Budget 2011-12 - Analysis

Tax Project
 Submitted to Professor Anil Gor
 Division – C - Group Members –

Abhishek Patade
Avinash Mantri
Harshali Dhabalia
Mangalam Maloo
Radha Waghmare
Saurabh Sadani

N L D a l m i a I n s ti t u t e o f M a n a g e m e n t S t u d i e s a n d R e s e a r c h
 Foreword

T he Indian economy showed remarkable resilience and gross domestic

product (GDP) is estimated to have grown at 8.6 percent in 2011-11 in real
terms. The Union Budget 2011 was presented at a time when the Indian
economy had rebounded to its pre crisis growth trajectory. The Finance Minister
stated in his budget speech that the major focus for 2011-12 would be to build
infrastructure for the agriculture sector and approved 15 Mega Food Parks during
2011-12, besides sanctioning 24 new cold storage facilities and to increase storage
capacity by 4 million tonnes. Another major focus of Budget 2011 was investment in
infrastructure. Funds allocated to this sector amounted to Rs 214,000 crore (US$
47.48 billion), which is an increase of 23.3 per cent over 2001-11 and amounts to
around 49 per cent of the total plan allocation. Other measures to enhance the flow
of funds to the sector included increase in the foreign investment investor (FII)
limits for investment in corporate bonds and provision of tax-free status to
infrastructure bonds. Tax rates applicable on interest paid on overseas borrowing in
case of infrastructure debt funds were reduced to 5 per cent instead of the regular
withholding tax rate of 20 per cent.

Overall, the budget seems to be a balance between growth and inflation. However,
there are also various concerns on which the budget is silent, or throws up some
challenges. Persistent inflation needs to be contained and the Budget’s projection of
a 4.6% fiscal deficit seems very optimistic. The Budget report is silent on FDI in
retail too, thus not a very a forward-looking budget.

Through the following report, we have tried to understand and explain the key
points of the Union budget and it’s impact and implications on the sectors therein.
We’d like to express heartfelt gratitude to Prof. Anil Gor for giving us this
opportunity and for all his support and guidance throughout.
 Union Budget 2011-12 Key Highlights:

 FY11 fiscal consolidation impressive

 Food inflation at 20.2% in Feb-11 – still a big concern
 GDP growth pegged at 8.6% for FY 11
 Divestment target set at Rs 40,000 Crs.
 FIIs allowed investing in MF schemes
 FDI allowed in MFs
 FII investment in Corporate bonds hiked 100% to USD 40 bn
 Taxfree bonds worth Rs 30,000 crs for infra to be allowed
 IIFCL disbursement target upped to Rs 25,000 Crs.
 Pension eligibility age cut to 60 yrs from 65 yrs
 FY11 fiscal deficit seen at 5.1%
 FY12 fiscal deficit target set at 4.6%
 FY13 fiscal deficit target set at 4.1%
 Tax exemption limit raised to Rs 1,80,000 from 1,60,000 for male. No change
in limits for female tax payers. For senior citizens limited hiked to Rs
2,50,000
 New tax exemption criteria for very senior tax citizens above 80 yrs.
Exemption upto Rs 5,00,000
 MAT raised to 18.5% from 18%. SEZs to be under the MAT ambit.Surcharge
for companies reduced from 7.5% to 5%.
 Rs 20,000 exemption for investment into infra bonds extended by another
one year.
 Service tax maintained at 10%.
 Government market borrowing target set at Rs 3,43,000 Crs. for FY12
 Base rate on excise raised to 5% from 4%.
 Health checkups under service tax ambit.
 Life insurance service providers to be taxed.
 Macroeconomic analysis of Budget

U nion Finance Minister Pranab Mukherjee presented the General Budget for
fiscal 2011-12 in lower house of Indian Parliament on Monday. The much
awaited document every year has traditionally been an opportunity for the
government to not only lay out its resource raising and spending plans for the
coming financial year but also to give a direction to its overall policy making in the
economic sphere. This year’s Budget was all the more important because of the near
halt in policy formulation for last few months due to political stand-off between the
government and opposition and other challenges like inflation, surging subsidy
expenditure and high current account deficit (CAD). Maintaining the recent recovery
and boosting infrastructure growth at this crucial stage of long run economic cycle
were also very important issues requiring a lot of attention.

The Budget presented by the finance ministry was quite in line with expectations
and tried to touch each of these aspects. From measures to ease supply bottlenecks
in agriculture to boost infrastructure, lower CAD and fiscal deficit and maintaining
growth trajectory, all found reasonable focus of the finance ministry. However, even
as a number of crucial issues seem to have been dealt reasonably well, things were
grey in many other areas, simply because of the zero sum nature of the game called
budgeting.

In what follows, we have tried to bring out the core issues addressed in the budget,
along with those where clarity has been left wanting and have tried to summarize
the impact of both of these on India’s macro economy and fundamentals going
forward.

Even as the Indian economy is modernizing rapidly, with share of agriculture in

gross domestic product (GDP) coming down rapidly, the sector has remained very
important given that 60% of Indian still depend on farms for their livelihood and the
precarious nature of bottlenecks prevailing in the farm commodities. In this
backdrop, the Budget had a major focus on agriculture sector. In order to provide
thrust to the farm sector, the finance minister announced reduction in interest rate
to 4% for farmers who repay loans on time, thus giving a 3% subsidy. He also
unveiled various schemes in the Budget with an outlay of Rs 2,200 crore to increase
production of vegetables, millets, milk, pulses, palm oil and fodder.

To increase investment in the farm sector, Mukherjee raised the agri-credit lending
target for banks to Rs 4,75,000 crore for 2011-12 from Rs 3,75,000 crore this year,
with special focus on small and marginal farmers. In view of growing demand for
vegetables, he also announced Rs 300 crore to set up a vegetable cluster, initially
close to metros.

Infrastructure has been talk of the town for quite some time when it comes to Indian
growth story. There have been concerns that the poor nature of India’s ‘Raj Era’
physical infrastructure can derail the long term growth trajectory of the country. As
such, plans have been announced to boost infrastructure investment in a major way.
Although no extraordinary breakthrough was announced in the Budget, there are
quite a few incremental steps that will help improve flow of funds to infrastructure
sector. More importantly, the government gave signals that it was serious about
pushing the growth in infrastructure space.

To begin with, the finance minister introduced infrastructure debt fund by floating
special purpose vehicles (SPVs) to attract foreign funds. He proposed to spend Rs
2.72 lakh crore on the transport and the energy sectors out of Rs.5.92 lakh crore
earmarked in the Central Plan for 2011-12. The allocation accounts for 45.95% of
the Plan outlay and marks an increase of 9.68% over the budget estimates of the
previous year and Rs 21.43% compared to the revised estimates for 2010-11.

He also announced issuance of tax-free bonds worth Rs.30,000 crore and extending
income-tax exemption on tax-saving infrastructure bonds up to a maximum of Rs
20,000 for one more year. The budget proposed to hike the ceiling of FII for
corporate bonds issued by infrastructure companies from $5 billion to $25 billion,
with the total FII debt cap at $40 billion.

Two major challenges facing the Indian economy at present are the need to continue
fiscal consolidation and check the surging current account deficit (CAD). While India
has regained the pre-crisis growth momentum, there is a need to effect adjustments
in the composition of growth on demand and supply side. As accepted by the
minister himself, it has to be ensured that along with private consumption, the
revival in private investment is sustained and matches pre-crisis growth rates at the
earliest. This requires a stronger fiscal consolidation to enlarge the resource space
for private enterprise. Fiscal consolidation is also necessary for effective
implementation of monetary policy which is going to be very important given the
prevailing high inflation.

In this wake, the government had in last Budget accepted the revised timeline for
fiscal consolidation as recommended by the Thirteenth Finance Commission (TFC).
The TFC had in its revised framework suggested a deficit figure of 5.5% for FY11
and 4.8% for FY12. Mukherjee pegged the fiscal deficit at 4.6% of gross domestic
product (GDP) for 2011-12 against a revised estimate of 5.1% of GDP for 2010-11.
Clearly, things are so far going at a better rate than the TFC’s recommendation.

The tax proposals in the Budget-2011 appears to be a finely balanced act of

widening the tax base while providing some relief to inflation hit individual and
corporate tax payers at the same time. The Budget provided relief to individual tax
payers by hiking the tax exempted income level to Rs 1.8 lakh. This will increase
disposable incomes marginally in a highly inflationary scenario.

From corporate point of view, there were two major reliefs. First, the 2% balance
stimulus that was still prevalent in economy has been left untouched. The
government had cut the excise duty by 4% across the board and services tax by 2%
following the global slowdown. While excise duty was hiked by 2% last year, both
the services tax and general excise duty have been left untouched this year, thus
leaving a 2% fiscal stimulus when compared with pre-crisis period.

In further relief for the India Inc, the surcharge on corporate tax on all domestic
companies has been cut from 7.5% to 5%. This is a move forward to the direct tax
code (DTC) to be applicable from FY13, which does away with surcharges all
together. Both these steps are market positive and relieve a major concern of the
corporate sector.

Further, the attempt at widening the tax has continued. Even as both services and
excise duties have been left at 10%, some new service have been brought within the
ambit of the latter while excise exemptions on more than 100 items have been
withdrawn, thus expanding the tax base. More importantly, the FM reiterated the
desirability to universalize the services tax with a small negative list, so that many
untapped sectors could be brought into the tax net.

The nature of reform agenda the government is aiming at becomes clear from a
section of the opening statement in Budget Speech when Mukherjee said, “At times
the biggest reforms are not the ones that make headline, but the ones concerned
with the details of governance, which affect the everyday life of aam aadmi”.

The incremental reform agenda is visible in a many parts in the Budget. The Finance
Minister accepted that having successfully launched the nutrient based subsidy, the
next logical step would be to bring urea in its, ambit, and announced that
consultations for the same were already going on.

Similarly, on the issue of general subsidy management, he looked positive to

implement reforms that would ensure a more effective and efficient subsidy transfer
from the government to the targeted masses. This is being contemplated to be
achieved through direct transfer on which a committee has been already constituted
under Chairman of UID Nandan Nilekani. The FM sounded confident that some
concrete formula for direct transfer will be achieved by start of next fiscal.

The continuation of disinvestment program with Rs 40,000 crore target for next
fiscal is again positive for markets and overall economy. Broader ownership of
public companies not only enhances government’s revenue but also bring a lot more
accountability and transparency in these organizations. Also, this year the
government cannot afford to under achieve the target as there will be no one time
revenue like that from 3G auction last year.

While the Budget seems to have exceeded expectations of most analysts in terms of
its market and industry friendliness in many areas, there are a still some areas
where the Budget fails to meet expectations. One of the most important misses is
further deregulation of the FDI policies. While the government has been gradually
liberalizing the FDI regime, it still continues to either bar or restrict the entry of
foreign players in some of the key sectors like multi-brand retail, legal services,
defence manufacturing and insurance etc.

Most of the domestic agencies in economic policy arena, including the Planning
Commission and the Commerce Ministry, too are in favour of greater FDI in these
sectors in order to create more capacities and promote competition. While political
oppositions remain, individual cases for most of these sectors are reasonably strong.
For instance, as accepted by the government in Economic Survey itself, the FDI in
retail can help bring massive investment in infrastructure and, with right set of
checks and balances, can go a long way in improving efficiency in distribution and
thus bringing down food inflation through lowering gapbetween farm gate and
retail prices. However, despite the discussion in Survey, no concrete announcements
came in the Budget.

Another key aspect left in grey are subsidy reforms. With crude oil prices surging,
the budgeted targets of various subsidies will be a difficult task to be met. While this
raises concerns on meeting the fiscal deficit targets, some people may also questions
government’s political will to bite the bullet on checking subsidies and
implementing politically difficult reforms. However, we believe that perhaps the
lack of clarity on these issues is more to do with defecting the political criticism for
the moment rather than lack of intention to go for difficult decisions. If an
opportunity arises to put in place some pragmatic polices on subsidies, the
government has kept doors for the same by keeping things in grey at the moment.
 Agriculture

I
ndia is to embark on an overhaul of its struggling farm sector in an effort to
cool rising food prices that have landed the country with the highest inflation
of any leading Asian economy. Pranab Mukherjee, India’s finance minister, put
the rural economy at the heart of a national budget on Monday ,saying ridding the
farm sector of crippling supply bottlenecks would be his “focus” in the coming fiscal
year. A market-neutral budget supporting agriculture, welfare schemes and the
extensions of banking services to more people was designed to display any sense
that the congress party-led government was in drift after a series of high profile
corruption scandals.

The present problems of Indian agriculture are:

1. Scarcity of input water.
2. Shortage of agricultural labour because of NREGS.
3. Mass desertion from farming to non-farm occupations because of expanding
constructions.
4. Shortage of organic manures in spite of rising demand. 
5. Feed problems of diary and farm animals and poultry birds.
6. Mounting overdue of farm loans and failure of cooperatives.
7. Climate related crop failures and outbreak of diseases.
8. Mental trauma of the farm families in combating economic reform.
9. Rising cost of living and deficit family budget.
10. Uncertainly of the cropping system and changing package of practices.
11. Confuse in the channel of marketing aid loss of market during harvesting. 
12. Widening gap of income between farmers and non-farmers.
13. Abrupt rise and fall of agricultural commodities supply because of liberalisation.
14. Transportation problems from farm to main roads.
15. Community ownership system of land adopted in the hills of NE region.
16. Acute problems of drinking water in rural areas.
17. Rising expenditure of socio-cultural activities and overconsumption.
18. Shortage of electric power and cooking fuels in remote villages.
19. Loss of working days due to extreme hot and extreme cold, and road blockade,
etc.  

Key highlights of the budget

* Removal of production and distribution bottlenecks for items like fruits and
vegetables, milk, meat, poultry and fish to be the focus of attention this year.

  * Allocation under Rashtriya Krishi Vikas Yojana (RKVY) increased from Rs.
6,755 crore to Rs. 7,860 crore.

Bringing Green Revolution to Eastern Region

* To improve rice based cropping system in this region, allocation of Rs. 400 crore
has been made.

Integrated Development of 60,000 pulses villages in rainfed areas

* Allocation of Rs. 300 crore to promote 60,000 pulses villages in rainfed areas.

Promotion of Oil Palm

  * Allocation of Rs. 300 crore to bring 60,000 hectares under oil palm plantations.
  * Initiative to yield about 3 lakh Metric tonnes of palm oil annually in five years.

Initiative on Vegetable Clusters

* Allocation of Rs. 300 crore for implementation of vegetable initiative to provide
quality vegetable at competitive prices.

Nutri-cereals
* Allocation of Rs. 300 crore to promote higher production of Bajra, Jowar, Ragi and
other millets, which are highly nutritious and have several medicinal properties.

National Mission for Protein Supplement

* Allocation of Rs. 300 crore to promote animal based protein production through
livestock development, dairy farming, piggery, goat rearing and fisheries.

Accelerated Fodder Development Programme

* Allocation of Rs. 300 crore for Accelerated Fodder Development Programme to
benefit farmers in 25,000 villages.

National Mission for Sustainable Agriculture

* Government to promote organic farming methods, combining modern technology
with traditional farming practices.

Agriculture Credit
* Credit flow for farmers raised from Rs. 3,75,000 crore to Rs. 4,75,000 crore in
2011-12.
* Interest subvention proposed to be enhanced from 2 per cent to 3 per cent for
providing short-term crop loans to farmers who repay their crop loan on time.
 * In view of enhanced target for flow of agriculture credit, capital base of NABARD
to be strengthened by Rs. 3,000 crore in phased manner.
 * Rs. 10,000 crore to be contributed to NABARD’s Short-term Rural Credit fund for
2011-12.

Mega Food Parks

* Approval being given to set up 15 more Mega Food Parks during 2011-12.

Storage Capacity and Cold Chains

* Augmentation of storage capacity through private entrepreneurs and warehousing
corporations has been fast tracked.
* Capital investment in creation of modern storage capacity will be eligible for
viability gap funding of the Finance Ministry.

Financial and Banking Sector

The Following are the indications and impact of the Union budget 2011-2012 on the
investment and financial environment of the nation

Foreign Direct Investment

 Discussions underway to further liberalise the FDI policy.

Foreign Institutional Investors

 SEBI registered mutual funds permitted to accept subscription from foreign

investors who meet KYC requirements for equity schemes.
 To enhance flow of funds to infrastructure sector, the FII limit for investment in
corporate bonds issued in infrastructure sector being raised.

Financial Sector Legislative Initiatives

 To take the process of financial sector reforms further, various legislations

proposed in 2011-12.
 Amendments proposed to the Banking Regulation Act in the context of
additional
banking licences to private sector players.

Public Sector Bank Capitalisation

 6,000 crore to be provided during 2011-12 to enable public sector banks to

maintain a minimum of Tier I CRAR of 8 per cent.
 500 crore to be provided to enable Regional Rural Banks to maintain a CRAR
of at least 9 per cent as on March 31, 2012.

Micro Finance Institutions

 “India Microfinance Equity Fund” of ` 100 crore to be created with SIDBI.

 Government considering putting in place appropriate regulatory framework to
protect the interest of small borrowers.
 “Women’s SHG’s Development Fund” to be created with a corpus of ` 500
crore.

Rural Infrastructure Development Fund

 Corpus of RIDF XVII to be raised from ` 16,000 crore to ` 18,000 crore.

Micro Small and Medium Enterprises

  5,000 crore to be provided to SIDBI for refinancing incremental lending by
banks to these enterprises.
 3,000 crore to be provided to NABARD to provide support to handloom
weaver
co-operative societies which have become financially unviable due to
non-repayment of debt by handloom weavers facing economic stress.
 Public sector banks to achieve a target of 15 per cent as outstanding loans to
minority communities under priority sector lending at the earliest.

Housing Sector Finance

 Existing scheme of interest subvention of 1 per cent on housing loan further

liberalised.
 Existing housing loan limit enhanced to ` 25 lakh for dwelling units under
priority
sector lending.
 Provision under Rural Housing Fund enhanced to ` 3,000 crore.
 To enhance credit worthiness of economically weaker sections and LIG
households, a Mortgage Risk Guarantee Fund to be created under
Rajiv Awas Yojana.
 Central Electronic Registry to prevent frauds involving multiple lending on the
same immovable property to become operational by March 31, 2011.

Financial Sector Legislative Reforms Commission

 Financial Sector Legislative Reforms Commission set up to rewrite and

streamline
the financial sector laws, rules and regulations.
 Companies Bill to be introduced in the Lok Sabha during current session.

Real Estate
Key measures

 Push to broaden affordable housing

o Limit of value of housing classifying as affordable rose from Rs2.0m to
Rs2.5m.
o Mortgages classifying for interest subvention scheme in affordable
housing rose from Rs1.0m to Rs1.5m.
o Should result in 1% interest subvention schemes; priority sector
lending to extend.
o Mortgages taken by EWS/LIG households to be guaranteed.
o Investment linked deduction for developing affordable housing
proposed; details to be worked out.
o Unitech (Unihomes) and HDIL (Virar housing) – benefit
 Implementation of MAT on SEZs
o SEZ developers and units operating in SEZs to be taxed at MAT (20%)
against Nil – Expected move.
o Dividend distribution tax to be imposed on SEZ Developers.
o Small negative earnings impact for DLF.
 No extension of STPI benefits
o Sunset clause in STPI to be effective from April’11 -
o Positive for SEZ developers but largely factored in.

Earnings changes
FY12 EPS % change FY12PE x
DLF 13.7 (1.4) 15.4
Unitech 3.8 - 9.0
HDIL 36.1 - 4.4
Sobha 25.2 - 9.8
Anantraj 15.2 - 5.0
JP Infratech 10.6 - 5.6

Low Cost Housing Loans

If you are looking at purchasing a low cost home, of say Rs 15 to 20 Lakhs, here is
some news to cheer up. Low-cost housing loans of Rs 15 lakh will be eligible for one
per cent interest subsidy, to help increase the demand for such housing. So your
loan for such a house has just got cheaper. The existing interest subsidy is on loans
of Rs 10 lakh where the cost of house is Rs 20 lakh.
Priority Sector Home loans

The home loan limit for the priority sector has been raised to Rs 25 Lakhs from the
earlier Rs 20 Lakhs. Also, the budget liberalised, the existing interest subvention of 1
percent on housing loans of up to Rs 15 lakh where the cost of the house does not
exceed Rs 25 lakh, from the present limit of Rs 10 lakh and 20 lakh respectively.

Direct Implications:

SEZs have been brought under the purview of MAT, which basically diminishes the
benefits that SEZs offer for developers over other commercial real estate asset
classes Raising the priority home loan limit from Rs 20-25 lakh is good news for the
LIG segment, but will do nothing to ease the pain in the metropolitan cities where
real estate prices and therefore demand for affordable housing is highest.
Companies such as Unitech and Ansals, which are rolling out budget housing, will be
benefited by increase of volumes. The 1 per cent interest subvention for home loans
upto Rs 15 lakh from the previous limit of Rs. 10 lakh will come as a relief to home
loan borrowers from the LIG segment.

Indirect Impact and Implications:

Enhancing personal tax exemption limit from Rs 160,000-180,000 is insignificant

and insufficient to make a difference in real estate market terms. Allowing FDI in
mutual funds would have been a blessing if the Government had been more
proactive in allowing REMFs. Stricter measures against black money can potentially
help bring about greater transparency and make the real estate sector more
attractive for foreign investors. The budget made no mention of FDI in retail, which
is great disappointment since the retail sector seriously requires the benefit of
foreign investments into multi-brand retailing.

The budget remained silent on the pressing issue of extension of the STPI
exemptions as well and Sec 80IA and 80IB, which are pertinent to the construction
of residential projects of units sizes below 1200 sq. ft. This is a de-motivating factor
which will further curtail the supply of affordable housing. Raising the corpus of the
Rural Infrastructure Development Fund from Rs 16,000 crore to 18,000 crore would
logically translate into the opening up the real estate potential of hinterland
locations. Much depends on how seriously actual implementation is taken.

The budget’s stated intention to create 150 lakh metric tons of food storage capacity
can potentially catalyze the formation of more retail warehousing. This would
potentially encourage the construction of more modern warehousing facilities, and
benefit the retail supply chain by reducing the cost of business operations via
increased shelf life of perishable products, reduced wastage and increased margins.

Key expectations:

Infrastructure Sector:

 Promotion of PPP projects so as to provide impetus to accelerated

infrastructure development and also provide requisite finance for mega
infrastructure projects.

 Development of rural infrastructure.

 Extension of deadline of 31st March 2012 for notifying Special Economic

Zones (SEZ)

 Reintroduction of tax exemption under section 10(23G) to companies

investing in infrastructure projects on interest income and long term capital
gains earned on investments
 Extension of exemption under section 80IA by another year
 Reduced interest rates on loans availed for infrastructure projects
 Limit available for deduction under section 80CCF for subscription to
infrastructure bonds to be increased and the period of deduction extended
by one more year
 Service tax exemption for roads and airport projects should be extended to
other infrastructure projects,
 specially in the power, water supply, water treatment, sewerage, mining and
gas distribution

Real Estate Sector:

 Re-introduction of tax holiday for affordable housing projects

 An upward revision of the present limit of Rs. 1 Lac for tax deduction of
interest on loan for self occupied house
 Deduction principal repayment of home loans should not be clubbed with
other deductions under section 80C
 External commercial borrowing (ECB), presently available only for
integrated township should be made available to select real estate activities
with appropriate safeguards
 Increasing tax breaks provided to housing finance companies
 Automobile Sector

I ndia’s automobile market is the second-fastest growing market in the world,

next to China, growing nearly 30 per cent in the past year. In 2011-12 however,
the domestic automobile industry is expected to grow at relatively lower rate of
17-18 percent given the increasing cost of ownership caused by hardening interest
rates and rising fuel prices. Having said that, as there has been an increase in
exemption limit of tax slab for individual tax payers form 1.6 lakh to 1.8 lakh, this is
like to lead to increased disposable income for households, thus pushing up 2-
wheeler vehicles sales.

This year, the Budget has decided to give the Indian auto sector enough incentives
to go green, in light of the rising fuel costs. The better news for consumers is that
there’s not likely to be any hike in car prices.

 The Union budget did bring in cheers for auto buyers as the Government has not
changed or hiked the excise duties, which comes as a relief to the auto sector.
Implication: The excise duty on the small cars will remain at 10 per cent, large
cars and SUVs will continue to attract 22 per cent of excise duty.

Also there has been no mention of any special change in small Diesel Engine car
prices as proposed by the “Kirit Parikh committee” in their report.
Implication: It is like a breather for auto-makers like M & M and Maruti as
they are planning to launch many diesel vehicles this fiscal.

The budget has also incentivized the conversion of petrol and diesel vehicles to
hybrid technology like CNG, LPG and electric, by reducing the excise duty on
conversion kits from 10 per cent to 5 per cent. LED lights are also likely to get
cheaper (and can see more use in automobiles), as they now only attract 5 per cent
excise duty according to Budget 2011 proposals for the auto industry.

Large taxis also benefit thanks to Budget 2011. The budget has proposed a refund-
based concession on excise duty to taxis that have a seating capacity not exceeding
13 people, including the driver. This concession is already available to 7-seater taxis.
Implication: This will benefit Force Motors and Tata Motors, besides
Mahindra, Maruti and Toyota.

A concessional rate of excise duty at 10% is being extended to factory built

ambulances and other vehicles retrofitted as ambulances subsequent to their
removal from the factory shall continue to be eligible for refund based concession.

Another key proposal is full exemption from basic customs duty and a concessional
rate of central excise duty of four per cent on batteries imported by manufacturers
for the replacement market.
Implication: an indigenous electric vehicle like the Mahindra Reva, will be
cheaper because it is assembled locally and the battery cost will be lower.

The Budget 2011 has proposed the setting up a National Mission for Hybrid and
Electric Vehicles that will be launched in association with all stake holders, which
include carmakers and battery makers. This mission will strive to provide green and
clean transport to the masses.

To spur research and development on fuel-celled vehicles running on hydrogen cell

technology, the Finance Minister has given such vehicles a concessional excise duty
of 10 per cent only. However, there are no commercially available fuel-celled
vehicles in India yet, though Mahindra and Honda have been doing some R&D on
this locally.

It’s not just green cars. The country also wants green roads, and has exempted bio-
based asphalt in road construction from basic customs duty, as well as exempted
machinery for road construction (road-rollers, tarring machines, tunnel borers)
from the same.

 Overall, the budget hasn’t significantly changed the pace of growth of the
automobile sector, but has tried to steer it in a green direction.
 Our View:

 Fiscal deficit FY 11 projections in previous budget at 5.5% have come out to

be just 5.1% on actual basis.

 Although the actual have come out to be low, the numbers were expected to
be much lower looking at huge one time credits like 3G spectrum auctions.
Projections for fiscal deficit numbers for FY 12 and FY 13 look quite
impressive.

 Market borrowing has been pegged at just Rs 3.43L Crs for FY12 which is
way below the previous years’ numbers. Low borrowing has been a big
positive for the bond street and would help the yields soften over the year.

 Inflows through divestment of Rs. 40,000 crs would help improve fiscal
health – a positive for both equity and debt markets.

 Allowing FIIs to invest in MF schemes a big move. The move is expected to

give depth to the markets. With India providing premium interest rates vis-à -
vis developed economies and many emerging nations, we expect the move to
boost FII inflows into the economy. Reduction of surcharge for corporates
also a big boost for debt mutual funds.

 The government has given a big push towards infrastructure spending by a)

allowing issuance of Rs. 30,000 Crs of tax-free bonds, b) Setting up
disbursement target of Rs. 25,000 Crs for IIFCL, c) extending the Rs. 20,000
exemption limit on investments on infra bonds by 1 year – thus inviting retail
investment into the said sector.

 After a year of scorching food inflation, the government has given much
 deserved attention to investments into agriculture sector. It has raised target
of credit flow to agriculture sector to Rs 4.75 trillion. Government has also
given 3% interest subsidy to farmers in 2011-12. Announced to developed
warehousing/storage facilities upto 4M tones in FY12. And cold storage
chains to be given infrastructure status and thus inviting huge chunk of
institutional investments into the said sector.

 The tax exemption limit for senior citizens should have been hiked to atleast
Rs 3,00,000 looking at the spiraling food inflation and medical costs. The new
tax exemption of Rs. 5,00,000 for senior citizens above 80 years is a big move
and is expected to benefit a huge section of the society.

 Extending service tax on medical checkups and diagnostic services would

make medical services costlier. With the already existing sky-rocketing
prices of medical services, this would be a big drain on the pockets of senior
citizens who avail these services on a regular basis and have very few
sources of income.