Beyond the budget- Much-needed reforms: Mining: Despite having the world's fourth largest coal reserves and

fifth largest iron ore reserves, it is unfortunate that India ends up importing coal and steel (though in small amounts). The government needs to address this mismatch by fast tracking policy reforms such as Mining Bill and Land Acquisition Bill (in the short term, these bills are expected to hit the bottom line , p of some listed companies; but in the long term, these will go a long way in accelerating mining growth), speeding up coal and iron ore mine auctions/allocations and smoother environmental clearances. All these measures will enable India to sustainably grow at a higher overall GDP rate, as mining GDP growth has been the biggest drag on overall GDP growth of late. FDI: In the near term, we do not anticipate any major reforms in sector-specific FDI caps, apart from least contentious FDI limits in aviation, which may be raised. FDI in multi-brand retail, the much-hyped FDI, is not expected to go through anytime soon, considering the political implications of the recent state elections (more assertive state players are not expected to support UPA in its bid to push this long-stalled reform). FDI in insurance is also not expected to see the light of the day, as deliberations are going on to resolve the contention of the opposition that opening up the insurance sector will expose our till now safeguarded financial system to global market uncertainties. Conclusion:- Fiscal discipline is the key expectation from this budget: With inflation and interest rates expected to come down, Indian corporates are poised for a better performance in FY2013 over FY2012, which saw high inflation as well as high interest rates dragging the bottom line. Markets will be more than happy even if the government is able to deliver only on the fiscal consolidation front in this budget, as it will lower interest rates and aid the declining trajectory of inflation. However, it will be a bonus for markets if the government takes some positive strides towards key policy reforms in the mining and infrastructure sectors, which are vital for India's sustainable and healthy growth. Sector-wise Expectations: Automobile: The automotive sector, especially the passenger vehicle segment, witnessed slowdown in demand during 9MFY2012 on account of rising interest rates and higher fuel prices. As a result, overall growth expectation for the automotive sector has been lowered to ~12% for FY2012E, with passenger vehicles, commercial vehicles and two-wheelers expected to grow by ~5%, ~16% and ~14%, respectively. While interest rates are expected to moderate going forward, providing relief to automakers, the likely increase in excise duty to rein in the widening fiscal deficit presents challenges to demand growth and pricing power of automakers in FY2013. Rising petrol prices and widening price differential between petrol and diesel led to ~37% yoy growth in diesel car sales during 9MFY2012. With a significant increase in sales of diesel cars and demand for imposition of additional tax on diesel cars by the Oil Ministry and Centre for Science and Environment, we expect additional excise duty on diesel vehicles in Union Budget 2012-13. Kirit Parikh Committee has recommended additional excise duty of `81,000/vehicle on diesel vehicles. The sector, however, will stand to benefit from indirect sops such as higher outlay for the rural sector (driving consumer spending) and increased budgetary allocation for infrastructure spending (increase in road freight). Overall, we expect Union Budget 2012-13 to be Negative for the Automobile Sector. Banking: FY2012 has been tough for the Indian economy, more so for the banking sector, which faced concerns ranging from declining credit demand to rising NPAs. Persistent inflation pressures kept interest rates elevated and liquidity in deficit mode for the entire fiscal year. Accordingly, the most keenly watched outcome for the banking sector in the forthcoming budget would be the government's initiatives towards curbing the currently high fiscal deficit. Credible signs of fiscal consolidation are expected to boost the chances of early commencement of monetary easing and consequent lowering of interest rates in the system. The government, in light of capital constraints being faced by the banking sector and the upcoming Basel-3 norms, is expected to earmark a healthy allocation for capital funds in public sector banks. Capital infusion plans for public sector banks have already commenced, however more clarity on the process is expected to be provided in the budget. The recapitalization is expected to aid banks in shoring up their tier-I ratios and maintain their pace of growth going into the next fiscal. Another positive that could emerge from the budget is the allowance of provisions for NPAs as an expense for calculating tax liability and not just full write-offs. Currently, tax benefits are restricted to the extent of 7.5% of gross total income and 10% of aggregate average rural advances made by banks. Amidst the backdrop of ongoing liquidity constraints, we also expect the banking sector's long-time budget wish list of reduction in lock-in period for tax-saving FDs to three years from five years, similar to an ELSS becoming a reality in the forthcoming budget. Further, the banking community has requested for interest income from fixed deposits with tenure of three years and above to be tax exempted, bringing them at par with fixed maturity plans with respect to tax treatment. Capital Goods: During the past few quarters, the capital goods sector has been bearing the brunt of slowdown in global economies and sluggish domestic industrial growth. A number of factors have led to this domestic slowdown; these are structural (policy inaction and unavailability of resources like land and fuel) and cyclical (overcapacity, high

interest rates, inflationary pressures and high commodity prices) in nature. Hence, the number of projects that have been stalled and cancelled has increased. Similarly, there has been an uptick in the number of shelved projects in recent times, thus leading to abysmal order inflow for capital goods companies. The slowdown in order inflows (especially in the BTG space) has led to downward revisions in order guidance from front-line companies. Besides, competition from Chinese players remains a threat in the already poor ordering scenario in the BTG space. Hence, domestic power equipment manufacturers have been demanding imposition of customs duty to ensure a level playing field, while IPP developers have been lobbying for cheaper imports. At present, power generation equipment for projects below 1,000MW bears a duty of 5%, while there is nil duty on equipment for projects over 1,000MW. We expect the government to impose a duty of 14-19% on imported power equipment. Additionally, fund allocation to various programs, including APDRP and RGGVY, would continue to provide a fillip to transmission line players. Overall, we expect the Budget to be Positive for the Capital Goods Sector. Cements: The cement sector is currently plagued with significant demand-supply mismatch, which has resulted in low utilization levels. However, in this oversupply scenario, companies have been successful in maintaining their margins by hiking prices (in-line with the increase in operating expenses) due to production discipline. Currently, the sector eagerly awaits demand pick-up, a hint of which was visible in 3QFY2012 when demand grew by 10.3% yoy, much better than 3.1% yoy growth recorded in 1HFY2012. Cement demand will get the much needed impetus if the government announces new schemes that would involve an additional spend on infrastructure projects. Other major announcements expected in the budget, which would affect the cement sector, include hike in excise duty from the current level and reduction in import duty on coal and petcoke. However, we believe the impact of these measures will ultimately be passed on to the end-consumer. Overall, we expect the Budget to be Neutral for the Cement Sector. FMCG: FMCG players posted improved financial performance in 9MFY2012, led by volume growth and price hikes, which offset higher cost pressures to a large extent. Further, acquisitions made over the past few years have boosted performance of FMCG players. Major announcements expected in the budget affecting the FMCG sector are (i) hike in overall excise duty rates from the current 10%; (ii) hike in excise duty on cigarettes. Overall, we expect the Budget to be Negative for the FMCG Sector. Infra: In the past 12 months, the infrastructure sector has been plagued by severe headwinds - depleting order books, high interest rates and policy paralysis, resulting in execution slowdown and shrinking bottom line of most infrastructure companies. Although the past year started with a renewed focus on infrastructure spending (48.5% of the total planned expenditure was allocated to infrastructure in 2011-12 Budget, 23.3% higher on a yoy basis), new projects could not take off due to delays in approval and decision making. Moreover, new project launches have dropped by 32% in 2011-12, owing to lack of clearances and no clarity on policy reforms (in particular the power sector) for various sectors. Hence, expectations from the budget, which marks the beginning of the Twelfth Five Year Plan, are high. It is quite evident that in order to sustain a healthy GDP growth rate, equivalent investment in infrastructure is required. Hence, the government will continue to focus on higher spending on the sector, and we expect some announcements to come through, viz. higher allocation to flagship programs of Bharat Nirman, JNNURM, APDRP, AIBP and NHDP. Land acquisition and environment clearance continue to remain the two major bottlenecks hampering the timely execution of projects. Hence, any further clarity on Land Acquisition Bill would lend a fillip to the sector. Besides allocating higher funds for the sector, the budget should also focus on funding for infrastructure projects by channelizing long-term, low-cost funds into the sector. Sources of these funds could be creation of corporate debt market, dedicated infrastructure debt fund, tapping insurance and pension funds and attracting foreign investment, which would solve the current asset-liability mismatch problem faced by banks. Further, incentives and tax breaks would enhance infrastructure investment. Overall, we expect the Budget to be Positive for the Infrastructure Sector.