TOTAL BUDGET REVIEW BY BENCHMARKERS

 

SECTOR WISE ANALYSIS OF BUDGET

AUTO COMPONENTS

PROPOSAL

Excise duty on auto components and tyres increased from 8% to 10%. Interest subvention of 2% on pre-shipment credit for small and medium exporters extended to 31 March 2011.

IMPACT

No significant impact on the industry. Increase in excise duty on tyres will be passed on fully to original equipment manufacturers (OEMs) and replacement segments. A rise in excise duty for the auto component sector may be passed on to automobile manufacturers. However, if absorbed, it will be offset by increase in demand. The interest subvention of 2% will have a marginally positive impact for small and medium exporters engaged in exports of auto components.

AUTO/ TWO- WHEELER

PROPOSALS

Excise duty up from 8% to 10%; excise duty on big cars, sport utility vehicles and multi-utility vehicles raised from 20% to 22%; additional duty component retained at Rs15,000 for cars of 1,500-1,999cc engine capacity and  Rs20,000 for passenger vehicles with engine capacity above 2,000cc; excise duty of Re1 per litre on fuel; customs duty 5% higher; allocation for road development up 13%; weighted deduction on in-house R&D spending raised from 150% to 200%; 4% excise duty on electric vehicles; critical parts and assemblies of such vehicles exempted from basic customs duty, special additional duty; countervailing duty of 4% imposed.

IMPACT

Higher excise duty rate is likely to be passed on to consumers and is partially negative. But this is likely to be compensated by exemptions on personal income-tax rates. The government’s thrust on rural and infrastructural development remains positive. The increased weighted deduction rate for in-house R&D will encourage higher R&D allocations.

BANKING/ NBFCs

PROPOSALS

RBI to consider giving banking licenses to private sector companies /non banking finance companies. Government to recapitalise select public sector banks by Rs16,500 crore; additional capital to regional rural banks. Increase in interest subvention from 1% to 2% for farmers who pay as per repayment schedule, extension of debt waiver and debt waiver for farmers extended to 30 June.

IMPACT

Competition is likely to further intensify. Recapitalising public sector banks is likely to help around one third of these banks. The additional interest rate subvention schemes to encourage prompt repayment by farmers should improve credit culture. But b, the government’s borrowing programme for FY11 remains sizeable and if the credit offtake is more than 15% - 16%, bond yields may rise and thereby impact treasury profits.

CAPITAL GOODS/ ENGINEERING

PROPOSAL

Increased allocation for power and infrastructure sector; excise duty cut from 8% to 4% on compact fluorescent lamps (CFL) and LED lamps; 5% concessional import duty on inputs for photovoltaic, solar panels; excise duty waived on photovoltaic, solar panels, and on inputs required in rotor blades.

IMPACT

Increased allocation and long-term funding availability for power and infrastructure projects will induce more investment and thereby benefit equipment manufacturers. Focus on energy efficiency and excise duty reduction for CFL will result in improved demand prospects for players in the lighting segment. Concessional import duty and waiver of excise duty on photovoltaic and solar panels as well as lower excise duty on inputs for rotor blades will benefit photovoltaic cell and wind turbine generator manufacturers, respectively.

CEMENT

PROPOSAL

2% excise duty hike.

IMPACT

Increase in outlay on roads, subventions on housing and focus on infrastructure development should boost demand for cement. Increased rural income under National Rural Employment Guarantee Scheme will also boost rural housing demand and, in turn, demand for cement. However, increase in excise duty and imposition of Rs50 per tonne cess on imported and domestic coal will increase costs, which will difficult to pass on to consumers given the current over supply situation.

CONSTRUCTION

PROPOSAL

Higher allocation for roads, railways, housing, urban infrastructure sectors; India Infrastructure Finance Co. Ltd (IIFCL) to continue take-out financing; minimum alternate tax (MAT) increased from 15% to 18% of book profits.

IMPACT

The increased outlay and continued take-out financing and refinancing plans of IIFCL, and availability of funds through long-term infrastructure bonds, will aid in faster execution of infrastructure projects. MAT increase will have negative impact on players with operational build-operate-transfer projects.

DRUGS/ PHARMACEUTICALS

PROPOSAL

Increase in weighted reduction from 150% to 200% on expenditure incurred on in-house research and development (R&D) activities, and from 125% to 175% on activities outsourced to specific institutions. Partial rollback in excise duty from 8% to 10% (to impact raw material costs).

IMPACT

The increase in weighted reduction on R&D activities is a positive and will continue to support higher investments by Researchled pharmaceutical companies. It’s a positive for contract research organisations as well. The increase in excise duty for raw material will impact the cost structure. Also, an increase in petrochemical prices may impact some of the basic raw material (intermediate) costs, impacting margin. The increase in MAT rate, however, is going to increase tax outgo for few companies that are currently paying lower taxes.

ELECRICITY/POWER

PROPOSALS

Increase in allocation to power sector at Rs5,130 crore (increase of 152%); increase in available long term funding through refinancing from India Infrastructure Finance Co. Ltd; increase in allocation to renewable energy sector at Rs1,000 crore (increase of 61%); formation of coal regulatory authority and national clean energy fund; clean energy cess of Rs50 per tonne on both domestic and imported coal; increase in minimum alternate tax (MAT) rates from 15% to 18%.

IMPACT

Increased allocation to power sector will be positive for central public sector undertakings. Increase in allocation and excise duty benefits are clear positives for firms in renewable energy segment. Coal regulatory authority will bring regulatory clarity and introduction of competitive bidding mechanism for allotment of coal blocks will further enable increased participation from private firms. The increase in MAT and cess on coal are a negative as they will negatively impact profitability of merchant power plants, where costs are not a pass through.

HOTELS/TOURISM

PROPOSALS

Benefits of 100% investment linked tax deduction on capital expenditure (excluding land, goodwill and financial instrument) for building and operating a new hotel (commissioned after 1 April) of two star category and above, extended from select locations to across the country.

IMPACT

Bringing the hotel industry within the preview of investment linked tax deductions could promote balanced (across categories) incremental investments in fresh inventory, reducing the supply–demand gap in the country. Benefits of increased government thrust on infrastructure/roads to trickle down to the tourism industry over the medium to long term. The increase in MAT rates will, however, have an adverse impact.

HOUSING

PROPOSAL

Rs1,270 crore allocated under Rajiv Awas Yojana; allocation for housing and urban poverty alleviation raised to Rs1,000 crore; 1% interest subvention on housing loan up to Rs10 lakh extended to 31 March 2011; allocation under Indira Awas Yojana increased.

IMPACT

Allocation under Rajiv Awas Yojana will aid slum redevelopment programmes. Moreover, extension of the scheme of 1% interest subvention on housing loan up to Rs10 lakh (where the cost of the house does not exceed Rs20 lakh) will continue to provide a boost to affordable housing. On the rural front, increase in allocation under the Indira Awas Yojana to Rs10,000 crore will help reduce the prevailing shortage in rural housing. However, these allocations will not significantly impact the organised housing sector.

INFORMATION TECHNOLOGY

PROPOSAL

Minimum alternate tax (MAT) rate has been increased from 15% to 18% while surcharge has been reduced from 10%  to 7.5% for Indian companies.

IMPACT

The impact of the Union Budget 2010-11 on the IT sector is negative. The increase in MAT rate will offset any  benefits resulting from the decrease in surcharge and will affect the players’ cash flows. The impact of MAT will be higher for tier II players compared to tier I players.

OIL AND GAS

PROPOSAL

Basic customs duty of 5% restored on crude petroleum, 7.50% on petrol and diesel and 10% on other refined  products. Central excise duty on petrol and diesel hiked by Rs1 per litre each.

IMPACT

The revised duty structure will marginally increase the import duty differential for refineries, leading to a marginally higher refining margin, which is a positive for standalone refineries, including greenfield projects currently being set up. Higher import duty and excise duty is negative for oil marketing companies as gross under-recoveries will increase. But the post budget hike in fuel prices will largely negate the impact. Increase of MAT is marginally negative

for some large oil and gas companies and new refinery projects. Five percent import duty on crude oil is positive for upstream companies, as they will be benefited in an import parity based pricing regime.

ROADS

PROPOSALS

Budget allocation for road projects increased by 13.5% to Rs19,894 crore in 201011, incremental disbursement of Rs25,000 crore over the next three years by India Infrastructure Finance Company Ltd ( IIFCL) under its takeout financing scheme and import duty exemption for specified machinery used in construction.

IMPACT

The increased outlay will favorably affect companies involved in road construction. The takeout financing through IIFCL would facilitate the availability of long term capital. The increase in MAT rate from 15% to 18% will have an adverse impact. Excise duty hikes in cement, petrol/diesel will also push up costs for the sector. Import duty  exemption for specific equipment will provide some respite.

TELECOM

PROPOSALS

MAT increased from 15% to 18%. Exemption from basic, countervailing duty (CVD), and special additional duty (SAD) to include battery chargers, headphones; Exemption of SAD extended to mobile phones not imported in prepackaged form.

IMPACT

The impact on the telecom services sector is negative. The increase in MAT will negatively impact the profitability of telecom services providers. The duty exemptions will result in further reduction in mobile handset prices. However, the impact will be marginal as mobile handsets and accessories are already very affordable.

TEXTILES

PROPOSALS

The exemption from basic, countervailing duty (CVD), and special additional duty (SAD) on components and accessories of mobile

handsets has been extended to include battery chargers and headphones. The government has also extended the exemption of SAD to mobile phones that have not been imported in prepackaged form. MAT increased from 15% to 18%.

IMPACT

The increase in MAT will negatively impact the profitability of telecom services providers. The duty exemptions will result in further reduction in mobile handset prices. However, the impact will be marginal as mobile handsets and accessories are already very affordable.

BY-

BENCHMARKERS

RACHANA JAIN

VIJAY POPAT

NITA CHANGANI

SONAM JAYASWAL

RAHUL AGARWAL

WASIM AHMED

VIJAY POPAT

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AFTER AFFECTS OF BUDGET

Inflation is the greatest danger to government’s growth estimates

Among industrial countries, India was the one country in Asia, which has a relatively high debt to GDP ratio, and the ratio has been going up in the last couple of years

 

The Budget is over and things look satisfactory on the fiscal front. But the greatest danger to the government’s economic growth estimates comes from inflation, which is now not restricted to food and commodities alone, says Michael Spencer, chief economist and head of global markets (Asia) at Deutsche Bank AG. Edited excerpts from an interview:How do you rate the Budget?
It hit most of the points we were expecting. Certainly, in terms of financial data it was bang in line with our expectations. We welcome the transparency the government has given to the medium-term fiscal consolidation strategy. This was needed particularly when you look at the broader perspective; when there is growing concern around the world about sustainability of government finances. Among industrial countries, India was the one country in Asia, which has a relatively high debt to GDP (gross domestic product) ratio, and the ratio has been going up in the last couple of years.

Graphic: Ahmed Raza Khan/Mint

Where we would have liked to see a little bit more discussion on was around the strategy for reducing fuel subsidies, for example, and food subsidies. There, I gather, it’s more a legislative process.Do you think the Budget is inflationary?
I don’t think the Budget is inflationary. You are raising taxes and increasing fuel prices. That gives you a temporary increase in prices. But the fact is that the government is scaling back its role as an economic agent.
(But) I think that there are real concerns about inflationary outlook in India. There is tremendous optimism (in India) about the demand side of the equation. And a lot of concern about whether supply can keep pace with demand, whether it be financial services or power generation. Not just in infrastructure, which most investors recognize as a sort of ongoing constraint, but in industry and services. That, to be honest, we do not hear anywhere else in world, certainly nowhere else in Asia. So, I do think there’s a little bit excess optimism that this is just about food prices, commodities…and by the end of the year, inflation will be clearly falling. But it is not clear to me that inflation is going to fall as fast as people expect.
Are you concerned about the government’s expenditure targets being a bit optimistic?
If we have concerns, it’s more on the revenue side. There’s generally a consensus of sorts in India (about growth), which we think is too optimistic. As we look through the last couple of quarters, inflation seems to have imposed more of a drag on consumption than people were expecting, even relative to our own expectation in the fourth quarter of the calendar year (2009). The numbers were a few tenths below our forecasts. On the expenditure side, what disappointed was consumption. In an environment where we think inflation is going to be 8.5% by the middle of the year and (is) probably not falling (as) quickly as people expect, there is going to be a bit more subdued consumption.
So, to the extent that India has suffered a pure supply shock to food for example, that hopefully will come off. But we have a real concern that core inflation is picking up.
Has the government done enough to curb inflation?
I expect the Reserve Bank (of India) will. There might be a couple of reserve requirement increases and we are looking at rates going up 125 basis points this year. There will be more rate hikes in 2011. So initially, real interest rates might be declining, but by the end of the year it’s clear (that) monetary policy will become measurably tighter.
 

VIJAY POPAT

CONTROVERSY OVER UNION BUDGET 2010

Political storm brews over fuel price hikes

Here are some of the issues behind the storm...

The government faces strong political opposition over a hike in fuel prices announced in last week’s Budget.
Here are some of the issues behind the storm.
Why does the government want to raise fuel prices?
The government raised petrol prices about 6% and diesel by 7.75% in last week’s Budget to help increase revenues and cut a budget deficit at a 16-year high.
India sets retail prices for fuel below market rates to protect citizens from higher prices and manage inflation, a subsidy that adds to New Delhi’s fiscal burden.
A recent government panel report urged freeing controls over automotive fuels, although the government has not taken any action on this politically charged, wider issue.
State oil marketing firms, partially compensated for selling fuel at subsidised rates, said prices had to be increased for them to protect their profits.
Cooking gas and kerosene prices — far more politically sensitive than motor fuel — were not raised in Friday’s Budget.
The government says the hikes will boost inflation by around 0.4%. Inflation is already at nearly 9%, the highest in more than a year.
Who opposes the rise?
The main opposition has come from the government’s two most important coalition allies, the Trinamool Congress and DMK parties.
Their leaders say the rise will hurt the poor most. Both parties are due to face state elections next year.
The ruling Congress party depends on the two groups, both regional parties, to help it reach a parliamentary majority of 272 seats. The Congress party has 208 seats. Trinamool has 19 and the DMK 18.
The main opposition group, the Hindu-nationalist Bharatiya Janata Party, opposes the hike. There have also been protests in some Indian states.
Several key Congress members are also reported to be pressing for a roll back, worried about losing support among poor voters.
Who supports the rise?
Prime Minister Manmohan Singh, one of the architects of the pro-market reforms of the 1990s, has said he will not roll back the hikes. Finance minister Pranab Mukherjee supports him.
What will likely happen?
The government will likely hold on to power despite the controversy. Both Trinamool and DMK benefit too much from being government allies. Both control powerful ministries they would like to keep.
The controversy is a test of how far the government can push reforms to liberalise state-regulated sectors like fuel. Stronger and growing opposition to the move could make the government more cautious in moving ahead with further reforms, such as price liberalisation in other areas.
Key to the outcome may be what Sonia Gandhi, head of Congress and India’s most powerful politician, thinks. She has a history of supporting pro-populist policies aimed at benefiting the poor, the base of support for the Congress party.
While Singh and Gandhi are close, they do sometimes have opposing political views. Gandhi is focused on winning elections. Singh, 77, is more concerned with securing his legacy in India and probably will not run in the next general election.
It is unlikely Singh will give in. But there could be a messy solution, with a partial rollback that allows both sides to claim victory. Expect a lot of political noise in the coming days.

VIJAY POPAT