45%

Profits for full tax-paying

companies will increase by

1.16%. All PSU companies are

full tax paying

MAT increased from ~19.93%

to ~20.01%, increase of

~7.7bps

This will have marginal impact

on profits

Tax benefits from NELP blocks

no longer available for NELP

blocks awarded after 31March 2011

Attractiveness of the NELP

reduces


17/19


Economy


Pharma Excise duty structure to

remain at current levels

Parity between formulations

(4% excise duty) and APIs

(10% excise duty) to reduce

Increase in excise duty form

4% to 5%

Marginally negative for

formulation players; largely to

be passed on

Extension of the list for life

saving drugs- List should be

expanded to cover more

drugs

Likely to be announced for

certain categories

IV fluids and vaccines to

attract 1% excise duty

Marginally negative for Claris

Lifesciences, Panacea Biotec

and GSK

Tax holiday on healthcare

infrastructure in tier-2 and tier

3 towns; should be extended

from 5 years to 10 years

Likely to be announced Nil

Service tax of 5% (with 50%

abatement) on inpatient

treatments by hospitals with

>25 beds

The scope of service tax also

includes diagnostics services

and consultation fees on

outpatients

Service tax to be paid by

patients, hence, no negative

impact in near term

Long term negative impact on

price realizations for high-end

specialty treatments in

specialty hospitals

200% weighted deduction on

R&D; should be extended tostandalone R&D and

outsourcing

Not expected Nil

Extension of Sunset clause Not expected Propose to levy MAT on SEZ

units

Negative for companies like

Cipla (1% of EPS); Divi's (3-

4% of EPS) and Ipca Labs (2-

3% of EPS). However, no

impact on DRRD, LPC, Sun

Pharma, Glenmark , Torrent

and Aurobindo.Ranbaxy has

not commenced its operation

from SEZ, therefore, no

impact

Reduction in surcharges Not expected Reduced from 7.5% to 5% Positive for full tax paying

companies such as GSK, Pfizer

and other MNCs


Power/ Infra Plan expenditure-Increase

spend towards distribution

To set a fund which Will

provide soft loans to discoms,

based on select milestones

None

Coal tax, introduced last year

(INR 50/ton), to be abolished

Not expected None Nil

Expects the government not

to accept the proposal of

import duty on power

equipment

Not expected Parallel excise duty exemption

for domestic suppliers

producing capital goods

needed for expansion of

existing mega or ultra mega

power projects

MAT levied on developers of

Special Economic Zones aswell as units operating in SEZs

Negative on SEZ developers

like Mundra port SEZ & Marg

due cash outflow on account

of MAT (Initially exempted

from MAT)


18/19


Economy


Real Estate Increase in exemption limit for

interest payment and on loan

repayments

Nil Nil NA

Home loan limit under interest

subvention scheme increased

to INR 1.5 mn from INR 1 mn

and home value limit

increased to INR 2.5 mn from

INR 2 mn

Positive for developers with

presence in affordable housing

and in Tier II/III cities -

Unitech, Puravankara, HDIL,

Parsvnath, Ansal Properties

and Omaxe

Both SEZ developers/units to

come under MAT

Negative for developers with

presence in SEZs - DLF,

Unitech and Mahindra

Lifespaces, but already

factored in estimates


Retail FDI norm gets liberalized for

different formats

This could happen as many

government departments are

supporting this and this could

be used to fight food inflation

by getting higher investments

in cold storage, technology

and logistics

No mention Negative for Retailers

Tax exemption limit We expect this to increase Tax exemption limit enhanced

from INR 1,60,000 to INR

1,80,000 to give consumers

more disposable income

Positive for FMCG/Retail

companies

Excise duty on branded

garment players: To levy

central excise duty of 10% on

branded clothes

Slightly negative for Retailers

Excise duty for Jewellery

manufacturers: Concessional

excise duty of 1% without

CENVAT credit facility is being

imposed on the articles of

jewellery manufactured or

sold under a brand name

Slightly negative for retailers

Cold storage projects: Cold

storage projects classified as

infrastructure sector

Positive for retailers looking to

set-up back end supply chain


Telecom No import duty to be imposed

on handsets

Import duty is likely to be

imposed on handsets, to

encourage local manufacturing

Nil Nil


Miscellaneous Increased allocation for social

schemes Bharat Nirman

(INR 580 bn vs INR 480 bn

earlier) and Sarva Shiksha

Abhiyan (INR 210 bn vs INR

150 bn earlier); outlay of INR

100 bn for rural housing

Positive for Sintex Industries

(monolithic construction and

prefabs segments)

Rural broadband connection to

250,000 panchayats in three

years. National Knowledge

Network to link 1500

Institutes of Higher Learning

and Research through an

optical fibre backbone by

March 2012.

Positive for optical fibre

manufacturers like Sterlite

Technologies


19/19

Economy

Edelweiss Securities Limited, 14th Floor, Express Towers, Nariman Point, Mumbai 400 021,Board: 91-22 2286 4400 Email: research@edelca .com

Vikas Khemani Head Institutional Equities [email protected] +91 22 2286 4206

Nischal Maheshwari Head Research [email protected] +91 22 6623 3411

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