Union Budget Preview 2011-12

‘Balancing between growth and inflation’

The Union Budget 2011-12 will revolve around fiscal consolidation, inflation control,
administrative checks and inclusive growth. We do not anticipate any major roll-back of
stimulus (indirect taxes) since some concerns lurk about pace of economic growth in 2011.
Further, given the upcoming elections in key states, the Government will, in all likelihood,
follow certain populist measures. Notwithstanding fiscal pressures, we believe the Budget
presents a golden opportunity to the incumbent Government to send a strong signal on the
policy front. All-in-all, the Budget is expected to be a mixed one with a marginal positive bias.

Direct tax: Raising of personal income tax slab for lower income group
Inflation pressure is resulting in low income groups spending a bigger share of their wallet on food and
other basic necessities. The Government will look to appease this class of people, especially with key
states going into elections soon. We expect an increase in personal income tax exemption limit, for the
lower income bracket from Rs160,000 to Rs175,000-180,000. The Government can afford this largesse
given last year’s buoyancy in direct tax collection. Corporate taxes, on the other hand, are likely to
compensate for the rise in slab in personal income tax. This would mean that the industry demand for
lowering the tax rate, removing the surcharge or reducing MAT rate will not be met and rates will be left
unchanged.
Indirect tax: No major change; tweaks in some components
The Government had partially rolled back excise duty last year (it had cut duties as a stimulus a couple of
years ago), but is unlikely to do so in the upcoming Budget, especially when concerns loom about a
possible percentage point drop in GDP growth and when industry is in investment mode. Roll-backs in
excise would be selective in our opinion. We see excise duty hike specific to diesel cars and SUVs, on
grounds that it provides subsidy to an audience not needing it. Similarly, excise duty may be hiked for
tobacco.
To tackle rising inflation, we expect excise duties on petroleum products or customs duty on crude and
petrochemicals to be cut. Certain countervailing duties may also be cut to lower value of imported items.
There is a view that service tax rate may be hiked to eventually converge with GST in future. However, in
our view, a better approach would be to widen the scope of the tax to include all services (with some
exemptions) while keeping rates unchanged this year. The Budget may not be able to give a detailed
roadmap on GST, given opposition from states.
Non-tax revenue: Amnesty scheme for black money holders
The Budget will possibly see announcement of an amnesty scheme to bring back to India some of the
black money residing in foreign banks. While such schemes raise a moral issue since they disadvantage
honest tax payers, but they will certainly help the fiscal position greatly. Even if the minister gives it a
miss, there is a strong possibility that the scheme is introduced during the course of the year and add to
revenues in 2012.
Social sector spending to witness healthy rise in allocations
We believe the Government will focus on strengthening existing schemes rather than introducing new
ones. Flagship projects like Bharat Nirman, Rajiv Awas Yojana, Midday Meal scheme and Right to
Education will see good increase in allocation. Healthcare is another area where expenditure will likely
rise. On the NREGA front, the focus would be on preventing inefficiencies and leaks in the system rather
than big rise in allocation.
Subsidy burden to remain elevated
It can be expected that the subsidy on food and fertilisers will continue to mount. On the oil subsidy front,
we see the Government tackling this issue by lowering duties rather than hiking subsidies substantially.
The two percent subvention scheme on export credit is scheduled to expire on March 31, 2011. The
subvention will either not be extended or will see a lower rate.
Strong agriculture focus
Ineffective public distribution is a major reason for food inflation. The Budget is likely to allocate funds for
effective warehousing and distribution of agricultural products. Administrative controls are also expected
to be put in place to check on hoarding of any produce. Common market for agricultural products and
reduction in Mandi tax are areas which could be addressed. We also expect allocation for irrigation to rise
meaningfully.

February 23, 2011

Union Budget Preview 2011-12

Infrastructure issues to be addressed partly

The Government will partly attempt to resolve funding constraints in infrastructure. Funding problems
have resulted in a major slowdown in order flow in the last 6-8 quarters. Capex uptick is a must to
sustain the growth rates in GDP. One way to channelize money flow into the power segment, which
accounts for a chunk of the infra capex, is to remove withholding tax on overseas investment. There is a
case to allow NBFCs and banks to raise tax free infrastructure bonds to ease funding to this sector.
Fiscal deficit: Will amnesty replace the 3G windfall?
The revised estimates for 2011 would reveal a lower fiscal deficit when compared to Budget estimates on
account of higher tax revenues last year and windfall 3G auction gains. For 2012, the fiscal deficit could
be around 4.7-5% in case the amnesty scheme is Budgeted for and closer to 5.5%, in case of non
inclusion of the voluntary disclosure scheme to bring back black money.
We see amnesty scheme, agriculture focus and easing of infra funding issues as the key addressable
areas, which could enthuse the equity market. A complete excise duty roll-back by 2% and higher fiscal
deficit target of 5.5% would be major negative surprises, in case announced. Jain irrigation, L&T, BGR
Energy, Everonn Education, Jindal Saw, SBI, GSK Consumer are our top Budget picks. ITC and Tata
Motors could be the top misses from the budget.
Budget at a Glance
Rs bn 2008-2009 A 2009-2010 BE 2009-2010 RE 2010-2011 BE
1. Revenue Receipts 5,403 6,145 5,773 6,822
2. Tax Revenue (net to Centre)
Gross Tax Revenue 6,053 6,411 6,331 7,467
Corporation tax 2,134 2,567 2,551 3,013
Income tax 1,060 1,129 1,250 1,206
Other taxes and Duties* 149 4 69 81
Customs 999 980 845 1,150
Union Excise Duties 1,086 1,065 1,020 1,320
Service Tax 609 650 580 680
Taxes of the Union Territories 15 16 16 17
Less- NCCD transferred to the NCCF / NDRF 18 25 32 36
Less States' Share 1,602 1,644 1,648 2,090
Centre's Net Tax Revenue 4,433 4,742 4,651 5,341
3. Non-tax Revenue 969 1,403 1,122 1,481
4. Capital Receipts (5+6+7) $ 3,437 4,063 4,443 4,265
5. Recoveries of Loans 61 42 43 51
6. Other Receipts 6 11 260 400
7. Borrowings and other Liabilities* 3,370 4,010 4,140 3,814
8. Total Receipts (1+4) $ 8,840 10,208 10,215 11,087
9. Non-plan Expenditure 6,087 6,957 7,064 7,357
10. On Revenue Account of which 5,590 6,188 6,419 6,436
11. Interest Payments 1,922 2,255 2,195 2,487
12. On Capital Account 497 769 644 925
13. Plan Expenditure 2,752 3,251 3,152 3,731
14. On Revenue Account 2,348 2,784 2,644 3,151
15. On Capital Account 405 468 508 580
16. Total Expenditure (9+13) 8,840 10,208 10,215 11,087
17. Revenue Expenditure (10+14) 7,938 8,972 9,064 9,587
18. Capital Expenditure (12+15) 902 1,236 1,152 1,500
19. Revenue Deficit (17-1) 2,535 2,827 3,291 2,765
% of GDP (4.5) (4.8) (5.3) (4.0)
20. Fiscal Deficit [16-(1+5+6)] 3,370 4,010 4,140 3,814
% of GDP (6.0) (6.8) (6.7) (5.5)
21. Primary Deficit (20-11) 1,448 1,755 1,945 1,327
% of GDP (2.6) (3.0) (3.2) (1.9)
* Includes draw-down of Cash Balance, $ Does not include receipts in respect of Market Stabilization Scheme.

Strategy Note 2
Union Budget Preview 2011-12

Sectoral expectations

Automobiles
Expectation Probability Implications
Increase in excise duty by 2% Low
Levy of special excise duty on diesel vehicles High Negative for Tata Motors and M&M

Banking
Expectation Probability Implications
Banks to be allowed to raise long-term funds through Positive for the sector as it would address the ALM
High
issue of tax-free infrastructure bonds (like IFCs) issues in infrastructure funding

Allocation of capital for infusion into PSU banks as in the

High Positive for small PSU Banks
2010 Budget (Rs165bn)
Increase in FDI limit for the insurance sector from current
Low Positive for banks/NBFCs having insurance ventures
24% to 49%
Government’s net market borrowings to be higher than Negative for the sector as this would put significant
High
FY11 pressure on yields amid tight liquidity
Positive for the sector as it would address the ALM
Raising limit of refinancing from IIFCL Medium
issues in infrastructure funding

FMCG
Expectation Probability Implications
Continued spending for development of rural sector High Positive for all FMCG companies
Increase in excise duty by 2% Low
Increase in excise duty on cigarettes High Negative for cigarette companies
Increase in MAT Medium Negative for companies paying MAT
Abolition of excise duty on biscuits Low Positive for biscuit manufacturers

Hospitality
Expectation Probability Implications
Positive for leading hotel chains like Indian Hotels, Hotel
Infrastructure status u/s 80IA for the industry Low
Leela & EIH

Information Technology
Expectation Probability Implications
Extension of Tax exemptions under sections 10A and Positive for all ; medium and small sized software
Medium
10B (STPI) for one more year. companies to benefit more than large companies
Clarity on the taxation of ‘right-to-use’ software as to
Positive for all software services and products
whether services tax and/or VAT has to be applied to Medium
companies
the same.
Positive for all ; medium and small sized software
Partial roll back of MAT for STPs Low
companies to benefit more than large companies
Significant increase in allocation for education High Positive for education companies

Strategy Note 3
Union Budget Preview 2011-12

Infrastructure
Expectation Probability Implications
Increase in infrastructure spending through higher
High Positive for the sector
allocation to various schemes
Steps towards expediting various clearances and
High Positive for the sector
eliminating bottlenecks for infrastructure projects
Allowing commercial banks to issue tax-free
High Positive for the sector
infrastructure bonds
Other initiatives towards improving availability of long-
Medium Positive for the sector
term funding for infrastructure projects
Positive for the sector as it would address the ALM
Raising limit of refinancing from IIFCL Medium
issues in infrastructure funding
Extension of benefits u/s 80IA and 80IB Low Positive for the sector

Metals & mining

Expectation Probability Implications
Decrease in customs duty on coal/coke Medium Positive for steel manufacturers
Increase in export duty of iron ore Medium Negative for Sesa Goa, positive for steel manufacturers
Introduction of Mining Bill Medium Negative for steel manufacturers and miners
Decrease in customs duty on HRC Low Negative for steel manufacturers

Oil & Gas

Expectation Probability Implications
Reduction in customs duty on crude oil from 5% to Nil High Negative for ONGC, Oil India, Cairn, Positive for OMCs
Restoration of 7-year tax holiday for Gas production Medium Positive fo RIL

Pharma & Healthcare

Expectation Probability Implications
Negative for the Pharma companies deriving larger % of
Extension of the list of Drugs under DPCO Low
sales from the drugs under DPCO
Change in transfer pricing policy (API attracts 10% Good for the companies having vertical integration
Medium
excise duty whereas formulations 4%) (Lupin, Dr Reddy, Sun Pharma, IPCA, Unichem, etc)
Infrastructure status to Healthcare Medium Good for Apollo Hospital and Fortis
Good for Dishman, Cipla, Divis, IPCA, Unichem, Torrent,
Extension of tax exemption beyond FY11 in EOUs Medium
etc
Exemption of central excise duty on physician samples Low Good for overall Pharma Sector
Extension of weighted deduction on R&D on all research
Low Good for overall Pharma Sector
related services (currently in-house R&D at 200%)

Retail
Expectation Probability Implications
Multi-brand retail for opening up FDI Medium Positive

Telecom
Expectation Probability Implications
Extension of 100% tax exemption u/s 80IA to 10 years, in
To benefit new license holders and 3G spectrum winners
line with other infrastructure providers; 3G capex eligible Low
such Bharti, Rcom. Idea etc
for 80IA tax benefits
Extension of tax benefits u/s 80IA to independent
Low Positive for tower companies
tower/infrastructure providers

Textiles
Expectation Probability Implications
TUFs scheme extended High

Strategy Note 4
Recommendation parameters for fundamental reports:
Buy – Absolute return of over +10%
Market Performer – Absolute return between -10% to +10%
Sell – Absolute return below -10%

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