Budget: Who can expect what

February 26, 2007

Every year, as the annual Budget draws closer, expectations across all sections of the society
start building up. This year too, it is no different. What is different this time, though, is that the
finance minister has a tightrope to walk on.

On one hand, global as well as domestic economies (including corporate earnings) are heading
for a slowdown leading to an added element of uncertainty, whether India will be able to sustain
its gross domestic product (GDP) growth rate of 8-9 per cent seen in the past three-four years.

In effect, it also indicates a potential slowdown in revenue collections for the government. On
the other hand, with inflationary pressures (higher prices of agri-produce, crude oil and other
commodities), many are expecting duties to be lowered or at least, rationalised.

The industry is thus hoping for initiatives or steps that will help ease the cost pressures, while
simultaneously providing thrust to growth. The third aspect comes from the political side. With
many states headed for elections this year and national elections scheduled for 2009, there are
expectations that the Budget will also contain populist measures.

In short, look forward to goodies for the aam admi through higher allocation for social sectors
like health, education, rural upliftment and so on.

For India Inc, where many sectors are facing a slowdown or negative growth (two-wheelers and
consumer goods) and cost pressures are on the rise, the expectations are high. Since many
industries are in the midst of creating new capacities, it is equally important that the Budget
continues to emphasise on sustaining growth rates.

Among sectors that are expected to receive higher attention include infrastructure (power, roads
and ports), agriculture, labour-intensive and/or export-oriented industries like textiles,
pharmaceuticals and auto components.

While the Budget may not end up appeasing everybody, if it can manage to strike a balance
namely, sustain growth, address inflationary issues, push tax reforms further, provide reasonable
emphasis to social sectors, as well as agriculture without compromising on fiscal discipline, it
will be an achievement. To know more on what the industry expects and the sectors that stand to
gain, read on:

Information technology

The Indian software and information technology (IT) industry have been in the dumps over a
large part of the past year.

Although issues like the rising rupee, imminent US slowdown and manpower (availability and
costs) are playing spoilsport, the industry seeks some relief through extension of the Software
Technology Parks of India (STPI) scheme, which would prolong their tax holiday.
Besides this, a reduction in the scope of fringe benefit tax (FBT) and a waiver from taxes on
equity stock option plans (ESOPs) may help companies add a bit to their fledgling bottom lines.

However, since IT companies already have high profit margins, and they have been enjoying tax
benefits since a decade now, chances are that these demands may not be fulfilled. For BPOs,
their demands include rationalisation of FBT to levels at with par with IT companies.
Text: Business Standard Smart Investor Team

FMCG

For the fast moving consumer goods (FMCG) sector, maintaining profitability became a
challenge due to cost pressures on inputs like wheat, milk, vegetable oils and palm oils even as
demand was robust.

Companies partially passed on the price increases to the consumers with some even sacrificing a
bit of volume growth. The soaps category saw a volume de-growth of 5 per cent in the last
quarter following the 10 per cent hike in product prices over the last six months.

Little wonder that most of the expectations pertain to lowering duties. That apart, incentives for
promoting the cold-storage infrastructure, essential for development of food processing sector,
are also expected.

Infrastructure

With higher allocation for infrastructure projects from 5 per cent of GDP to 9 per cent by 2012
planned, companies operating in the space as well as catering to the needs of the infrastructure
sector stand to gain. However, some issues need attention.

These include, focus on funding issues like increasing Viability Gap Funding (VGF) and help
financing critical, long-gestation and financially less viable projects.

Further, there are hopes of re-introduction of tax sops, with an aim to attract higher investments.
Besides, the industry is also expecting more clarity on the section 80IA (benefits given to the
companies engaged in infrastructure development) and extension of the same to the contractors
as well.

Pharmaceuticals

Hit by rupee appreciation and price erosion, large Indian pharma companies are looking at
various ways of enhancing revenues -- by looking at European and less regulated markets,
conducting joint research trials and outsourcing arrangements with large multinational pharma
companies.

Their demands pertain to tax concessions for R&D units and treatment of expenses relating to
clinical trials and product patents as R&D expenses.
Should these be accepted, it will be positive for companies, which have a higher spending on
ANDA, IND and DMF--- all procedures to register a product in regulated markets. CRAMS
players, too, will be helped by this immensely.

Power

If the government's target of �power for all� and the rising demand for power is considered,
then, power could be among the few focus areas. Broadly, the industry is expecting more fund
allocation for ongoing schemes such as APDRP and RGGVY besides, a greater degree of
commitment through further reforms.

For easy access to funds, the industry has proposed tax free power bonds, priority lending status
for power sector, relaxation of ECB norms and extension of tax benefits till 2017 for UMPPs.

To address the supply constraints for key equipments, a cut in custom duty on power and
transmission equipment is proposed.

Besides, a reduction in excise duty on power equipment will also help lower equipment. On the
raw material front, tax incentives for captive mining and, policy initiatives for easy availability
of feed stocks have been proposed.

Metals

Amid concerns over the rising iron ore and coal prices, companies not having captive resources
are hoping that the custom duty on the coke and refractories to be scraped besides, more
restrictions on the export of iron ore.

In finished products, a reduction in excise duty on long steel products (used in construction) is
also expected. This should help partly offset the pressure on account of rising input costs.

Capital goods and Engineering

Capital goods sector will be the key beneficiary of increased spending and incentives for the
infrastructure sector and robust industrial capex. Higher budgetary allocation of funds for
different schemes such as APDRP and RGGVY, and segments like power, transports, ports and
mining augur well for the sector.

It is expected that some relief, to help offset rising raw material prices, will be provided by way
of reduction of custom duty on metals like aluminium, zinc and steel alloys. This will help lower
costs for the industry.

Oil & Gas

The high subsidies that companies like ONGC, HPCL, BPCL, IOC and GAIL have to bear, have
negated the benefits of the bullish global oil scenario. The small price hikes for diesel and petrol
and the issue of oil bonds have not helped the oil refining and marketing companies much, as
their under-recoveries still stand at a huge Rs 92,000 crore (Rs 920 billion).

Moreover, the need to speed up exploration and production (E&P) activities is desired.

Auto and Auto components

The auto and auto component sectors have been reeling under the combined assault of higher
interest, raw material costs and a stronger rupee. Commercial vehicles and two wheelers have
borne the brunt of this, as banks shut off the credit tap while buyers postponed their purchases.

Softening of interest rates and reduction in excise duties could bring down costs for the customer
and boost sales of vehicles across segments, thus helping both, auto makers and component
players.

Little wonder, the industry hopes that excise duties on bigger cars and utility vehicles will be
brought at par with smaller cars to 16 per cent, while excise duty on two wheelers will be cut
from 16 per cent to 12 per cent.

Agriculture

The budget is expected to be positive for the sector by way of creation of infrastructure like
water resources, availability of funds, procurement centers, warehousing, power, etc, aimed at
improving output. Hence, better prospects for companies in the irrigation, seeds and fertilizer
segments.

Regards rising input costs, the fertiliser companies are expecting important changes with respect
to availability of gas and other inputs at cheaper prices. Secondly, to reduce India�s dependence
on imports, there is a need to attract investment with an aim to create fresh capacities, hence, the
expectation of tax incentives.

Apart from fertiliser, the sugar companies are expecting a reduction in excise duty on molasses
that will help reduce the cost of producing ethanol and improve production for blending with
petrol.

Cement

Last year�s move of introducing a dual excise duty structure, aimed at putting a lid on cement
prices, backfired as companies resorted to raising prices due to higher input costs. In this
scenario, moving back to a simplified structure by rationalising the excise duties is not ruled out.

With costs rising, a reduction in limestone royalty (currently Rs 67 a tonne) and a waiver of the
extant 5 per cent import duty on coal and pet coke is expected. Should that happen companies
which rely on imported coke should benefit.

Banking and NBFC

The overall situation in the banking industry seems to be satisfactory except lower credit growth
and asset-liability mismatch (proportion of deposits more than five years in total deposits is very
less at 8.3 per cent). Thus, there is a need to make long-term deposits more attractive.

Further, resources have to be channeled to agriculture and infrastructure sectors, if higher GDP
growth is to be achieved.

For non-banking finance companies (NBFCs) catering to the needs of the housing and
infrastructure sectors, there is a need to reduce cost of funds. Housing finance companies (HFCs)
are hoping that they be allowed to borrow through external commercial borrowings (ECBs) and
infrastructure finance companies are expecting the removal or reduction of 20 per cent
withholding tax on payment of interest on ECBs.

Textiles

The rise in the value of the rupee has adversely impacted the competitiveness and profitability of
Indian textile industry-one of the top export contributors and the second largest employer.

While operating margins of top exporting companies has eroded, the country's total exports to
the US during April-October 2007 have declined by 3.2 per cent in value terms.

Thus, there is a need to achieve scale, modernise existing machinery and improve cost-efficiency
in order to be globally competitive. Moreover, there is also a need to reduce the input costs for
both cotton textile and man made fibre industry.