UNIONBUDGETUPDATE March16,2012

Finance Minister Pranab Mukherjee had three prime challenges to overcome ahead of presenting the FY13 Union Budget: controlling the rising fiscal deficit, checking inflation and bringing the economybackongrowthpath.Whilethefocuswasobviouslyongrowth,inflationstillremainsan areaofgreatconcern,ashighertaxeswillpushuppricesfurther. Some key announcements were made in the Union Budget this year. The excise duty was raised from10%to12%andtherebythestimulusgiventoindustriesin200809,wasrolledback.Thenet ofservicetaxwasalsowidenedandtheratewasincreasedto12%.GoodsandServicesTax(GST), whichholdsthekeytolongpendingtaxreforms,willbeimplementedbyAugust2012.TheFinance MinisterhasdroppedenoughhintsthattheGovernmentwillreducesubsidiesonbothfertilizersand petroleum products in the coming days. The Government has set the target to restrict subsidies below2%ofGDPin201213,withapromisetofurtherreduceitto1.75%ofGDPinthefollowing threeyears. TheGovernmenthasproposedtoallowExternalCommercialBorrowing(ECB)ofupto$1billionto raiseworkingcapitalfortheairlinesindustryforoneyear,whichwillgivethemuchneededimpetus tothestrugglingsector.ThedecisiontoallowQualifiedForeignInvestorstoenterIndiancorporate debtmarketsisalsoawelcomemove.AllowingECBtopartfinancerupeedebtinpowerprojectswill boostthesectorandeconomyingeneral.Proposaltoremovesectorspecificrestrictiononventure capitalfundinvestmentsisalsoasteptowardsreform. However,therearenotmuchgoodnewsforcorporatesectorandchancesofareductionininterest rates in near term also appear uncertain. The yields may harden because of higher than expected netmarketborrowingofRs.4.7lakhcrore.Theincreaseinexcisedutywillnegativelyimpactmany sectors. Thechangesinpersonalincometaxwerealongexpectedlines,andareunlikelytoprovideamajor boosttoconsumptiongrowthbecausehigherservicetaxandexcisedutieswilloffsetthegain. However,inspiteofallmeasures,problemsofinflationandgrowthstillpersist.Ifsubsidiesarenot cut,thefiscalandrevenuedeficittargetsof5.1%and3.4%ofGDPrespectively,willnotbemet.But thesubsidycutwillincreaseinflationarypressure,whichinturn,willmakeitdifficultforRBItocut ratesinnearfuture.Higherrateregimehasalwaysprovedtobeahurdleforeconomicgrowth. Inthefollowingpages,wearepresentinganindepthanalysisoftheUnionBudget,andwillfindout how the proposals put forward in the Budget are going to impact different sectors. The tax implementationonindividualandtheimpactoftheBudgetondifferentinvestmentavenueshave alsobeenprovidedforquickreference. ICRAOnlineLimited

UNIONBUDGETUPDATE March16,2012
ImpactofUnionBudgetonVariousSectors Sector MajorAnnouncements i. Plan outlay raised 18% to Rs 20,208 crore ii. Irrigation, dams will be eligible for special funding iii. Rs 300 crore allotted for intensified irrigation program iv. Agricredit target for FY 13 set at Rs 5.75 lakh crore v. Interest subvention for shortterm crop loan continues vi.Newstateownedirrigationcompanywillbesetup OverallImpact

Agriculture

Positive

Aviation& i.ECBfundingwillbeallowedtofinanceworkingcapital Airport needsofairlines Infrastructure ii.Importofaircraftpartsexemptedfrombasiccustomsduty i.Standardexcisedutyhikedto12% ii.Dutyonlargecarsraisedto24% iii.Nochangeinpeakcustomsduty iv.Carstoattractadvaloremrateof27% v.AllocatedRs1,000croretoNationalSkillDevelopment Fund(NSDF) i.DivestmenttargetofRs30,000crinFY13 ii.TaxexemptiononsavingsinterestincomeuptoRs10,000 willboostCASAratioforbanks iii.RRBcapitalisationextendedfor2years iv.Rs15,890croreallocatedforrecapitalizationofPSUbanks v.QualifiedFIItobeallowedtoinvestindomesticcorporate bonds vi.Rs10,000croreallocatedtoNABARDtofundRRBs vii.ThenetmarketborrowingforFY13peggedatRs4.8lakh crore viii.Proposaltoremovesectorspecificrestrictiononventure capitalfundinvestments i.AllocatedRs25,555crforRighttoEducationinFY13; interestratesonloanstoWomenSelfHelpGroupscut ii.Schooleducationexemptedfromservicetax

Neutral (asmarketwas expectingFDIin aviation) Negative (Ashigherexcise dutywouldleadto higherautomobile prices)

Automobiles

Banking& Finance

Positive

Education

Positive

ICRAOnlineLimited

UNIONBUDGETUPDATE March16,2012
Sector MajorAnnouncements i.Centralsubsidiestoremainunder2%ofGDP ii.Computerizedschemeforfertilizersubsidytransfertobe launched iii.Subsidywillbebroughtdownto1.7%ofGDPinthenext3 years iv.Tobecomeselfsufficientinureaproductioninnext5years v.5%customsdutyexemptedonequipmentforfertilizer plants vi.DeductionforCAPEXenhancedto150%forFertilizer Sector i.LCDandLEDpanelsexemptedfromcustomduty i.ExternalCommercialBorrowingforpower,housing,and roadconstructioncompaniesallowed ii.NRHMallocationhikedtoRs20,820crore iii.Packagedcementwillattractdifferentialexciseduty, dependingontheretailsalepriceperbag iv.ProvisionsunderRuralHousingFundraisedfromRs3,000 croretoRs4,000crore v.Schemeofinterestsubventionof1%onhousingloanupto Rs15lakhextendedforanotheryear,wherethecostofthe housedoesnotexceedRs25lakh OverallImpact

Fertilizers

Positive

Household Appliances

Positive

Housing

Positive

i.AllocationfortaxfreebondsdoubledtoRs60,000crorefor financing infrastructure projects in 2012/13 ii. Rs 14,000 crore allocated for rural drinking and sanitation iii. Rural development fund of Rs 20,000 crore allocated iv. Some infra construction services exempted from service Infrastructure tax v. Infrastructure sector to get Rs 5000000 lakh crore investment vi. Tax benefit under Section 80IA and Rs 20,000 investment inInfrastructureBondshasbeenextendedbyoneyear

Positive

ICRAOnlineLimited

UNIONBUDGETUPDATE March16,2012
Sector MajorAnnouncements OverallImpact Neutral (Positiveimpactof plannedexpenditure relatedtoUIDwould benullifiedbythe lowerprofitability duetohigherservice taxoutgoandhigher inputcostbecauseof riseinexciseduty)

Information Technology

i.Rs14,232crallocatedforUIDproject,up13%inFY13

Media& Entertainment

i.Servicetaxupfrom10%to12% ii.Servicetaxnetwidensbutsomeexemptionsare expectedforthefilmindustry,whichcompleted100 years

Neutral

i.Directtransferofsubsidyforkeroseneinitiated ii.Centralsubsidiestobeunder2%ofGDP iii.Subsidy/GDPratiotobeunder2%inFY13 Petrochemicals/ iv.Oilandgaspipelinestobeeligibleforviablegap Oil&Gas funding v.LNGoutofcustomsdutynet vi.CessoncrudeoilhasbeenraisedtoRs4,500perMT fromRs2,575 i.ECBwillbeallowedtopartfinancepowerrupeedebt ii.Rs10,000croreoftaxfeebondsforpowersector iii.ECBwillbeallowedforpower,housingandroad constructioncompanies iv.CoalIndiahasbeenadvisedtosignFSAwithpower plants v.Fullexemptiononcustomsdutyoncoal vi.Thermalpowercompaniesexemptedfromcustoms dutyfor2years vii.Additionaldepreciationof20%forpowersector companies

Negative (Directtransferof subsidyisawelcome movebutitwould taketimetobe implemented. Estimationofoil subsidiesseemstobe conservative)

Power

Positive

ICRAOnlineLimited

UNIONBUDGETUPDATE March16,2012
Sector MajorAnnouncements i.Effortscontinuetoarriveatconsensusfor51%inretailFDI ii.12%excisedutyimposedonbrandedretailgarments iii.Customsdutyonsomegoldandplatinumproducts increased iv.Customsdutyonrefinedgolddoubled v.Diamondsemeraldandrubypriceswillgoup vi.Customsdutyongoldandplatinumraisedto4%from2% vii.Brandedsilverjewelleryfullyexemptedfromexciseduty viii.GSTrolloutfromAugust2012 i.12thPlaninfrainvestmentpeggedatRs50lakhcrore ii.Tomake8,800kmofhighwaysinFY13;outlayraised iii.ECBforpower,housingandroadconstructioncompanies willbeallowed i.Telecomtowersmadeeligibleforviabilitygapfunding ii.Mobilephonepartsexemptedfrombasiccustomsduty OverallImpact Neutral (Positiveon accountofGST rolloutand negativeasno consensusyeton FDI.Also12% excisedutyon brandedretail garmentswould hurtcommonmen) Positive

Retail

Roads& Highways

Telecom

Positive

ICRAOnlineLimited

UNIONBUDGETUPDATE March16,2012
ImpactofUnionBudgetonInvestmentAvenuesforRetailInvestors InvestmentAvenues BudgetAnnouncement Impact

Equity

Equity,Commodity

TheGovernmenthastakenthisinitiativeto drawretailinvestorstoequities.Itwillallow 50%taxdeductionforthosewhohaveannual RajivGandhiEquitySavings incomebelowRs10lakhandwhoinvestupto Rs50,000instocks.Therewillbealockin Scheme periodof3years.ThuswithinvestmentofRs 50,000instockmarket,aninvestorcanclaim taxdeductionofRs25,000. SecuritiesTransactionTax Itwouldmeanlowercostoftransactionfor (STT)reducedfrom0.125% retailinvestors.However,marketwas to0.100% expectingcompleteabolitionofSTT. Doublingofcustomsduty to4% Thedemandisunlikelytofallasgoldis purchasedinIndiamainlyduringmarriageand festiveseasons.Henceacustomdutyriseof 2%willhardlyhaveanyimpact. Centralised KYC will make processing of transactions simpler and over the time it will reducetheoveralladministrativecosts.

Gold

CentralKYCDepository MutualFund

The Rajiv Gandhi Equity Savings Scheme is in RajivGandhiEquitySavings competition with the ELSS. While the former Scheme will offer only 50% tax relief, ELSS offers tax reliefontheentiremoneyinvested. LimitonInfrastructure BondsdoubledtoRs 60,000crore Themovewillgivemoreoptionstoretail investorsasthelimithasbeendoubledfromRs 30,000croretoRs60,000crore.

TaxFreeBonds

ICRAOnlineLimited

UNIONBUDGETUPDATE March16,2012
TaxImplications

DirectTax

ShiftinTaxSlab The basic tax exemption limit has been raised from Rs 1,80,000 to Rs 2,00,000. This will lead to a savings of Rs 2,060 annually for men. However, women will gain Rs 1,030, as they had higher exemptionlimitofRs1,90,000.Thetaxstructureofseniorcitizensremainsunchanged. Asthehighertaxslabof30%hasbeenraisedfromRs8,00,000toRs10,00,000,individualshaving incomeofmorethanRs8,00,000willnowsaveRs22,660(Rs21,630incaseofwomen). IntroductionofRajivGandhiEquitySavingScheme(RGESS) IntroductionofRajivGandhiEquitySavingScheme(RGESS)willleadtohighercashinflowtowards equity market by retail investors. Individuals having annual income less than Rs 10,00,000 can get deductionof50%oftheirinvestment,byinvestinguptoRs50,000insharemarket,withalockin periodof3years.SoifoneinvestsRs50,000(maximumamountonecaninvest),hecanclaimatax deductionofRs25,000. However,thereisnocleardirectionintheBudgetastohowthisschemewouldoperate,whether the benefit would be available through direct investments in equities or through mutual fund schemes,whichcouldbelaunchedwithsuchbenefits.IfcomparedwithELSS,RGESShasalimited advantageasELSSisavailabletoallinvestorsand100%deductioncanbeclaimedunderSection80C. OtherKeyAnnouncements: InterestuptoRs10,000earnedonsavingsbankaccountwillbeexemptedfromincometax. Salaried individuals with income up to Rs 5 lakh would not be required to file income tax returns. Seniorcitizens,nothavingincomefrombusiness,proposedtobeexemptedfrompayment ofadvancetax. STT reduced by 20% from 0.125% to 0.1% on delivery transactions in cash segment. This means, traders now have to pay Rs. 10,000 both on sale and buy for every Rs 1 crore of transaction. Corporatetaxratesremainedunchanged. TheturnoverlimitfortaxaudithasbeenincreasedfromRs60LakhtoRs1crore. ProposaltoextendthelevyofAlternateMinimumTaxtoallpersons,otherthancompanies, claimingprofitlinkeddeductions. Tax to be deducted at source on cash purchase of bullion and jewellery in excess of Rs 2 lakh. ICRAOnlineLimited

UNIONBUDGETUPDATE March16,2012

Goods&ServicesTax(GST) GoodsandServicesTax(GST)willbeoperationalbyAugust2012.However,crudepetroleum,diesel, petrol,aviationturbinefuel,naturalgasandalcoholwontcomeunderthepurviewoftheGST.In thelightoftheeventualgoaloftransitiontoGST,ServiceTaxlawandCentralExcisewillbebrought ascloseaspossible. ServiceTax Scope of Service tax has been widened to all services except those in the negative list. However, exemption from service tax is proposed for some sectors like school education and some cinema services. Rate of Service tax, in the Budget, was increased from 10% to 12%. The proposals in the servicestaxisexpectedtoyieldadditionalrevenueofRs18,660crore. ExciseandCustomsDuty Excisedutywasproposedtobeincreasedfrom10%to12%duetotheneedforfiscalconsolidation andonaccountofeconomicdownturn.However,nochangehasbeenproposedforpeakcustoms duty. Proposals related to Customs and Central excise to result in net revenue gain of Rs 27,280 crore. WhiledirecttaxproposalsintheBudgetwillresultinanetrevenuelossofRs4,500crore,indirect taxeswillresultinanetrevenuegainofRs45,940crore.Thus,thetaxproposalswillleadtoanet gainofRs41,440crore.

IndirectTax

ICRAOnlineLimited

UNIONBUDGETUPDATE March16,2012
ImpactonEquityMarket
ReasonsforCheer The Government has opened a new door to save taxes in the form of Rajiv Gandhi Equity Savings Scheme.ApartfromparkingmoneyinbankFDs,PPFs,NSCs,ELSSmutualfundschemes,individuals cannowinvestinstockmarketsdirectlyandcangettaxbenefits.Newinvestors,withyearlyincome belowRs10lakh,whobuystocksuptoRs50,000andholdthemforthreeyears,cansavetaxworth Rs25,000.Thismovewillcertainlyencourageretailinvestorstoparticipateintheequitymarketand a good inflow is expected in coming days, which in turn, will boost the market. The mandate of threeyearlockinwillalsoprovidethenecessarystability. Though the Government refrained from announcing any major reforms, the Budget was not a populistoneeither,likethatofsomepreviousyears.Themainfocusinthelastfewyearswereon development schemes and rural income, but this time growth was given importance, which may bringcheertothemarketincomingdays. The20%cutinSecuritiesTransactionTax(STT)fordeliverybasedtransactionsispositivenewsfor themarket.ThoughtherewasspeculationofcompleteabolitionforSTT,themarginalreductionwill enthuseretailinvestors,whodealincashsegmentandalsothebrokers. However,thetotalturnoverinthemarketlargelydependonfuturesandoptionssegment,whilethe cashsegmentaccountslessthan5%oftheturnover. ReasonsforConcern Thoughalotofstresswasgivenoninfrastructure,itcouldnotdeliverasperexpectation.Thetwo bigpointswerethe12thPlanexpenditureforinfrastructurewaspeggedatRs.50lakhcroreandalso doubling of the said amount that can be mopped up via taxfree infrastructure bonds. But, in the Budgetspeech,therewasspecificplanchalkedoutforactualspendingandprojectsthatwouldbe undertaken.TherewasalsonoproposalonconcreteactionsneededtoincreasePPPprojects.This cameasadisappointmentforthemarket. MarketswerealsokeenlywaitingforaspecificdirectiononFDIinretailandaviationsector,butsuch issueswereavoided,whichprovedtobeadampener.Therewasalsonomentionofanybigreform in any of the sectors. Ways to tackle inflationary pressure and decision on fuel subsidy was not touchedupon.Asaresult,oilandgasstocksplungedontheBudgetday.Thebankingstocksalsohad tobitethedust.Intheend,Sensexlost209.65points,whileNiftyshed62.60points. Outlook The future course of equity market would largely depend on the risk appetite of the FIIs, who continuetodrivetheIndianmarket.Withhighertaxesimpactingtheinflation,achievingGDPgrowth targetcouldprovetobeachallenge.TheprojectedGDPgrowthislikelytobeachievedonlywhen interestratescomedown,givingscopeforfurtherexpansion.Thefiscaldeficittargetwouldalsobe missediftheGDPtargetcannotbeachieved. ICRAOnlineLimited

10

UNIONBUDGETUPDATE March16,2012
ImpactonDebtMarket
ReasonsforCheer TheGovernmentwillnowallowqualifiedforeigninvestorstoaccessIndiancorporatedebtmarket. Thisproposal,whenimplemented,willdeepenthecountrysshallowbondmarketandalsoopenup alucrativeavenueforforeigninvestors,whoarekeentoparticipateinIndia'sgrowthstory. ReasonsforConcern Higherthanexpectedfiscaldeficittargetof5.1%ofGDPsetforFY13helpedthe10yearbenchmark yield rise by 6 bps to close at 8.42%, after touching threemonth high of 8.45%. Although fiscal deficit target was set lower than the present level, the higher amount of borrowings has raised concernsovertheliquiditycrisisinthebankingindustry. Outlook Shortterm rates are still ruling high due to rising demand for shortterm liquidity. If rates dont comedown,RBIhastocomeoutwithstrongliquiditymeasuresforthebankingsector.Longterm rates could also remain at an elevated level for some more time till liquidity situation improves. FasterprocessbytheGovernmenttorecapitalizebanksmayeaseliquiditycrunchtoalargeextent. However,riskofhigherinflationduetorisingtaxratescouldfurtherdelayRBIsmoveonlowering policyrates. Now that the Budget is over, within a few trading sessions, all eyes will be fixed on RBIs policy reviewandquarterlyresultsofcompaniesduenextmonth.

ICRAOnlineLimited

11

UNIONBUDGETUPDATE March16,2012
TheUnionBudgetwasonexpectedlinesasittriedtomovetowardsfiscalconsolidationandstayed awayfromannouncinganymajorreforms. Budgetaryallocationsfortheindustryandthesocialsectorswereshortofexpectations.Theimpact ofrisingfuelandcommoditypricesleftitsmarkonthefiscaldeficit.However,theGovernmenthas planstoreducethesubsidyburden,whichinturn,wouldminimisethefiscaldeficitgoingforward. TheGovernmentisyettotakesometoughdecisions.Forinstance,aninprincipledecisionregarding decontrolofdieselpricehasbeentaken;however,thereisnoroadmapforitsimplementationdue tohighpricesinglobalmarkets. ThefocusoftheGovernmentisnowtoimplementthebudgetaryproposals.Itremainstobeseen howintroductionofGSTandmanagementofAadhaarisgoingtoimpactthe balancesheetofthe Government. Disclaimer: AllinformationcontainedinthisdocumenthasbeenobtainedbyICRAOnlineLimitedfromsources believedbyittobeaccurateandreliable.Althoughreasonablecarehasbeentakentoensurethat theinformationhereinistrue,suchinformationisprovidedasiswithoutanywarrantyofanykind, andICRAOnlineLimitedinparticular,makesnorepresentationorwarranty,expressorimplied,asto theaccuracy,timelinessorcompletenessofanysuchinformation.Allinformationcontainedherein mustbeconstruedsolelyasstatementsofopinion,andICRAOnlineLimitedshallnotbeliablefor anylossesincurredbyusersfromanyuseofthisdocumentoritscontentsinanymanner.Opinions expressedinthisdocumentarenottheopinionsofourholdingcompany,ICRALimited(ICRA),and shouldnotbeconstruedasanyindicationofcreditratingorgradingofICRAforanyinstrumentsthat havebeenissuedoraretobeissuedbyanyentity. ContactInformation: ICRONResearchDesk researchdesk@icraonline.com Ph:02267816100

ToSumUp

ICRAOnlineLimited

12