Pre Budget Analysis PDF

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N e w s l e t t e r v o l u m e 1
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The Budget is the most awaited financial
document for the year. The Union Budget
of India lays down guidelines and pro-
nouncements on different types of taxes,
financial allocations for various heads as
well as developmental plans for different
sectors. The Budget is also an important
source of information on government fi-
nances that shows which way its heading.

Every year, before the Budget is presented,
there are expectations of people all over
the country, industry and the masses alike.
There are a few concerns and challenges
such as inflationary pressure from food and
oil, slowdown in the growth rate of the
economy from the previous years and in-
creasing fiscal pressure. The budget which
is slated for July 6
th
in the midst of raging
recession will be truly a masterpiece of
budget. It will combine the populism of a
newly re-elected government with the
pragmatism of fiscal deficit and recession
threatening to sweep the countrys health
away.

We, the Research Committee at SIBM, Ban-
galore bring before you the pre-budget
analysis. The content that follows discusses 7
different sectors. We give insights about the in-
dustry, current scenario of the industry, expec-
tations from the upcoming budget and the stocks
you should watch for to invest. Criticisms are
welcome, though we wouldnt mind compli-
ments either!!!
Student Research Committee
SIBM, Bangalore
S i b m , b a n g a l o r e

SIBM since 1978 has been synonymous with
progress, and it has continued this trend by
being the first to set up its offshore campus
at Bangalore. The world is changing and
SIBM, Bangalore is poised to be the perfect
catalyst to drive this change. SIBM is consis-
tently ranked among the top ten institutes
in the country. Encouragement provided for
analytical research creates the intellectual
capital which is highly sought after. The
program here provides a holistic approach
to management and this goes a long way in
creating a dynamic identity.

VISION
To be recognized globally as the preferred desti-
nation for all future leaders, where the spirit of
inquiry and enterprise will drive growth through
innovation.

MISSION
To create a centre of academic excellence with
a collaborative environment, which fosters ex-
perimental learning that can be applied towards
social, economic and global development.

Macro-Economic Overview Com-
mentary
In the annals of socio-economic history,
never has there been the story of a billion
people massively struggling to rewrite their
economic destinies with vigor as un-
matched as Indias. The much anticipated
budget of this year is largely seen as a con-
tinuation of the Governments efforts
aimed at providing stability to an economy
ailing with the distresses of an economic
recession coupled with a fiscal deficit of
almost 11% GDP (State and Central Govern-
ment figures put together) and a looming
drought. The budget is expected to an-
nounce several bold measures to enhance
economic growth in an 'inclusive' manner as
well as to introduce much needed struc-
tural reforms.
For the country to achieve a growth rate of
8%, as against the projected figures of
6.7%, the Government would require to
tweak the various economic levers to en-
sure that there is massive spending in the
social sector that would include increased
allocation to various infrastructure related
sectors- roads, ports, etc, yet at the same
time ensuring that the fiscal deficit does
not go out of hand. A deficit any more than
the existing range would have seriously
negative repercussions denting the cur-
rency stability brought about painstakingly
by the RBI.
The Government in three installments have
provided massive infusions of liquidity in
the form of stimulus packages and tax cuts,
hence inflation-expectations for the next
year will be at historical highs and running
a tight monetary policy will be a pre-requisite.
This runs contrary to the current need of running
a rather liberal interest rate regime to boost
investments and ensuring a visible increase in
the credit-off take. The Budget will be closely
monitored to see if the Government sacrifices
its prudent fiscal policies to advance growth. As
the RBI states in its Annual Policy Statement for
the year 2009-2010, Unlike the WPI based infla-
tion, CPI based inflation in India, remains high,
with recent evidence of very modest moderation
and this has emerged as an important issue in
the conduct of Reserve Bank's monetary policy.
Hence the need of the hour will be to balance
the reduction of the high fiscal deficit with poli-
cies that promote growth.
Additionally, righting the wrongs of non-
expansion of critically important social sectors
will be schemes such as NREGA, Bharath Nirman
and JnNURM , this in turn requires massive infu-
sion of funds which in spite of all of the ills asso-
ciated with them are meant for the voiceless
whose marginalization is disastrously dangerous
for the nation while it attempts to achieve an
enhanced status in the league of nations-
extraordinaire.
While it may look bleak everything is not lost as
the present government has come in with in-
creased seat strength and the government can
push forward with many structural reforms
which was not be possible in the last few years
due to coalition pressures. Let us see, if Pranab
Mukherjee, our finance minister is able to fulfill
the historic mandate given to him.

Industry Overview
The automotive sector in India mainly com-
prises of two wheelers, light motor vehi-
cles, and heavy vehicles which include
buses and lorries. The major players in this
sector include Hero Honda, TVS, Bajaj, Ma-
ruti, Tata Motors, Ashok Leyland, Hyundai
etc and there are many more foreign firms
eagerly waiting to join the league.
The past one year was a momentous occa-
sion for the Indian automotive industry with
the launch of the ultra cheap Tata Nano
car at Rs 1 lakh which astounded the entire
international automobile industry.
The previous budget of 2008-09 had re-
duced excise duties on two and three
wheelers. The duty was reduced to 14.0
percent from the existing 24.0 percent on
hybrid cars and from 16.0 percent to 12.0
percent on small cars thus making them
cheaper. With a reduction in duties on
these cars, the lagging demand for small
cars was anticipated to pick up and this was
expected to boost sales. Thus the auto ma-
jors were provided a stimulus to undertake
capacity expansion and they were expected
to make India a hub for small cars.
But as per Data released by Society of In-
dian Automobile Manufacturers (SIAM), it is
confirmed that the auto industry is badly
hit by the recession with passenger cars
dipping by 19.38 per cent and commercial
vehicles recording a sales slump of 49.52
per cent the worst ever decline in the past
eight years. In short, the auto sector has
been sliding into a recession.
However the government announced a
stimulus package for the automotive indus-
try to reverse the effects of economic slow-
down in January 2009 and the RBI has slashed
key policy rates. Reacting to these measures the
Indian automotive market managed to stand up
to the vagaries of the economic meltdown to
show slightly positive growth during fiscal 2008-
09. Overall vehicle sales at 97.23 lakh grew 0.71
per cent from 96.54 lakh units in 2007-08.
Passenger vehicle sales at 15.51 lakhs registered
flat growth while commercial vehicle sales
showed a 21 per cent drop. The automotive mar-
ket has recovered from the downturn that hap-
pened during September-November.

Expectations from Budget 09
The Government under the fiscal stimulus
packages had cut the excise rates for cars,
commercial vehicles and auto components.
Though, such measures are encouraging, they

havent completely bailed out the auto
industry. Radical actions are expected to
be taken keeping in view the long term
perspective of making India the hub of the
auto manufacturing.
Creation of special auto-component parks
with specific direct & indirect tax bene-
fits. For Auto parts manufacturers the im-
port duty for certain components stands
at 7.5 per cent. It is likely to increase so
as to provide scope for Auto components
parks.
Banks can be asked to reduced the inter-
est rates charged on automobile loans.SBI
has already gone ahead in this measure by
charging 8% interest on car loans. Many
other banks are expected to follow suit.
Export is an area of grave concern given
the global economic crisis. Continuance of
tax holiday for Export Oriented Units
(EOUs), deductions for profits on exports
for Small & Medium sector non- EOUs are
expected for the survival for many auto
component manufacturers.
For promoting use of environment friendly
fuel efficient cars, incentives for develop-
ment of technology for hybrids and reduc-
tion in custom rates on import of energy
efficient completely built units are also
expected.
Incentives are expected for improving the
demand for commercial vehicles, by pro-
viding incentive to scrap old vehicles and
buy new ones like the enhanced deprecia-
tion benefit scheme etc.
While small cars attract 8 per cent excise
duty, the effective manufacturing duty on
large cars and utility vehicles is 22-24 per
cent so we can expect that there will be some
reduction in the excise duty.
We also expect the VAT structure to get ration-
alized across all states .Now it varies from 12.5
% in Delhi to 15% in other states.

Stocks to watch out for
Tata Motors, Ashok Leyland, Maruti and M&M

Conclusion
Despite the slowdown, the prospects of growth
for the Indian auto industry are perceived to be
strong, given that the country has a much lower
vehicle population as compared to the devel-
oped nations. Most of the auto giants have ex-
pressed confidence in the Indian markets and
are continuing with their India investment/
expansion plans. However, consumers demand
for new passenger cars are known to be discre-
tionary and hence, can dip in an uncertain eco-
nomic environment. Similarly, the fortune of the
commercial vehicles segment is closely linked to
the industrial production. But, we do expect
that the government will definitely undertake
concrete measures to help Auto Industry regain
its lost glory.

Industry Overview
The Indian banking sector has acquired a
greater degree of resilience due to the fi-
nancial reforms implemented in a gradual
and sequential manner under the watchful
eyes of Reserve Bank of India and Ministry
of Finance. This was implemented by a par-
ticipative process aimed at reduction in
statutory pre-emption.
An assessment of the banking sector per-
formance shows that banks in India have
experienced strong balance sheet growth in
the post-reform period in an environment
of operational flexibility. Improvement in
the financial health of banks, reflected in
significant improvement in capital ade-
quacy and improved asset quality, is dis-
tinctly visible. These significant gains have
been achieved even while renewing the
goals of social banking by maintaining the
wide reach of the banking system and di-
rected credit.

Current Scenario
Banks in India have always played a pivotal
role in providing a thrust to the develop-
ment of the country by assisting in the de-
velopment of the priority sector in India
which includes agriculture as well as in the
industrial and infrastructural development.
Changes in these sectors are essential to
boost comprehensive growth and revival of
the economy. Thus, in the current challeng-
ing times of economic stagnation affecting
these sectors, it becomes all the more nec-
essary to provide the much required fiscal
support to the banking industry.

The risk aversion which has crept into the do-
mestic banking sector on account of the interna-
tional banking crisis has created a situation of
deep concern and threat for the real economy
and all the players in it. Challenges facing the
Indian Banking sector this year include: compli-
ance with Basel II norms and competition from
foreign banks.
There has been a lackluster demand for credit
despite sufficient liquidity in the system and
lowering of interest rates by banks, following
the phased reductions in cash reserve ratio and
policy rates by the Reserve Bank of India. The
reduction in PLR required cut in deposit rates as
well. Credit targets of public sector banks had
been revised upwards to reflect the needs of the
economy, which called for a recapitalization
plan for banks to improve their soundness and
their ability to withstand sudden shockslike the
ongoing global crisis that has devastated many
of top-notch US banks.
There is a negative impact on the banking sector
due to lending at fixed ceiling rates to focus sec-
tors. Margins have been hurt as the banking sys-
tem has raised a large portion of its liabilities at
high rates in the recent past.

With economic slowdown being the major
issue at present, the bankers' main concern
is to fund growth without facing any hur-
dles. The obvious choice, according to
bankers, which has to be acted upon, is in-
frastructure funding. Though there has
been a revival of economic growth and a
pick up in the pace investment cycle, the
banking sector expects several positive
measures in the Budget 2009-10, so that
they can continue to play a vital role in
intermediating between the demand and
supply of funds.

Expectations from the Budget
Banks may be given full tax exemption on
the interest earned from long-term loans
to infrastructure projects in order to pro-
vide them with the much needed invest-
ment thrust. This would additionally help
in reducing the interest rates charged by
banks on infrastructure projects having
long gestation periods.
Allowance for deduction based on provi-
sioning for bad and doubtful debts in the
books will ensure that banks are taxed on
profits that are similar to their accounting
profits.
De-regulation of the fixed deposit lock-in
clause and the small savings rate which
would give banks more flexibility to lower
deposit rates, meaning lower cost of funds
for banks, helping them protect their net
interest margins to an extent.
The government is expected to announce
more social welfare schemes which are
going to be financed by the banks, putting
the nationalized banks under more pressure.
Stocks to Watch Out for
Infrastructure/housing lenders HDFC Bank, SBI,
PNB and other Public Sector Banks

Conclusion
Thus, key measures in Budget 2009-10 which are
expected to have a positive impact on the sector
are the de-regulation of the small savings rate,
reduction in the lock-in period for FDs, qualify-
ing for tax deductions and tax breaks for infra-
structure and housing lenders.
Key measures expected to have a negative im-
pact on the sector is lending at some ceiling
rates to specific sectors and activities agricul-
ture, infrastructure, SMEs, exporters, education
and affordable housing.

Industry Overview
Education for all is the motto of the pre-
sent UPA government. The governments
vision is to convert our countrys huge
population into skilled resources and help
India compete in the global market. To en-
sure this the government is focusing on the
three Ps of the Education Sector: Participa-
tion, Performance and Proportion. Though
government has taken a number of initia-
tives, funds have always been a problem.
The solution to the problem of education
infrastructure is through participation pri-
vate players should be allowed to partici-
pate and contribute to this sector in a more
unfettered manner. Performance im-
provement in the quality of education pro-
vided to students. Proportion larger
amount of money from the budget needs to
be allocated, as it is really an investment in
India's future.
Increased demand for education has re-
sulted in major changes on the supply side
especially in the higher education arena.
Universities that had virtual monopolies for
decades are now dealing with a range of
competitors that are vying for revenues
and surplus.
Current Scenario
Education is an important indicator of so-
cial development. It is increasingly becom-
ing the primary determinant of overall de-
velopment in the emerging knowledge
economy. India has a large number of
schools, colleges and universities across the
whole country. India houses many big edu-
cational institutes like IITs, IIMs, JNU, DU
and other
MBA col-
l e g e s .
There are
many insti-
tutions that
also cater
for many
di s t a nc e-
l e a r n i n g
courses. In
fact, India
is a home for education. There are over 300 Uni-
versities and 45,000 colleges of various types in
the country. India has made huge progress in
terms of increasing primary education atten-
dance rate and expanding literacy to approxi-
mately two thirds of the population. However,
education is still far behind developing countries
such as China or Thailand. There is no focus on
the quality of education in terms of the depth
and dimensions of teaching and in terms of syl-
labi, though technical education does have some
quality control.
Looking at the industry perspective, there is no
link, whatsoever, between the producers and
users of manpower with the result that institu-
tions of learning, essentially at the secondary
and technical levels, are not exactly aware of
the end result and use of their manpower out-
put. There has to be a complete synchronization
and rapport between the two sets: the produc-
ers and the users, as happens in most of the
countries, including the developing ones.

Allocation for National Skill Development Cor-
poration to increase.

There is a need to set up more number of
higher secondary schools as well as col-
leges to match with the primary schools.
Budget expected School Education:
Rs.1100 crores. Number of schools:
50,000.
Focus on women and adult education in
the rural areas.
Major announcement for educations and
higher technical educations for new
higher educations institutes at various
places of country. Budget expectation for
higher education: Rs.150 crores. Number
of colleges: 400.
Two IITs, six IIMs, 10 NITs and 14 universi-
ties are still to be launched.
Schemes to be announced for the welfare
of the minorities including a multi sec-
toral development plan to be drawn for
each of the minority concentration dis-
trict and a scheme for modernizing ma-
drassa education. Expected budget alloca-
tion is: minorities department : Rs.520
crores, number of madrasas: 550.
Private university regulatory bill
Foreign university regulatory bill
Setting up National Commission for Higher
Education and Research which will be an
apex body in education
Allowing Foreign Direct Investment into
Education Sector
Increasing funds for SSA (Sarva Shiksha
Abhiyan), Mid-day meal scheme. Expected
budget for SSA is Rs.13, 100 Crores. And
for national program of Mid-Day Meal
Scheme Rs. 8000 Crores
Increasing funds to Kasturba Gandhi Balika
Vidyalaya
National Means-cum-Merit Scholarship
1% of GDP may be spent of R&D

Educomp, NIIT, Environ, Pearson

Conclusion
It is quite evident that the higher education sec-
tor in India faces a number of challenges and
constraints which need to be overcome through
various focused initiatives. Although the Govern-
ments focus on the development of higher edu-
cation is increasing; much still needs to be done
to ensure that the targeted enrolment rates are
achieved. It is also clear that the expansion of
the higher education system in India would not
be possible without sufficient levels of private
sector funding. With a clear gap in the availabil-
ity of this private sector funding there is a need
to look at partnerships to create progress on this
front in the near term. Overall we believe the
budget allocations and higher spending by the
Indian middle class are expected to fuel growth
of private education companies in India.


Industry Overview
According to FICCI, India FMCG sector is all
set to grow at 16% during 2008-09, from a
base of INR 85,470 crores. An increase in
disposable income, across rural and urban
consumers, has led many rural consumers
to shift from traditional unorganized un-
branded products to branded FMCG prod-
ucts and urban fraternity to splurge on
value added and lifestyle products.
In the current economic downturn and
global financial turmoil, the FMCG industry
in India should be able to continue to grow,
albeit at a slower pace due to robust do-
mestic market. Increasing penetration and
low per capita consumption would help to
achieve the volume growth. However the
rate of growth may come down due to
higher base effect and falling commodity
price.
FMCG has inherent characteristics of neces-
sity and inelastic products used for daily
consumption. Also the demand from rural
India, which constitutes about 50% of the
total FMCG market in India, is expected to
remain strong as it has been boosted by
hikes in minimum support prices for agri-
cultural commodities and farm loan waiv-
ers, rising consumerism and better penetra-
tion of FMCG sector. However the errant
monsoon has started giving sleepless nights
to fast moving consumer goods (FMCG) ma-
jors; poor rains could play havoc with de-
mand for their products, especially from
the rural markets. India has a tremendous
potential for development of food process-
ing industry. This is primarily due to chang-
ing preferences towards healthy lifestyle,
Increase in disposable incomes, breakup of
joint families into nuclear families, double in-
come families and robust growth in organized
retail which is all leading to increased demand
for the processed food items in India.
Current Scenario
Overall sales growth in the FMCG sector contin-
ues at 20% plus with the balance tilted towards
price growth in large categories. However, re-
cent product price cuts mean that future growth
will be dominated by volumes.
Unorganized/regional competition has become
more active as expected, and this is partially
responsible for the dent in the market share of
larger players.
Although gross margins will expand, the quan-
tum of expansion will be lower than originally
estimated due to the recent rally in commodity
prices.
Focus on cost control should become even more
important in light of reduced scope for gross
margin improvement.


There is a possibility of tax incentives for
R&D in food processing industry which
would help the companies to invest in
R&D and evolve new standards and prac-
tices in food processing.
The government may raise the excise duty
on cigarettes. If excise duties increased
more than 10% might hurt cigarette vol-
umes as companies pass on all tax hikes to
consumers.
We believe that the government may roll
back part of the reduction in overall ex-
cise duties for the sector (say by 200-400
bps). In the event of a rollback of excise
duties, all FMCG companies would be af-
fected. However, FMCG companies would
likely raise prices to offset the impact of
a potential increase in costs.
The government may reduce in VAT from
12% to 4% for biscuit Industry.
There can be provision for Fringe Benefit
Tax (FBT) dilution. All FMCG companies
will have positive impact of that, as they
incur lot of expenditure on travel etc for
product promotions.
FMCG companies expect the government
to boost the rural economy by increasing
allocation for various agriculture-centric
and employment generating schemes. In-
crease income in the hands of rural con-
sumers will increase rural consumption.
All FMCG companies are expected to
benefit from strong rural growth.

We think is there it is very unlikely that this sec-
tor will get positive reforms so our view is bear-
ish on this sector.

Conclusion
FMCG is expected to grow at a CAGR of a little
over 10% for the next few years to reach a size
of US$ 51 billion (Rs. 240,000 crore) by 2015.
But volume growth is all set to drive top line
profits, backed by new products and rural con-
sumer demand. For FMCG controlling overhead
costs is more important than ever.


Industry Overview
India is referred to the back office of the
world in the IT & ITES Sector. ITeS, which
started with basic data entry tasks over a
decade ago, is witnessing an expansion in
its scope of services to include increasingly
complex processes involving rule-based de-
cision making and even research services
requiring informed individual judgment. It
now offers services such as knowledge
process outsourcing (KPO), legal process
outsourcing (LPO), games process outsourc-
ing (GPO) and design outsourcing among
others.
Indian IT and IT-enabled services industry is
expected to grow at 10.8 per cent in 2009,
the lowest in the last five years, due to the
global economic meltdown. The overall IT/
ITeS industry is expected to grow at 13.9
per cent (CAGR 2008-2013) to touch over
USD 110 billion in 2013.The domestic IT and
IT-enabled services (ITeS) revenue is slated
to touch about Rs 2, 06,398 crore by 2013
from Rs 99,254 crore in 2008, growing at a
CAGR of Rs 15.8 per cent, the study said.
India has the second lowest ITeS/BPO salary
base of about US$ 7,500-US$ 8,500, just
little above China's base of US$ 7,000-US$
8,000. The other positive for India is that
the country is one of the largest producers
of English-speaking graduates, including
engineers and management graduates.

Current Scenario
The sector has faced significant challenges
in FY09. Growth in exports dropped from
30% in FY08 to about 16%. The economic
turmoil in developed nations impacted and
continues to impact demand for Indian IT / BPO
vendors. While there are initial signs of the
situation easing in those economies, it is still
early to determine whether they have turned
the corner. Indian companies have seen some
signs of stabilization in the form of fewer pro-
ject deferrals, fewer pricing negotiations and
visits from new clients.
Another problem with the IT sector in India is
that there is a great amount of dependency on
the US market. Indian companies are now look-
ing to explore new and emerging markets such
as the Middle East and Australia.
Realizing its potential of this ever growing sec-
tor, after IT Parks and IT special economic zone
(SEZs), the government has cleared a proposal
for creating much larger Information Technology
Investment Regions (ITIRs) to give a fillip to the
country's growing IT and ITeS sector. But unfor-
tunately it is yet to be implemented and is cur-
rently facing bureaucracy hassles.

In this backdrop, the budget is expected to
focus on maintaining an environment con-
ducive to the future growth of this largely
export-oriented industry.

As this is a job generating and export ori-
ented sector , Govt. will look to encour-
age sector for boosting export growth. So
for that Government can give Tax exemp-
tion Under Section 10A and section 10B.
Till date this exemption is till 2010 gov-
ernment may expand period beyond 2010.
The industry has also submitted that FBT
be removed. Removal of FBT will have a
positive impact on the sector in terms of
cost control and competitiveness.
The industry also expects an Amendment
in Section 10AA of IT Act. Section 10AA(7)
states that only a portion of profits of IT
special economic zones (SEZ) profits will
be tax exempt as proportionate to the ex-
port contribution of that unit to the com-
panys total exports. This nullifies to a
large extent, the logic of doing new busi-
ness via SEZs as they are meant to be tax-
free zones. Thus there might be some res-
pite to the industry in that respect. Prime
Minister Manmohan Singh has already ex-
pressed his keenness in correcting this
anomaly.
The industry also anticipates the programs
for Nationwide broadband rollout and fo-
cus on skill building to be launched during
this budget. This will ensure long term
competitiveness of the IT industry.

Infosys, Mphasis, KPIT Infosystems

Conclusion
The government reforms in this sector will cer-
tainly provide a fillip to the sagging profit mar-
gins of the IT industry. Thus it will provide for
the lesser layoffs and create more jobs in this
sector. The sector which is one of the largest
source of employment in this country is certainly
looking with bated breath towards this years
annual budget.


Industry Overview
Infrastructure is a very broad term which
encompasses everything from roads, rail-
ways, ports, bridges to power, irrigation,
water supply to housing, hospitals, schools
etc. It includes everything which is not part
of the manufacturing, service and agricul-
ture sector.
For any country growth mainly depends on
its infrastructure facility which in turn
helps in industrial growth. India has been
wanting in infrastructure from independ-
ence; lacking the most basic of amenities.
It has only been since the last 10-15 years
that government has really started paying
attention to infrastructure. Indias infra-
structure sector is mainly financed by gov-
ernment funds but nowadays Public Private
Partnership (PPP) projects are also in
vogue.
The major flagship schemes of the govern-
ment towards infrastructure building:

Bharat Nirman: This is the Governments
flagship program to provide houses, elec-
trification, telephony and irrigation facili-
ties for the rural poor and providing good
road connectivity to their areas.
Indira Awaas Yojana: The objective of In-
dira Awaas Yojana is to help in construc-
tion of dwelling units for members of
Scheduled Castes/Scheduled Tribes, freed
bonded laborers and also rural poor below
the poverty line.
Highways: One of the most ambitious pro-
jects of the government launched under
National Highways Development Project
(NHDP) by Golden Quadrilateral is a high-
way network in India connecting Delhi, Mum-
bai, Kolkata and Chennai, thus forming a quad-
rilateral of sorts. It consists of building 5,846
kilometers of four/six lane express highways at
a cost of Rs. 60,000 crores.
The corpus of Rural Infrastructure Develop-
ment Fund (RIDF-XIV) has been raised to
Rs14,000 crore, with a separate window for
rural roads.
National Maritime Development Programme
(NMDP) to boost infrastructure at major ports
in the next 10 years. The programme is ex-
pected to increase the port capacity from
389.5 MT to 917.5 MT by 2014.
In the power sector the government has many
schemes which include Rajiv Gandhi Grameen
Vidyutikaran which has a capital subsidy associ-
ated with it and Accelerated Power Develop-
ment and Reforms Project (APDRP).

Current Scenario
This sector is currently facing a host of issues
that needs timely attention from the govern-
ment:
Land acquisition is turning out to be a big prob-
lem for the infra companies which have re-
sulted in the delay or cancellation of many in-
frastructure projects which include the much
vaunted SEZ projects.
There are many procedural clearances such as
environmental regulations and rules which are
hampering the growth of the industry.
Access to capital is one of the major problems
of the infrastructure industry. With long gesta-
tion period involved banks are usually reluctant
to lend to infra companies. The infra compa-
nies would expect the budget to encourage

banks to lend to infra companies.
Infrastructure industries have to face a lot
of political problems while undertaking
projects.
Infra companies have issues with regard to
payments from government agencies in
case of cash contracts and annuity based
projects. Delay in payments for projects
have adverse impact on profitability of
companies
Machinery and equipment imported from
abroad at very high rates which ultimately
increase the total price of the project.
Industries like shipping are greatly af-
fected by the sharp drop in exports. They
would expect a stimulus package to boost
buying of more marine assets and the re-
moval of tax anomalies vis--vis foreign
companies.

The President's Address to Parliament on
June 4, 2009 had outlined the broad con-
tours of the socio-economic agenda the
UPA government plans to pursue in its sec-
ond term with emphasis on more effective
implementation of various infrastructure
projects and social schemes.
In an environment of economic slowdown
and deficient monsoons with accompanying
decline in rural income the government will
be seriously stressed to boost public spend-
ing on basic infrastructure for urban devel-
opment and under the Bharat Nirman pro-
gramme for the rural areas. Fiscal deficit
which is pegged at 5.5 % of the GDP, de-
clining tax revenues is also expected to be
a major dampener on government spending
on infrastructure. But the government will not
desist from investing in infrastructure as it will
not only create more employment avenues but
also revive the economy by boosting spending
power of the general public and also encourage
the growth of construction and allied industries
like cement, steel, etc.
The major expectations from the budget are:
It is expected that government will give banks
tax relief on interest earned on infrastructure
lending in the budget to enable them to lend
more to the sector. This would be very neces-
sary as government is already in the midst of
an ever galloping fiscal deficit and the govern-
ment is under severe pressure to announce
more sops for the industry.
The GOI had announced Rs 99,000 crore for
infrastructure spending during the interim
budget of 2009-10; we expect this sum to in-
crease by almost 10% in the full budget.
The housing sector is expected to get a major
boost with special incentives and low interest
schemes for affordable housing. There will
be special announcement for low income group
for housing scheme.
Government is expected to give a major boost
to their welfare schemes like NREGS and other
rural welfare programmes which will be used
to improve productivity of land and build rural
infrastructure. The present government is
thought to have won on the premises of rural
prosperity and the looming drought and resul-
tant rural unemployment is threatening to
hamper the picture. So we do expect substan-
tially more investment in the rural welfare
schemes.
We expect the government to announce vari-
ous PPP partnership proposals in roads, sea
ports and airports.

The government is also expected to an-
nounce major urban reforms and in-
creased spending on urban infrastructure
programmes for water supply and sanita-
tion like JNNURM, UIDSSMT etc.
We expect the announcement of construc-
tion of new airports and ports under PPP
partnership programs.
New mega power plants and nuclear
plants (under the US- India nuclear part-
nership) are also expected to be an-
nounced in this budget.
More reforms are expected in the power
sector including the opening of T& D busi-
ness to private players
Concessions in import duties on construc-
tion equipment can be expected.

Larsen & Turbo, IVRCL Infra, Ramkey, Gam-
mon India, Reliance Infra, GMR Infra, NCC,
IRB Infra, Patel Engineering.
Infrastructure shares have been hot com-
modities for domestic/foreign funds in India
after the recent elections as the new gov-
ernment lays out plans to improve the
country's overburdened roads and bridges.
While such expectations have helped infra-
structure shares surge twice as fast as In-
dia's benchmark index since mid-May.
However we would advice restraint on the
part of the investors not to get over enthu-
siastic over infrastructure stocks as the
market has already considered the heavy
spending embarked for infrastructure and
the expectations of further increase in
spending during the new budget. The gov-
ernment will be hard pressed for funds this
year as fiscal deficit is already at 5.5 % and any
further increase in spending will worsen the fi-
nancial situation.
We expect the government to announce a slew
of projects with private participation i.e. PPP
projects.PPP projects transfer the associated
risk and financial burden to the private parties
and the revenue is spread over a longer period
of time. Thus on a short term infrastructure
companies will experience volatility as the
budget will not meet up the heightened expec-
tations from the budget, but in the long run in-
fra companies are a very good bet.
Conclusion
This budget would continue the trend of the
previous budgets in investing more funds in in-
frastructure and this trend would be expected to
grow for many more years to come especially in
the light of the huge gap between India and the
developed countries in infrastructure. Also a
slew of reforms and correction of the existing
anomalies would be expected in this budget.


Industry Overview
Size
Generation capacity of 122 GW; 590 bil-
lion units produced (1 unit = 1kwh)
CAGR of 4.6% over the last four years.
India has the fifth largest electricity gen-
eration capacity in the world.
Low per capita consumption at 606 units;
less than half of China
T & D network of 5.7 million circuit km
the 3rd largest in the world
Coal-fired plants constitute 57% of the
installed generation capacity, followed by
25% from hydel power, 10% gas based, 3%
from nuclear energy and 5% from renew-
able sources

Structure
Majority of Generation, Transmission and
Distribution capacities are with either pub-
lic sector companies or with State Electric-
ity Boards (SEBs). Private sector participa-
tion is increasing especially in Generation
and Distribution. Distribution licenses for
several cities are already with the private
sector. Many large generation projects have
been planned in the private sector.

Current Scenario
Policy
100% FDI permitted in Generation, Trans-
mission & Distribution - the Government is
keen to draw private investment into the
sector
Policy framework in place: Electricity Act
2003 and National Electricity Policy 2005
Incentives: Income tax holiday for a block of 10
years in the first 15 years of operation; waiver
of capital goods import duties on mega power
projects (above 1,000 MW generation capacity)
Independent Regulators: Central Electricity
Regulatory Commission for Central PSUs and
inter-State issues. Each State has its own Elec-
tricity Regulatory Commission.

Opportunity
India requires an additional 100,000 MW of
generation capacity by 2012.
Opportunities in Transmission network ventures
- additional 60,000 circuit km of transmission
network expected by 2012. A corresponding
investment is required in transmission and dis-
tribution networks.
Hydel power potential of 150,000 MW is un-
tapped.
Total investment opportunity of about US$ 200
billion over a seven year horizon.
Over 90,000 MW of new generation capacity is

required in the next seven years.
Power costs need to be reduced from the
current high of 8-10 cents/unit by a com-
bination of lower AT & C losses, increased
generation efficiencies and added low
cost generating capacity.
Large demand-supply gap: All India aver-
age energy shortfall of 7% and peak de-
mand shortfall of 12%.
Open Access to transmission and distri-
bution network. Distribution circles to be
privatized. Tariff reforms by regulatory
authorities.

Infrastructure Bonds: To garner funds for
infrastructure, interest on infrastructure
bonds to be included under 80C.
Withholding tax to be removed on foreign
borrowings. This may not be applicable
for NTPC
To garner funds, ECB relaxation to bor-
rowing limits may be given.
Extension to 80IA tax benefit may be
given beyond 2010
Subsidy to Naphtha, a raw material for
turbines, is possible.
Approvals to additional Power projects,
including nuclear plants is possible. Huge
investments possible.
Renovation, modernization, up-rating and
life extension of old thermal and hydro
power plants.

Torrent Power, Jaiprakash Hydro-Power Ltd,
GVK Power & Infra, Gujarat Industries Power
Co., Neyveli Lignite Corporation Ltd., Power
Grid Corporation of India Ltd, Tata Power, En-
ergy Development Co., Indowind Energy and Re-
liance Power.
In the last one month, shares of power compa-
nies have performed well after the govt. ex-
tended the exemption of basic custom duty on
naphtha import for generation of electricity.

Conclusion
Indias current GDP growth of 6.7% is the second
fastest, globally. India's high investment rate
(more than 35%) has been largely responsible in
India achieving a high GDP growth rate. Power
Sector is expected to receive continued atten-
tion and funding (approx Rs 20 trillion). Power
Ministry desires to be able to add power genera-
tion capacity of about 78,000 MW by 2012. It
also wants to reach its target of providing elec-
tricity to about 118,000 villages at the earliest
(60000 villages already covered). Speedier im-
plementation will make these plans more effec-
tive.


Industry Overview
The Indian Telecom industry is said to be in
a hyper growth mode and is set to pip
China to the post by becoming the largest
telecom market till 2013. Currently India is
ranked second in the world in terms of sub-
scriber base behind China.
For all those who are statistically inclined it
can be noted that:
India added 113.26 million new custom-
ers in 2008, the largest globally thus hav-
ing a cellular base growth of almost 50%
As per TRAI, the total number of tele-
phone connections (mobile as well as
fixed) had touched 385 million as of De-
cember 2008. This means that one out of
every three Indians has a telephone con-
nection.
It is projected that the industry will
generate revenues worth US$ 43 billion in
2009-10.
Foreign direct investment (FDI) is one of
the important sources to meet the huge
funds that are required for rapid network
expansion. At present, 74% to 100% FDI is
permitted for various telecom services.
The total FDI equity inflows in telecom
sector have been 1261 million USD during
2007-08 which constitutes about 9% of the
total FDI Inflow in India during the same
period.
The next big thing in telecom is the rural
market - Rural telephones have gone up
from 12.3 million in March 2004 to 109.05
million in October 2008 with a tele-density
of 13.04%. Tele-density here is 10% as com-
pared to a national tele-density of 21%
thereby providing a huge potential for telecom
companies.
In Feb this year, Government of India introduced
3G services in the country with which India en-
tered into a new era of telecommunication. This
was done when BSNL was awarded one block of
3G spectrum 6 months before the actual auction
for all other private players take place.

Current Scenario
There is a huge pressure on average revenue per
user due to the soaring network infrastructure
costs. But the sheer number of subscriber is the
reason for the growth that we have witnessed. It
is high time that we stop depending on the vol-
ume game and thus calls for reduction of the
basic infrastructure costs. Another reason is the
profit sharing requirement set by the ministry.
As of now the telecom companies share 25-30%
of the profits with the government that is result-

ing in upward pressure on the average cost
per user.
The competitors have been involved in a
price war with each mobile network pro-
vider trying to woo the user with their low
tariff rates. As of now these companies
have succeeded in maintaining their profits
over the years but if this price war contin-
ues the sector may see tough times ahead.
Also there has been a long standing differ-
ence between the Telecom ministry and
Finance ministry regarding the 3G reserve
price.
Currently, telecom industry is subject to
service tax, license fees including universal
service obligation fees, spectrum charges.
Besides, the states levy additional taxes
such as octroi, VAT, stamp duty, entry tax
and levies on towers. The total of all the
above levies on telecom industry works out
to around 30% of their total revenues,
which is one of the highest in the world.
Telecom Industry in other developing coun-
tries like Malaysia, Sri Lanka and Pakistan
pay less than 7% and in China it is around
3%.
The industry wish list as far as the telecom
sector is concerned is very long.
Rationalizing of various taxes levied on the
industry has been top on this list for quite
some time now. The telecommunications
industry has repeatedly requested that the
multifarious taxes, charges and fees appli-
cable to the industry should be unified and
a single levy on revenue should be col-
lected.
There are talks also of extending the Tax
Holiday under section 80-IA in case of mergers/
amalgamations. Currently it is available to all
companies who have commenced operations be-
fore April 2005. There is a strong industry de-
mand to extend it till Dec 2010. We believe that
this will not get the Finance Ministry Approval in
this years budget. But here is a list of things
that we believe will be implemented:
Increase in FDI Cap: The most important an-
nouncement that is expected is the increase in
FDI caps in telecom sector. Cat present 74% FDI
is allowed in this sector. The government be-
lieves that the sector has matured very rapidly
and hence can deal with an increased FDI limit
even up to 100%.
Listing of BSNL Likely: The government will
certainly take some concrete steps towards the
listing of Bharat Sanchar Nigam Limited (BSNL).
This was on the agenda in the last budget as
well but thanks to the Left party this couldnt
materialize. When this happens it is expected
to be the largest public offer in India and is
expected to fetch approx $10 billion
Reduction of taxes, fees and duties: The li-
cense fee and spectrum charges prevalent in

India are the highest in the world. But it is
expected that there will be some respite
in this area come July 6. We might see a
reduction or even scraping of the Univer-
sal Service Obligation Fee (USO). This is
the fee charged on only the private play-
ers for offering services. The total of all
the taxes, fees and levies works out to be
30% of their total revenues which is an
unprecedented number. For all other de-
veloping economies like Malaysia, Sri
Lanka it is around 7% where as in China it
is 3%. An overall reduction is highly prob-
able in this area. Also there is a strong
possibility of the excise duty on domestic
telecom products reduced. It is currently
at 16%.
Provisions and procedures for 3G Auc-
tions: There is likely to be announce-
ments regarding the early execution of 3G
Auctions. Also it will be ensured that fair
procedures and regulations are in place
before the auction begins. This will en-
able the ministry to raise huge amount of
funds.
Reduction of network infrastructure
costs: The cost of infrastructure for these
telecom companies is almost sure to come
down. We expect reduction is cost of cus-
tom duty on fibre optic cables. Also the
price of mobile handsets is likely to come down.

Bharti Airtel, Reliance Communication
Conclusion
To summarize, the overall impact that the
budget will have is that it will encourage more
foreign players into India and thus create a more
competitive environment. The telecom ministry
has already hinted about the reduction of call
rates especially STD calls. A huge rural market
to tap powered by reduced costs along with a
whole gamut of services to offer to the mobile-
savvy Indians is certainly a mouth watering pros-
pect for the telecom companies. All-in-all the
budget 2010 augurs well for the future of tele-
com in India and finally it is the consumer that
will benefit.


The upcoming budget would be very impor-
tant for the overall direction of the market.
The key market performance would depend
on whether the government can spur
growth while balancing an increasing fiscal
deficit. A strong policy action is needed by
the new government to tackle the fiscal
situation and growth through investment in
infrastructure.
However, given the macroeconomic con-
straints on the economy, especially growing
inflationary pressures and the dramatic rise
in fiscal deficit, the expectations from the
Budget may be too high to fulfill. Only time
will tell if the wish list of the all the Sec-
tors, people and students like you and me will
be fulfilled.
While details would be known soon, the one
thing that would remain unchanged even post
Budget is the fact that India has embarked on a
growth path that is certain and clear, notwith-
standing the near-term pressures as a result of
the global economic slowdown and we, as Fu-
ture Managers of India would continue to con-
tribute towards this growth.

Aditya Ambekar
Apurv Dhingra
Ashu Bhardwaj
Dej Hegde
Divya Mittal
Gaurav Khetan
K Mythreya
Mogili Sindhu

Milind Suryavanshi
Nishit Mehta
Prashanna Sivaraman
Prem Mohan
Rajiv Govindan
Rahul Sopanrao Ghodke
Sejal Solanki
Swati Banthiya


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