Union Budget 2013-14

While Fiscal Deficit in line with target, underlying revenue and expenditure assumptions to be tested over the course of the year
February 2013 ICRA RESEARCH SERVICES

OVERVIEW
The Union Budget for 2013-14 has been presented amidst a particularly challenging macro-economic scenario. While the Government of India (GoI) has taken concerted efforts to arrest fiscal slippages and also announced some bold policy measures in the recent past, growth continues to slow alarmingly; the Current Account Deficit (CAD) remains unsustainably high; the investment cycle is showing no signs of revival; and inflation, despite some moderation, remains well above the comfort zone. With the Finance Minister having clearly stated the Governments commitment towards fiscal consolidation, what was of interest was the fineprint behind the estimated fiscal deficit in terms of the expenditure and revenue policies adopted to achieve the same. Other areas of interest were the steps designed to revive investment spending; the Governments commitment to some long awaited reforms like the introduction of the Goods and Services Tax (GST); and the potential impact of populist measures, in particular, the National Food Security Act. While, as expected, the fiscal deficit target for 2013-14 has been adhered to in the Budget Estimates (BE), the underlying assumptions of a 13.4% economic growth in nominal terms; sharp pickup in non tax revenues from telecom and disinvestment proceeds; and containing the subsidy bill at Rs. 2.2 trillion may be tested over the course of the year. Whether the allocation for fuel subsidies is adequate would critically depend on the global prices of crude oil, the exchange rate and regular revision of diesel prices by the oil marketing companies. With fertiliser subsidy in 2012-13 RE lower than the estimated subsidy requirement for the ongoing fiscal, clearing the backlog would make it difficult to restrict fertiliser subsidy with the budgeted amount in 2013-14. The budgetary provision for a portion of the additional funding required for the implementation of the National Food Security Act is welcome, although the actual requirement would be determined by the timing of introduction and final scope of entitlements under the Act. The lack of a definite time frame, even this year, for the introduction of either the Direct Tax Code (DTC) or the GST remains a disappointment. Although the Budget echoed the theme of inclusive growth, the restraint in announcing new big-ticket schemes and attempt to rationalize the number of centrally sponsored schemes are favourable from the point of view of fiscal prudence. Given the constraints to providing a direct fiscal stimulus, Budget has been a pragmatic one that emphasises on the need to revive growth and provides some measures to promote investments, incentivise savings in financial instruments, including insurance and strengthen the capital markets. The 29% growth in plan expenditure, thrust on key infrastructure sectors like road and coal and emphasis on the need to facilitate infrastructure financing through innovative instruments are positives. The Budget has also proposed a series of measures towards strengthening the corporate bond markets. These include simplifying KYC norms , provide better access to various foreign investors and proposed enhancement of the list of eligible securities for pension and provident funds in addition to directly participating on the debt segment of the stock exchanges (on receipt of regulatory approvals). GoIs commitment to recapitalise Public Sector Banks is a positive for banks in the near term in meeting their capital requirements under Basel III, while also growing at a steady pace. Given the macro economic situation, the corporate sectors expectations from the budget was muted. The investment allowance has come as a positive, as also the fact that there has been no across-the-board increases in indirect tax rates. Overall, what the corporate sector would be hoping for is a revival in aggregate demand and resolution of sector specific issues, most of which would have to be taken through policy actions which are outside the purview of the Union Budget. Interestingly, while the Budget speech recognised the CAD to be the single biggest cause for worry from the macro-economic point of view, there does not seem to have been any measures designed to counter the same. Going forward, therefore, measures to tackle the CAD are critical to ensure macroeconomic stability, avoid deterioration in global investors sentiments regarding the outlook for the Indian economy and attract foreign inflows.

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Assessment of Government of Indias Fiscal Situation

The Union Budget for 2013-14 has forecast a fiscal deficit (refer Chart 1) of 4.8% of GDP, lower than the deficit of 5.2% in 2012-13 (according to Revised Estimates or RE). Notably, the estimated fiscal deficit for 2012-13 is an improvement over the target set in October 2012 (5.3%, refer Table 5), while that for 2013-14 is in line with the target of 4.8% of GDP. Fiscal Situation as per 2012-13 RE: In line with our expectations, the RE for 2012-13 indicate a shortfall in corporation tax, customs duty and excise duty collections relative to the BE for 2012-13, by Rs. 144 billion, Rs. 218 billion and Rs. 224 billion, respectively. However, this would be partly offset by higher income tax and service tax collections, which are expected to exceed the BE for 2012-13 by Rs. 103 billion and Rs. 87 billion, respectively. Moreover, non tax revenues from the telecom sector are expected to fall substantially short of the budgeted Rs. 400 billion while disinvestment proceeds (estimated at Rs. 240 billion) are likely to be somewhat lower than the budgeted Rs. 300 billion. While non plan revenue expenditure exceeded the budgeted levels by Rs. 541 billion (led by higher subsidies of Rs. 676 billion), plan revenue expenditure fell short of the BE for 2012-13 by Rs. 771 billion. As a result, the quality of revenue expenditure is inferior to the BE for 2012-13. Notably, out of the shortfall of Rs. 371 billion relative to the budgeted target for capital expenditure, nearly two-thirds was on account of defence and contribution to multi-laterals, which highlights that the squeeze in outlay for infrastructure sectors was not alarming. The allocation for capital expenditure (ex defence and contribution to multilaterals) expanded by 11% in 2012-13 RE relative to 2011-12. Overall, the revenue and fiscal deficit for 2012-13 are forecast to exceed the BE by Rs. 408 billion and Rs. 73 billion, respectively. The extent of slippage (refer Chart 2) as compared to the target for the fiscal deficit is limited in 2012-13 (0.1%) relative to 2011-12 (1.1%). Chart 1: GoIs Revenue and Fiscal Deficit as a Percentage of GDP
7% Revenue Deficit
6% 5%

Fiscal Deficit

4% 3%
2% 1%

0% 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 RE 2013-14 BE

Source: Union Budget 2013-14; ICRA Research

Chart 2: Extent of slippage in GoIs Fiscal Deficit as a Percentage of GDP

7%
BE 6% 5% 4% Actual

3%

2013-14 BE Revenue Trends: The revenue receipts of GoI are estimated to expand by 21% in 2013-14, reflecting a 19% and 33% rise in net tax and non tax revenues, respectively. Tax Revenues: GoI has forecast that its gross tax revenues (refer Table 1) will expand by 19% in 2013-14, primarily reflecting an increase in surcharges for direct taxes; and factoring in GoIs expectation that real economic growth would be 13.4%. ICRA expects real economic growth of 5.8-6.0% in 2013-14.

2%
1% 0% 2010-11 2011-12 2012-13

Source: Various Union Budgets; ICRA Research Note: 2012-13 data represents RE not Actual

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Corporation tax collections are estimated to expand by 17% in 2013-14, considerably higher than the 11% growth in 2012-13 RE, benefiting from an expected recovery of Corporate profitability. The key new proposals introduced by GoI for Corporation tax are an increase in the surcharge to 10% (from 5%) on domestic companies whose taxable income exceed Rs. 100 million and to 5% (from 2%) on foreign companies who pay a higher rate of corporate tax, if the taxable income exceeds Rs. 100 million, for a period of one year. Moreover, the surcharge has been increased from 5% to 10% in the cases of taxes such as the dividend distribution tax and tax on distributed income. Crucially, an investment allowance at the rate of 15% has been introduced for manufacturing companies that invest more than Rs. 1 billion in plant and machinery between April 1, 2013 and March 31, 2015, which is expected to contribute towards a modest recovery in investment activity. Personal income tax collections are estimated to rise by 20% in 2013-14, similar to the 21% growth in 2012-13 RE. While the slabs and rates for personal income tax are unchanged, GoI has levied a surcharge of 10% on individuals whose taxable income exceeds Rs. 10 million for one year. At the same time, tax payers with sub-Rs. 5 lakh incomes have been given a tax credit of Rs. 2,000, a small palliative against high inflation, while at the same time ensuring that assesses remain within the tax net. While the Securities Transaction Tax has been reduced for certain transactions, Commodity Transaction Tax has been introduced on non-agricultural commodities future contracts. As anticipated, the peak rates of indirect taxes were left unchanged to avoid dampening economic growth further. GoI has forecast excise duty collections to rise by 15% in FY14, slower than the 18% growth in 2012-13 RE. Excise duty on SUVs (except those registered as taxis) has been hiked from 27% to 30% while specific excise duty on cigarettes, cigars etc. has been increased by about 18%. GoI has forecast service tax collections to rise by 36% in 2013-14, similar to the growth in 2012-13 RE, which would continue to benefit from the measures introduced over the course of 2012-13 (such as the negative list, tax on rail transport of certain goods etc.) as well as the proposed introduction of a one-time scheme called Voluntary Compliance Encouragement Scheme to recover past dues of service tax. While no change has been proposed in the peak rate of customs duty (10%) on nonagricultural goods, duty on high end products, raw silk etc. has been increased. GoI has forecast customs duty collections to expand by 14% in 2013-14, higher than the growth of 10% in 2012-13 RE; the achievement of this target would critically depend on the volume of trade in the coming fiscal.

Table 1: Trends in Tax Revenue Receipts Rs. billion 2012-13 BE (1) 2012-13 RE (2) 2013-14 Variation BE (3) in 2012-13 (2)/(1) 12,359 4,195 2,476 1,873 1,976 1,801 -396 -144 103 -218 -224 87 Growth in 2013-14 BE (3)/(2) 19% 17% 20% 14% 15% 36%

Gross Tax Revenues 10,776 10,380 - Corporation Tax 3,732 3,589 - Income Tax 1,958 2,061 - Customs Duty 1,867 1,649 - Union Excise Duty 1,944 1,720 - Service Tax 1,240 1,327 Source: Union Budget 2013-14; ICRA Research

Table 2: Trends in Major Subsidies Rs. billion 2012-13 BE (1) 2012-13 RE (2) 2013-14 Variation BE (3) in 2012-13 (2)/(1) 660 900 650 50 100 533 Growth in 2013-14 BE (3)/(2) 0% 6% -33%

Fertiliser 610 660 Food 761 850 Fuel 437 969 Source: Union Budget 2013-14; ICRA Research

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Overall, GoI has estimated the proposals regarding direct and indirect taxes to boost revenues by Rs. 133 billion and Rs. 47 billion, respectively. The lack of a definite time frame for the introduction of either the DTC or the GST is a major disappointment. It remains to be seen whether the allocation of Rs. 93 billion for CST compensation (refer Table 2) helps to soften the resistance of some State Governments to an early implementation of GST. Non-Tax Revenue and Disinvestment Proceeds: The BE for 2013-14 forecast inflows from telecom to double to ~Rs. 400 billion from ~Rs. 200 billion in FY13, the achievement of which would depend on market conditions and the outcome of ongoing legislation regarding one-time spectrum fee from private GSM players. GoI has assumed a sharp uptick in dividends and profits to ~Rs. 740 billion in FY14 from ~Rs. 555 billion in FY13. The target for disinvestment has been set at Rs. 558 billion (Rs. 240 billion in 2012-13 RE). This includes Rs. 140 billion from disinvestment of residual government share in nongovernment companies. Notwithstanding the budgeted figures, the magnitude of inflows from these sources would depend on market conditions, timing of sale, valuations etc.

Table 3: Trends in Revenue and Capital Expenditure Rs. billion 2012-13 BE (1) 2012-13 RE (2) 2013-14 Variation BE (3) in 2012-13 (2)/(1) 14,362 3,707 2,311 707 1,169 93 1,747 4,628 2,291 867 144 -230 -31 676 7 -49 -3 -404 -427 -371 -100 -140 Growth in 2013-14 BE (3)/(2) 14% 17% -10% 11% 7% 92900% 41% 18% 37% 25% 4292%

Revenue Expenditure: Revenue expenditure is budgeted to increase by 14% in 2013-14 (refer Table 3) relative to 10% in 2012-13 RE. Non plan revenue expenditure is expected to rise by a modest 8% in 2013-14 BE, lower than the 13% growth in 2012-13 RE. However, plan revenue expenditure is expected to expand by a healthy 29% in FY14, following the low 3% growth in 2012-13 RE. in particular, grants for capital assets are estimated to grow by 41% in FY14 after contracting by 6% in FY13. Although the Budget echoed the theme of inclusive growth, the restraint in announcing new big-ticket schemes and attempt to rationalize the number of centrally sponsored schemes are favourable from the point of view of fiscal prudence. Committed items such as interest payments and pensions are estimated to rise by 17% and 11%, respectively, in 2013-14, whereas the outlay for defence has been enhanced by 7%. In contrast, the allocation for subsidies has been reduced by 10% in 2013-14 BE relative to 2012-13 RE. The Budget for 2012-13 had clarified that subsidy expenditure would be limited to 2% of GDP in 2012-13, and be reduced to 1.75% of GDP over a three-year period (by curtailing subsidies other than those related to food). As compared to this, subsidies stand at 2.6% of GDP in 2012-13 RE and 2.0% of GDP in 2013-14 BE. Whether the Rs. 650 billion (refer Table 2) allocation for fuel subsidies proves adequate would critically depend on the global prices of crude oil, the exchange rate and regular revision of diesel prices by the oil marketing companies. The food subsidy allocation has been enhanced from Rs. 850 billion in 2012-13 RE to Rs. 900 billion in 2013-14 BE, which includes an additional provision of Rs. 100 billion towards the funding required for the implementation of the National

Revenue Expenditure 12,861 12,631 Interest 3,198 3,167 Subsidies 1,900 2,577 Pensions 632 638 Defence 1,138 1,089 CST Compensation 3 0 Grants Capital Assets 1,647 1,243 Balance 4,344 3,917 Capital Exp. Gross 2,048 1,678 Loans & Adv. Defence 796 696 Contribution/ 143 3 Subscription to Multilaterals Recapitalisation of 159 147 Banks etc. Other 950 832 Memo Item Capital Exp (excluding 2,756 2,221 Defence, Multilaterals) + Grants for Capital Assets Source: Union Budget 2013-14; ICRA Research

155 1,124 3,026

-12 -118 -534

6% 35% 36%

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Food Security Act; the actual requirement, however, would be determined by the timing of introduction and final scope of entitlements under the Act. With fertiliser subsidy in 201213 RE substantially lower than the estimated subsidy requirement of ~Rs. 950 billion, there is likely to be a spillover of ~Rs. 300 billion, which would need to be cleared in 2013-14. Consequently, the budgeted subsidy for 2013-14 is likely to be underestimated. Some of the sectors with substantially higher outlays in 2013-14 relative to the RE for 2012-13 include health & family welfare, housing, welfare & nutrition in line with the Governments inclusive growth agenda. At the same time, the outlay for rural employment has been increased by a relatively small amount to Rs. 330 billion in 2013-14 from Rs. 394 billion in 2012-13 RE. The BE for 2013-14 include a 22% rise in the allocation for the Ministry of Agriculture, which would play a role in easing supply bottlenecks. This includes a small allocation for pilot programmes on Nutri-Farms for introducing new crop varieties rich in micronutrients. The allocation for the Rural Infrastructure Development Fund has been augmented to Rs. 200 billion, and Rs. 50 billion would be provided to NABARD to finance the creation of warehousing facilities. The Budget also announced that the interest subvention scheme for short-term crop loans would be continued in 2013-14 and extended to loans availed by farmers from private sector scheduled commercial banks.

Table 4: Fiscal Balances for GoI Rs. billion 2012-13 BE 2012-13 RE 2013-14 BE 2014-15 Rolling Targets 2015-16 Rolling Targets

Revenue Deficit -3,504 -3,912 -3,798 NA NA Percentage of GDP -3.4% -3.9% -3.3% 2.7% 2.0% Effective Revenue -1,858 2,670 2,052 NA NA Deficit Percentage of GDP -1.8% 2.7% 1.8% 0.9% 0.0% Fiscal Deficit -5,135 5,209 5,425 Percentage of GDP -5.1% 5.2% 4.8% 4.2% 3.6% Total Outstanding 45.5% 45.70% 44.30% 44.3% 42.3% Liabilities as a Percentage of GDP# Source: Union Budget 2013-14; ICRA Research #Does not include the portion of National Small Savings Fund and Market Stabilisation Scheme that are not used to finance GoIs fiscal deficit

Capital Expenditure: Capital expenditure and gross lending is budgeted to rise by a sharp 37% in 2013-14 relative to the modest 6% in 2012-13 RE. Capital expenditure on defence is expected to rise by 25% in 2013-14 BE, following the low 2% growth in 2012-13 RE. Non-defence capital outlay and gross loans & advances are estimated to expand by a sharp 45% in the coming fiscal (8% in 2012-13 RE). This includes an allocation of Rs. 155 billion for capitalisation of Public-Sector Banks, Regional Rural Banks etc., as compared to Rs. 142 billion in 2011-12 and a revised allocation of Rs. 147 billion in 2012-13. Additionally, Rs. 144 billion has been allocated for contribution or subscription to various multilateral agencies such as the International Monetary Fund (IMF), Asian Development Bank (ADB), World Bank etc., higher than Rs. 29 billion in 2011-12 and Rs. 3 billion in 2012-13 RE. Inclusive of grants for creation of capital assets (which are included in revenue expenditure), and excluding capital expenditure towards defence and multilaterals, the total allocation for expenditure that is capital in nature is estimated to increase by a healthy 36% relative to the RE for 2012-13.

Table 5: Fiscal Deficit Targets for GoI Performance/ Targets Targets set in October in Budget 2013-14 2012 2012-13 5.2% 5.3% 2013-14 4.8% 4.8% 2014-15 4.2% 4.2% 2015-16 3.6% 3.6% 2016-17 NA 3.0% Source: GoI; ThFC Report; ICRA Research Targets set by ThFC 4.2% 3.0% 3.0% 3.0% 3.0%

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Fiscal Balances: At an absolute level, the revenue deficit and effective revenue deficit are estimated to decline in 2013-14 as compared to 2012-13 RE (refer Table 4) even as the fiscal deficit is estimated to widen to Rs. 5.4 trillion from Rs. 5.2 trillion, respectively. In particular, the effective revenue deficit is estimated to decline appreciably to Rs. 2.1 trillion in 2013-14 from Rs. 2.7 trillion in the ongoing fiscal. Moreover, the targeted fiscal deficit of 4.8% of GDP is in line with the target set in October 2012. While the fiscal deficit target for 2013-14 has been adhered to in the Budget Estimates, the underlying assumptions of a 13.4% economic growth in nominal terms, sharp pickup in revenues from telecom and disinvestment proceeds and containing the subsidy bill at Rs. 2.2 trillion may be tested over the course of the year. The credibility of the fiscal consolidation effort is particularly crucial in the current scenario, as it would play a role in the timing and magnitude of monetary easing over the course of the fiscal year. Nevertheless, with economic growth having slowed to 4.5% in Q3FY13, ICRA maintains its expectation of monetary easing of a further 75 basis points (bps) over the remainder of this calendar year, including a 25 bps cut in the mid-quarter policy review in March 2013. The rolling targets indicated by GoI for 2014-15 and 2015-16 aim to curtail the fiscal deficit to 4.2% of GDP and 3.6% of GDP, respectively, in line with the targets set in October 2012. Outstanding liabilities are projected to decline to 42.3% of GDP in 2015-16, an improvement from 45.7% in 2012-13 RE.

Table 6: GoIs Long-Term Market Borrowings (Rs. billion) Net Borrowings Redemptions Gross Borrowings Source: RBI; ICRA Research 2012-13 4,674 906 5,580 2013-14 4,840 1,450 6,290 Growth 4% 60% 13%

Borrowings: GoI has indicated a net long term borrowing programme of Rs. 4.84 trillion in 2013-14, marginally higher than the borrowings of Rs. 4.67 trillion in 2012-13 (refer Table 6). However, the gross borrowings to be undertaken by GoI in 2013-14 exceeded market expectations (~Rs. 5.8-6.0 trillion), causing long-term bond yields to harden. This was on account of the decision to introduce a buy-back/swapping of Government securities of Rs. 500 billion in 2013-14, to reduce redemption pressure between 2014-15 to 2018-19. GoIs ability to limit the fiscal deficit may be tested during the course of the year, which would exert some pressure on yields. Nevertheless, yields are expected to soften over the course of 2013, in line with the anticipated easing in policy rates to be undertaken by the Reserve Bank of India.

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ICRA Sectoral Analysis Cement

Proposals Additional interest deduction of up to Rs. 0.1 million on housing loan to provide fillip to housing demand. Enhancement in provisions under Rural Housing Fund to ensure better flow of institutional credit for housing loans. Several measures proposed for improving funding of infrastructure projects- encouragement to Infrastructure Debt Funds (IDFs), tax-free infrastructure bonds, credit enhancement by India Infrastructure Finance Corporation (IIFCL), setting up of regulatory authority to address the problems faced by road projects, planned award of 300 km highway projects and extension of 80IA benefits for power projects by one year. Impact-Marginally Positive Increase in long term funding availability for infrastructure projects will facilitate more investment in these sectors and thereby boost cement demand. Further increased provision under Rural Housing Fund and interest deduction on housing loans will also boost urban and rural housing demand and in turn the demand for cement.

Iron & Steel

Proposals Overall thrust on the housing and construction sectors. Reduction of basic customs duty (from 5% to 2%) and countervailing duty (CVD) (from 6% to 2%) on imported bituminous coal. Impact- Moderately Positive The incentives provided to the corporate sector for incurring capital expenditure and also to individual home buyers are positives for the domestic steel industry, given that almost 60% of steel consumption is derived from construction related activities. Additionally, the reduction in import duty and CVD on bituminous coal import is expected to reduce the coal costs of sponge iron manufacturers dependent on imported coal.

Construction
Proposals Thrust on removing execution bottlenecks and guide decision making in respect of new proposals and stalled projects through Cabinet Committee on Investments (CCI). Creation of a regulator for the road sector to address various issues including construction risk, contract management issues etc.

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Focus on development of rural roads under the Pradhan Mantri Gram Sadak Yojana (PMGSY) plan. Investment allowance of 15% for the companies investing more than Rs. 1 billion in plant and machinery over the next two financial years. Impetus and stated focus on execution of Delhi Mumbai Industrial Corridor (DMIC); plans to setup two more corridors Bengaluru-Mumbai and Chennai-Bengaluru. Setting up of two new ports in West Bengal, Andhra Pradesh to add 100MT capacity; setting up a new harbour in Tamil Nadu to add 42MT capacity. 17% Increase in allocation to water supply and sanitation. Public Private Partnership (PPP) policy framework in partnership with Coal India Limited (CIL) to encourage investments in coal mining coupled with extension of eligibility date for power projects to avail the Section 80 IA benefit (tax holiday) till FY 2013-14. Continued encouragement for mobilization of long-term funding towards infrastructure sector through IDFs, IIFCLs take-out finance and credit-enhancement schemes, and tax-free bonds of Rs. 500 billion to be issued by certain institutes. Impact- Positive Recognizing the need to kick-start investments the budget proposes to renew the thrust on removing execution bottlenecks and guide decision making in respect of new proposals and stalled projects through CCI; however on-ground benefits are yet to be ascertained. Setting up of a regulator for the road sector has been proposed to address issues such as construction risks and contract management. Companies engaged in road construction could benefit from the stated intent of awarding 3,000 km of projects in H1FY14, development of rural roads under PMGSY, and assistance from World Bank and Asian Development Bank (ADB) for road construction in North Eastern states. Two greenfield ports; 17% increase in allocation to water supply and sanitation and stated focus on development of seven new cities under the DMIC could also improve order inflows for construction companies. Further, PPP policy framework proposed in partnership with CIL to tackle the rising domestic coal shortages and extension in eligibility date for power projects to avail of tax holidays till FY 2014 is expected to provide a flip to the power sector. Some revival in capital expenditure cycle is expected with the proposed investment allowance of 15% for the companies investing more than Rs. 1 billion in plant and machinery over the next two financial years. Further, continued focus on increasing the availability of long-term funding sources for infrastructure projects is positive considering the significant planned investments on infrastructure in the 12th five-year plan.

Real Estate
Proposals Additional deduction of interest upto Rs. 0.1 million for a person taking first home loan upto Rs. 2.5 million during 2013-14. Increase in provision under Rural Housing Fund to Rs. 60 billion from the existing Rs. 40 billion to provide housing finance to targeted groups in rural areas at competitive rates. Setting up of Urban Housing Fund by National Housing Bank and Rs. 20 billion to be provided to the fund in 2013-14. Introduction of Tax Deduction at Source (TDS) of 1 percent on transfer of immovable property (other than agricultural land) above Rs. 5 million. Increase in excise duty on marble from Rs.30 per square meter to Rs. 60 per square meter. Increase in rail freight cost for cement and steel. Reduction in abatement from 75% to 70% for service tax assessment on construction services provided for homes and flats with a carpet area of 2,000 square feet or more or value of Rs.0.01 billion or more.

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Impact-Neutral
The budget proposals such as increase in provision under Rural Housing Fund to Rs. 60 billion from the existing Rs. 40 billion and the setting up of Rs.20 billion Urban Housing Fund are likely to boost the demand for rural and affordable urban housing. Further, additional deduction of interest upto Rs.0.1 million will promote home ownership and drive the sales for residential units priced below Rs.5 million. On the flip side, surcharge of 10% on a person whose taxable income exceed Rs. 10 million, reduction in abatement from 75% to 70% for service tax on flats with a carpet area of 2,000 sft or value of Rs. 10 million and increase in the raw material prices may dissuade buyers of luxury apartments.

Hotel and Tourism

Proposals Widening of the service tax net to include all air conditioned restaurants. Impact-Moderately Negative Calling the distinction between air-conditioned restaurants servicing liquor and those not serving liquor artificial, the budget brought all air-conditioned restaurants under the service tax net. Mostly impacting standalone/small/quick service restaurants/restaurant chains which do not serve liquor, this is marginally negative for the industry with applicable service tax for all restaurants of 4.94% (including abatement of 60%). The increase in surcharge on taxable income is also a negative for the industry already struggling under a huge demandsupply mismatch

R o a d s an d P o r t s
Proposal Setting up a regulatory body for road sector to address contract management, financial stress, and construction risk. 3,000 km of highways to be awarded in H1FY14. Road development activities in the North Eastern States with the assistance of the World Bank and ADB. Two new major ports to be set up, sixth national inland waterway to be added. Total budgetary allocation towards PMGSY at Rs. 217 billion in FY14 compared to Rs. 240 billion in FY13. Take-out financing and credit enhancement schemes floated by IIFCL along with the formation of IDFs will increase the availability of long-term funds.

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Impact- Positive The biggest positive impact on the road sector is expected from the proposed regulatory body which could address some of the obstacles faced by the road developers. Although details on the role of such a regulatory body are yet to be finalised, if such a body were to support the developers in obtaining regulatory approvals and in speedy resolution of pending arbitration claims then it would provide major impetus to growth in this sector. Further, the planned award of 3,000 km highway projects in H1FY14 is positive. The setting up of new ports and expansion of the outer harbour are expected to facilitate capacity additions and improvement in operating parameters of the Indian port sector. While the allocation to PMGSY has been lowered, it remains sizeable. The government also seeks to increase the funding options for the infrastructure projects through takeout financing and credit enhancement schemes floated by IIFCL, and formation of IDFs.

Oil & Gas

Proposals Shift from profit sharing to revenue sharing policy for exploration and production of oil & gas. Review of natural gas policy to reduce uncertainty on domestic gas prices. Shale gas policy to be announced. Faster clearance of stalled NELP blocks. Investment allowance of 15% for investments above Rs. 1 billion. Provision of subsidy for sensitive petroleum products: Rs. 969 billion under 2012-13 RE and Rs. 650 billion under 2013-14 BE. 5 MMTPA Dabhol terminal to be fully operational in 2013-14.

Impact- Neutral The shift from profit sharing to revenue sharing policy for exploration and production of oil & gas could reduce the cost monitoring by Government of India (GoI) and the incentive for inflating of costs by the contractor. The review of natural gas policy could improve clarity on determination of domestic gas prices and any material increase in gas prices would be a key positive for domestic gas producers. Though there is proposal to announce shale gas policy, the timelines and structure of the policy are yet not known. The GoI reiterates commitment to increase focus on faster clearance of stalled New Exploration Licensing Policy (NELP) blocks as being followed up by CCI. The investment allowance of 15% (as deduction) for investments above Rs. 1 billion would benefit oil downstream projects being commissioned in FY14 and FY15. The provision of subsidy for 2012-13 and 2013-14 for Public Sector Undertakings (PSU) Oil Marketing Companies (OMCs) is expected to largely meet the requirements and additional subsidy requirements could be small if diesel price continues to increase as per envisaged deregulation. Sharp rise in crude oil prices from the current levels of around $110/bbl (Brent) and lack of adherence to diesel price hike schedule are the risk factors, which could lead to higher subsidy requirements. Though 5 MMTPA Dabhol terminal will be fully operational in 2013-14; the actual regasification volumes could be lower due to technical and climatic challenges.

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Power Sector
Proposals Constitution of IDF encouraged; credit enhancement mechanism to be offered by IIFCL & ADB for the long term financing through bonds. Fund raising limit of upto Rs. 550 billion allowed through issuance of tax free bonds. PPP policy framework in partnership with CIL proposed to encourage investments in coal mining. Generation based incentive for wind energy projects reintroduced; Rs. 8 billion allocated for the same. Funds allocated from National Clean Energy Fund (NCEF) so as to enable low interest rate funding of viable renewable energy projects. Scheme to be proposed for encouraging investments by municipalities through PPP mode in waste to energy generation projects. Eligibility date for power projects to avail the Section 80 IA benefit (tax holiday) extended till FY14.

Impact- Positive Proposed measures for improving funding of infrastructure projects is likely to augment availability of long term funding at cost-competitive rates for the power sector. Further, PPP policy framework proposed in partnership with CIL is a positive, given the rising domestic coal shortages leading to dependence on coal imports. Also, extension in eligibility date for power projects to avail of tax holidays till FY 2014 will benefit the power projects which are scheduled to be commissioned till then. Re-introduction of Green Building Initiative (GBI) policy is a positive for the wind sector and likely to encourage fresh capacity addition by Independent Power Producers (IPPs). The allocation of funds from NCEF will enable low cost debt funding which would benefit the non-conventional sector.

A u t o 2 W / P a s s en g e r V e h i c l e s
Proposals Customs duty on imported luxury cars increased from 75% to 100%. Customs duty on imported luxury bikes (with >800cc engine capacity) increased from 60% to 75%. Excise duty on non-taxi Sports Utility Vehicles (SUVs) hiked from 27% to 30%. Period of customs duty concession available to specified parts of electric and hybrid vehicles extended from March 2013 to March 2015. Rate of tax on royalty and technical fee payments to foreign parent increased from 10% to 25%.

Impact- Neutral On expected lines, excise duty and peak rate of basic customs duty were left unchanged whose impact on the auto sector shall be neutral. Increase in customs duty on select imported motor vehicles may subdue demand over the short term; however, it should hasten the process of local production. Strong growth in volumes of SUVs, particularly over last two years, had partially mitigated the demand sluggishness faced by the overall passenger vehicle industry. While increase in excise duty may weigh on the SUV segments volume growth, it may in turn aid volume growth of other car segments to some extent. Also, some models like Maruti Suzuki Ertiga, Nissan Evalia and Renault Duster would not be impacted

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by the excise duty hike as they do not qualify the SUV definition. The governments thrust on rural development remains a positive as the proportion of automobile sales in the rural markets is steadily on the rise.

C o m m e r c i a l V e h i c l es
Proposals Marginal reduction in excise duty on truck chassis from 14% to 13%. Sharp increase in allocation for the JNNURM scheme, promising an addition of 10,000 buses by SRTUs, especially in the hill states. Thrust on infrastructure spending increased through higher allocation and easier fund raising for infrastructure sector, especially roads & highways. Impact: Moderately Positive The reduction in excise duty on truck chassis from 14% to 13% would only be marginally helpful for the commercial vehicle that is currently witnessing slowing sales trends owing to weak macro-economic indicators and low-cargo availability. However, the sharp increase in budgetary allocation for the JNNURM from Rs. 74 billion to Rs. 149 billion with specific focus on adding 10,000 buses to the existing fleet of SRTUs is a positive for the industry, especially for Original Equipment Manufacturers (OEMs) with established product portfolio in the bus segment. The step up in infrastructure spending particularly in segments such as roads & highways and measures to encourage innovative funding mechanism for infrastructure projects will support demand for construction-enabling CVs (i.e. tippers) besides facilitating easier freight movement.

Tyres
Proposals Allowance of 15% on investments of Rs. 1.0 billion and above in plant and machinery during the period 2013-15. Continuation of JNNURM in the 12th Plan; additional sanction towards purchase of 10,000 buses during 2013-14. Impact- Moderately Positive With the tyre industry in the midst of a large capital expenditure of over Rs. 80 billion in the next two years, the 15% allowance on investments of Rs. 1.0 billion and above on plant and machinery over the next two fiscals is a positive for tyre manufacturers. Continuation of JNNURM scheme is also expected to spur demand for buses and consequently tyres, albeit marginally, with the additional sanction towards purchase of 10,000 buses.

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Tractors
Proposals Target for institutional credit flow to agriculture raised by Rs. 1,250 billion (up 22%) in 2013-14. Interest subvention scheme for short-term crop loans to continue in 2013-14; scheme extended to crop loans borrowed from private sector scheduled commercial banks. Total plan outlay for agriculture increased to Rs 271 billion (22% increase over 2012-13 RE) with allocation under Rashtriya Krishi Vikas Yojna increased by 8% to Rs 100 billion in 2013-14. Increase in allocation towards rural development to Rs 802 billion (46% growth over expected expenditure in 2012-13).

Impact- Moderately Positive

Availability of credit is necessary for farm mechanisation. While there is adequate availability of finance in the tractor market at present, which is currently plagued by other stumbling blocks like irrigation related problems, weak farm income and lower non-agricultural usage; increase in target for agricultural credit and roping in of private sector banks is a step to ensure that growth in the agricultural sector as a whole is not stymied by lack of finance. Further, Governments thrust on rural and agricultural development continues, and although these do not have a direct impact on tractor demand as such, these programmes encourage rural prosperity which in-turn is a positive influence on demand side drivers of the tractor industry.

Auto Ancillary
Proposals Investment allowance of 15% provided to manufacturing entities who invest more than Rs. 1biilion in plant & machinery over next two years. Non-tax benefits enjoyed by Micro, Small & Medium Enterprises (MSMEs) allowed for a period of upto three years even after growing out of the MSME status. Refinancing capability of SIDBI for lending to MSMEs enhanced from Rs. 50 billion to Rs. 100 billion. An amount of Rs. 22 billion allocated for setting-up 15 additional tool room and technology development centres. An amount of Rs. 10 billion earmarked for skill development schemes for youth.

Impact-Neutral Since there are no direct budget proposals to encourage end-automobile demand, recovery of auto component supplies to auto (OEMs) is also likely to remain slow over the short term. However, over the medium term, the proposals made are likely to encourage investments by medium-to-large sized entities as also improve technical and manufacturing capabilities of lower-tier auto ancillaries. Also, skill development related expenditure should partly address the problem related to short-supply of skilled labour, while boosting overall productivity.

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Capital Goods
Proposals
Investment allowance of 15% for the companies investing more than Rs. 1 billion in plant and machinery over the next two financial years. Customs duty exempted on semi-conductor water fabs. Customs duty & CVD on steam coal and bituminous coal rationalized to 2% each. Several measures proposed for improving funding of infrastructure projects (encouragement to IDFs, tax-free infrastructure bonds, credit enhancement by IIFCL).

Impact- Marginally Positive Given the slowdown in industrial capex in last one year period, provision of investment allowance is likely to incentivize companies across the manufacturing & infrastructure sector to invest in fresh projects, which is likely to improve demand for capital goods. Further, measures announced to encourage long term funding in the infrastructure sector also are a positive for the capital goods sector.

Aviation
Proposals Certain concession on maintenance, repair and overhaul (MRO) Services. No proposals towards reduction in sales taxes on Aviation Turbine Fuel. Withdrawal of exemption of education cess on import of aircraft and aircraft parts. Impact-Neutral The basic customs duty exemption available to parts & testing equipments for maintenance, repair and overhaul of aircrafts has been extended to aircraft parts, while the time period of consumption / installation of these parts have been extended from 3 months to 12 months. However, there have been no developments towards reduction in sales taxes on aviation turbine fuel (or declared goods status) as proposed by the industry players as well as civil aviation ministry.

Shipping
Proposals Full exemption from excise duty provided to the shipbuilding industry on ships and other vessels. Consequently, CVD has been abolished on the imported ships and vessels. Time limit for consumption of imported goods by ship repair units extended from 3 months to 1 year.

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Impact-Positive Exemption from excise duty on ships and vessels provides a small positive for the domestic shipbuilding industry. Currently, 2% excise duty is paid by the domestic shipyards in case no CENVAT credit is availed and 6% in other cases. With the above exemption, the Indian shipyards would benefit marginally, who in turn may pass on some of the benefits to the Indian ship owners placing orders with them. Import of ships will also become marginally cheaper with the abolition of the CVD on imported ships and vessels. Overall, the above exemption from excise duty is a small positive for the domestic shipbuilding & shipping sector, which has been facing several challenges such as slowdown in orders, cancellation of orders, stretched cash flows and high leverage.

F e r t i l i s er s
Proposals Budgetary provision for subsidy: Rs. 660 billion each in 2012-13 (RE) and 2013-14 (BE). Subsidy on indigenous fertilisers (urea): Rs. 210 billion. Subsidy on imported fertilisers (urea): Rs. 155 billion. Subsidy on decontrolled fertilisers: Rs. 294 billion.

Thrust on agriculture through various programmes.

Impact- Negative
GoI has kept the budgeted subsidy at almost the same level as the previous year. Subsidy provisioning for 2012-13 is substantially lower than the estimated subsidy requirement of ~Rs. 950 billion, which would result in a subsidy backlog to the extent of ~Rs. 300 billion. This will lead to continuation of the tight liquidity situation that the fertiliser companies have faced in the recent past. The spillover would also lead to part of the budgeted subsidy for 2013-14 being utilised to pay the subsidy commitment of 2012-13. Consequently, the budgeted subsidy for 2013-14 is likely to be lower even if the GoI announces a ~15-25% lower subsidy for phosphorus and potassium nutrients for 2013-14 as is expected and is likely to lead to a further spillover to 2014-15. Sharp increase in domestic gas prices, if any, will call for additional subsidy, while upward revision in urea prices will lower the backlog amount to some extent. Continued thrust on the agricultural sector through various programmes will help the sector in sustaining the demand growth.

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Pharmaceuticals
Proposals No major announcements apart from the increased budgetary allocation for the healthcare sector. An allowance of 15% for investments of Rs. 1 billion or more into plant & machinery above would however encourage higher spending towards manufacturing and R&D facilities.

Impact-Neutral
In view of no specific announcements, the budget for 2013-14 is unlikely to have a material impact on the healthcare industry. Measures such as increased budgetary allocation towards public healthcare may only have a marginal impact. However, the proposal for an investment allowance of 15% will encourage higher spending by large pharmaceutical companies towards manufacturing and R&D facilities and would benefit their ongoing capital expenditure plans. The increase in surcharge on corporate tax and increase in dividend distribution tax to adversely impact large pharmaceutical companies with high tax and dividend payout rates.

Textiles
Proposals Optional zero excise duty for the branded garment sector reintroduced as against mandatory excise duty with 70% abatement. Target investments of Rs 1,510 billion in textile sector under Textile Upgradation Fund Scheme (TUFS) during XII five year plan, with focus on modernisation of power-loom sector. TUFS allocation of Rs 24 billion vs revised BE of Rs 23 billion for 2012-13. Overall budgetary allocation for textile sector at Rs 46 billion as against RE of Rs 45 billion for 2012-13. Investment allowance of 15% of investments of Rs 1 billion or more in plant and machinery, which is in addition to existing depreciation rates. Allocation of Rs 0.5 billion for five apparels parks to be setup within Integrated Textile Parks promoted under Scheme for Integrated Textile Parks (SITPs). Allocation of Rs 0.5 billion for improving the effluent treatment infrastructure of textile processing units. Subsidised working capital and terms loans at 6% for handloom weavers and societies. Custom duty on imported raw silk increased from 5% to 15%. Impact- Positive The key positive for the sector is the restoration of optional zero excise duty for branded garment sector as against mandatory excise duty with 70% abatement. This will improve the garment manufacturers ability to stimulate demand by lowering prices under current weak economic conditions. The budgetary allocation for the overall textile sector for FY 2013-14 is marginally higher by 3% at Rs 46 billion vs the revised budgetary estimates of Rs 45 billion. Similarly allocation under TUFS at Rs 24 billion is 3% higher as compared to

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revised estimates of Rs 23 billion for FY 2012-13. Further, given the high fixed capital intensive nature of spinning and weaving units, an additional investment allowance of 15% together with continuing benefits under TUFs will improve cash flows and boost further investments in the textile sector.

FMCG
Proposals Increased allocation towards rural development and agriculture-centric schemes. Marginal reduction in personal income tax rates for income levels upto Rs 0.5 million. Rapid rollout plans for direct benefit transfers to bank accounts of the beneficiaries. 18% increase in special excise duty on cigarettes of length exceeding 65 mm. Lack of firm roadmap for implementation of the proposed GST and Food Security bills.

Impact- Neutral
Despite focus on fiscal consolidation, 46% increase in allocation towards rural development programmes and 22% increase in allocations towards agriculture-centric schemes is expected to boost farm production and rural prosperity. The marginal reduction in personal income tax rates for income levels upto Rs. 0.5 million is expected to increase disposable incomes; while accelerated implementation of direct benefit transfer scheme to bank accounts of the beneficiaries could boost consumer spending. However, relatively steep 18% increase in special excise duty on cigarettes of length exceeding 65 mm, if passed on to the consumers, may lead to some demand moderation for the cigarette companies. Besides, an increase in surcharges on corporate income tax and dividend distribution tax from 5% to 10% would marginally impact companies with high profitability and dividend yields. Lastly, the union budget lacked any firm roadmap for implementation of Goods and Services Tax (GST) and Food Security bills which could have positively impacted the FMCG companies.

Retail
Proposals Exemption of excise duty on cotton readymade garments and negligible (12% excise duty at the fibre stage) on readymade garments made of spurn yarn. Lack of firm roadmap for implementation of the proposed GST. Duty on mobile phones above Rs. 2,000 increased to 6%. Impact- Neutral During the last budget, the excise duty on branded apparels was increased from 10% to 12%, with abatement levels increased to 70% from 55%, resulting in reduction in effective tax rate to 3.6% from 4.5%. Despite the reduction in effective tax rate, the sales of branded apparels had been impacted as manufacturers passed on the increase in excise duty to the

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customers. The exemption of the said excise duty is thus a positive for the readymade garment industry. The increase in the duty mobile phones may impact demand on handsets, which remains a significant segment for the retail industry.

Telecommunication
Proposals Excise duty on mobile phones priced at more than Rs. 2,000, raised from 1% to 6%. Estimate of non-tax revenues from telecommunications revised from BE of Rs. 582.17 billion to Rs. 194.41 billion for FY13. Estimate of Rs. 408.47 billion for FY14. Impact- Marginally Negative Increase in excise duty on higher-priced mobile phones can have some adverse impact on their sales and the proliferation of data usage, which is the major growth driver for the telecom sector, given that one of the primary hindrances to growth in data usage in the country is the high price of smart phones. The decline in estimated non-tax revenue collections from the sector is on account of lower collections from spectrum auctions (both November 2012 and the forthcoming March 2013 auctions). The increased contribution expected by the Government in FY14 primarily on account of deferred payments of past spectrum sales, one-time spectrum fees, and inflows from future spectrum auctions, however appears a bit optimistic.

Media and Entertainment

Proposals 839 new private FM radio channels to be auctioned in FY2013-14, thereby expanding the services to 294 more cities ensuring coverage of all cities having a population of more than 0.1 million. Increase in import duty on set top boxes from 5% to 10%. Exemption from service tax on copyrights related to recording of cinematographic films now restricted to cinematographic films exhibited in cinema halls. Impact-Neutral The enhanced spread of radio in India will lead to an increase in overall listenership, thereby making the medium more relevant for advertisers. However, radio broadcasting companies would require significant funds outflow towards license fee and associated capital expenditure, denting short-term cashflows and profits; though would generate positive returns in the long-term. The increase in import duty on set top boxes aimed at encouraging domestic production is negative for most direct-to-home (DTH) and digital cable service providers on account of limited availability of indigenous set top boxes. As such, since no major announcements have been made, the overall impact on the media & entertainment sector is neutral.

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Information Technology
Proposals One Year extension of concessional rate of 15% tax on dividend received by Indian company from foreign subsidiary together with waiver on dividend distribution tax to its shareholders of that portion of the income received from its foreign subsidiary. Increase in surcharge on Income tax (taxable income greater than 0.1 billion) and dividend distribution tax from 5% to 10% for FY 2013-14. Increase in tax rate for royalty and fee for technical service to non-residents from 10% to 25%. The applicable tax rate would be 25% or in case of Double Tax Avoidance Agreement (DTAA), the lower of the two. Appointment of committee to look into tax matters (safe harbour rules) related to Development centres and IT sector.

Impact-Neutral The increase in surcharge from 5% to 10% for Income tax as well as dividend distribution tax will lead to marginal higher tax outflow for 2013-14. Global Indian IT companies are likely to benefit from one-year extension of concessional 15% tax rate dividend received from their foreign subsidiary. Moreover, they will save on the dividend distribution tax to the extent of such dividends received and distributed to shareholders.

The increase in tax rate for royalty and technical services payments to non-residents will result in higher withholding tax payments by Indian IT companies; as in few cases the same has to be eventually borne by the Indian companies. The appointment of Rangachary committee for development centres in addition to IT sector for Safe Horbour rules will help captive IT centres of foreign companies from tax compliance point of view.

Banking and Financial Services

Proposals GoI to recapitalise 15 Public Sector Banks (PSBs) by infusing Rs. 140 billion in 2013-14; Capital infusion for 2012-13 fixed at Rs. 125 billion (BE of Rs. 159 billion). GoI commits adequate capital be available for Public Sector Banks to meet Basel III requirements. Proposal to constitute a Standing Council of Experts in the Ministry of Finance to analyse the international competitiveness of the Indian financial sector, review the transaction costs and provide inputs to Government for necessary action. Budget for Rural Housing Fund increased from Rs. 40 billion to Rs. 60 billion in 2013-14; proposal to start a fund of Rs. 20 billion towards Urban Housing Fund as well. Allow some institutions to issue tax free bonds in 2013-14, up to Rs. 500 billion. Enhance the refinancing capability of SIDBI to MSMEs from the current level of Rs. 50 billion to Rs.100 billion per year. Provide a corpus of Rs. 5 billion to SIDBI to set up a Credit Guarantee Fund for factoring; with the Factoring Act 2011 having been passed by the Parliament. Tax incentive of an additional Rs. 0.1 million deduction for interest on housing loan upto Rs. 2.5 million in 2013-14 Additional interest subvention of 3% for farmers repaying promptly extended to PSBs.

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 Target to bring all banks on CBS and e-payment system by December 2013 to progressively increase financial inclusion. Proposal to set up Indias first Womens Bank as a public sector bank by October 2013 with an initial capital of Rs. 10 billion from GoI. Impact-Neutral GoIs proposal to recapitalize the PSBs to meet Basel III requirement is in line with the expectations. Similar / Higher Capital infusion can be expected in the budgets over next four years, as the capital infusion requirement from GoI ( after factoring in the budgeted amount for 2013-14) remains at around 0.8-1.2 trillion to meet the Basel III norms by March 31, 2018. Restructuring package for Discoms would alleviate concerns on asset quality in the Power sector and encourage bank lending for additional investments in this sector. Further, access to resources through tax-free bonds for institutions financing infrastructure would support growth. Initiatives to extend credit to priority sector including extension of interest subvention scheme to private sector banks would help in meeting priority sector targets, but at the cost of lower portfolio yields. Additional income tax benefit for first home buyers, enhancement of Rural Housing Fund and setting up of Urban Housing Fund will encourage home buyers and will add to banks priority sector credit. Higher gross borrowing programme for the next year could crowd out corporate borrowings and impact bond yields adversely.

H o u s i n g F i n a n c e Co m p a n i e s
Proposals Allocation to Rural Housing Fund in 2013-14, increased to Rs. 60 billion. National Housing Bank to set up Urban Housing Fund, Rs. 20 billion to be provided to the fund in 2013-14. Additional deduction of interest upto Rs. 0.1 million for a borrower taking his/her first home loan in FY14 upto Rs 2.5 million , given the value of the residential property does not exceed Rs. 4 million and the borrower does not own any residential property at the time of sanction. For homes and flats with a carpet area of 2,000 sq.ft. or more or of a value of Rs. 0.01 billion or more, which are high-end constructions, where the component of services is greater, rate of abatement reduced from 75% to 70%. TDS at the rate of one percent on the value of the transfer of immovable property where the consideration exceeds Rs. 5 million. However, agricultural land will be exempt. Impact- Positive Increased fund availability with NHB at competitive rates for on lending to Housing Finance Companies (HFCs) especially those HFCs which are focused on rural housing and affordable housing segment.

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Reduction in effective tax outflows and hence improved affordability for borrowers getting home loans sanctioned for their first home during 2013-14 which could lead to some surge in home loan demand in the Rs 1.5 million -Rs 2.5 million segment. As per ICRA estimates the total disbursements in this segment for banks and HFCs as a whole in FY12 were less than Rs. 400 billion. Further, given the restriction on property price at Rs. 4 million, the demand could be more from Tier II cities where property prices are relatively lower or borrower could go for home loans with lower LTV ratios to qualify for the deduction. Higher service tax and TDS would lead to increase in cost of acquisition of properties by 1-1.62% .

Securitisation
Proposals Tax to be levied at the time of distribution of income by a Securitisation Trust and distributed income received by the investor to be exempt from tax; Distribution tax not to be applicable for persons exempt from Income tax. The list of eligible securities in which Pension Funds and Provident Funds may invest, enlarged to include exchange traded funds, debt mutual funds and asset backed securities. Impact- Positive for MFs Clarity on the taxation of income from instruments issued by a Securitisation Trust, has been eagerly awaited by the market participants. The FMs proposal exempting securitisation trusts from income tax is a positive, especially for Mutual Funds. While a tax has been levied on distribution of income by the Trust, such tax will not be applicable where Mutual Funds invest in securitisation, since MFs are exempt from income tax. Nevertheless, in the case of banks, if the expenses incurred in respect of such investment are not permitted to be deductedgiven that the income received would be exempt from taxit would be a negative. Inclusion of Asset Backed Securities in eligible securities for Pension and Provident Funds should be a positive for securitisation market.

I n s u r an c e
Proposals No prior approval required to open branches in towns classified as Tier II or lower. Banks authorised to act as Insurance brokers. KYC of banks sufficient to acquire insurance policies. Insurance Bill to be moved in the current parliament session. Banking Correspondents to be authorised to sell micro-insurance. Group insurance products to be offered to homogeneous groups. Insurance companies to be allowed to trade directly in the dedicated Debt Segment of Stock exchanges.

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Impact- Neutral Easing of network expansion through opening branches without prior approval and appointing banks as insurance brokers addresses some of the operational issues in improving market penetration. However, the increase in FDI cap to 49% announced in October 2012 and listing of insurance companies in stock exchanges would be ineffective without the necessary legislative amendments. Passing the Insurance Amendments Bill would be crucial for the development of the sector. While banks are being allowed to act as Insurance brokers, they would need approvals from the regulators Reserve Bank of India (RBI) and Insurance Regulatory and Development Authority (IRDA). Allowing insurance companies to trade directly in the debt segment of stock exchanges could lead to savings on transaction costs for insurance companies. The industrys expectations of an increase in the limit for deducting health insurance premium for income tax purposes and relaxation in service tax on premiums, have not been addressed. The Budget is also silent on the issue of capitalisation support to public sector general insurance companies under the proposed economic solvency requirements.

Capital Markets
Proposals Increase the income limit for first time investors under Rajiv Gandhi Equity Savings Scheme (RGESS) from Rs 1 million to Rs 1.2 million. Avenues for investment expanded to investment in mutual fund units in addition to direct equity investments. Scheme extended for a period of 3 years. Mutual fund distributors to be allowed to become members in the Mutual Fund segment of stock exchanges. Simplification of the procedures and prescription of uniform registration and other norms for entry of foreign portfolio investors. Making KYC easier for Foreign Institutional Investors (FIIs). Introduction of Commodities Transaction Tax to the tune of 0.01% on non-agricultural commodity derivative transactions. Reduction in Securities Transaction Tax (STT) on equity futures transaction to 0.01% from 0.017%. Proposal to allow participation of FIIs in exchange trade currency derivative segment. Pension Funds and Provident Funds to be allowed to invest in Exchange Traded Funds (ETFs). Stock markets allowed to operate dedicated debt trading segment. Banks and PDs to provide liquidity and insurance companies, pension funds and provident funds to be allowed as members of the exchange.

Impact- Marginally Positive

The proposal to increase income limit, avenues and time frame for retail investors under the RGESS is expected to invite a higher degree of retail participation in the Indian capital markets over the medium term. Allowing Mutual Fund distributors to become members of the stock exchange could also help increased channelization of retail savings into capital markets. Simplification of KYC norms for FIIs and elimination of ambiguity in classification between FII and Foreign Direct Investment (FDI) could ensure greater FII registration and enhanced flows over the medium term.

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Introduction of commodities transaction tax is expected to impact volumes on the commodities exchange in the near term. However, over the medium term, the extent of the proposed taxation (0.01%) may not be strong enough to disrupt proprietary activity and consequently growth of the segment may not be significantly impeded. Reduction in STT on equity futures transactions may help increase proprietary trading activity in the equities segment could help improve traded volumes. The proposed enhancement of the list of eligible securities for pension and provident funds in addition to directly participating on the debt segment of the stock exchanges (on receipt of regulatory approvals) is likely to speed up the development of the bond market and also mobilize stable long term resources. Accordingly we expect the activity levels to improve on the corporate bonds on the back of continued efforts to broad-base and deepen the corporate bond markets and expectations of softening of interest rates over the next few quarters.

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