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Budget Analysis – 2011-12
• • • • • • • • Fiscal deficit pegged at 4.6% of GDP for 2011-12. Fiscal deficit projected at 4.1% and 3.5% for 2012-13 and 2013-14, respectively. Revenue deficit for 2011-12 pegged at 3.4%. Revenue deficit for 2010-11 revised downwards to 3.4% from the budgeted estimate of 4.0%. Net market borrowings for 2011-12 is budgeted at Rs. 3,430 billion, 2.3% over 2010-11. Total expenditure for 2011-12 to increase by 3.4% over 2010-11. 1.4% fall in capital expenditure, while 4.1% increase in revenue expenditure over 2010-11. Personal income tax slabs changed: o o o o o • • • • • • • • • • Income upto Rs.1.8 lakhs – nil. Income between Rs. 1.8 lakhs and Rs. 5 lakhs – 10%. Income between Rs. 5 lakhs and Rs. 8 lakhs – 20%. Income above Rs. 8 lakhs – 30%. Incomes of senior citizens between 60 and 80 years of age, to be exempted upto Rs. 2.5 lakhs and for those above 80 years, exemption applicable upto Rs. 5 lakhs.
Standard rate of excise duty on all non-petroleum products to be maintained at 10%. Minimum Alternate Tax (MAT) rate to be increased from 18% to 18.5%. Rate of service tax retained at 10%, but coverage extended. Disinvestment receipts for 2011-12 estimated at Rs 40,000 cr. Government to move towards direct transfer of cash subsidy for kerosene and fertilizers. Foreign investors who meet Know Your Customers (KYC) norms to be allowed to invest in Indian equity mutual funds. FII limit for investment in corporate bond with residual maturity of over five years issued by companies in infrastructure sector, is raised by US$ 20 billion to US$ 25 billion Rs 6,000 cr allotted to public sector banks to maintain a Tier 1 CRAR of 8% during 2011-12 Direct Tax Code to be implemented by April 1, 2012 Allocation to infrastructure at Rs. 2,14,000 cr for 2011-12, 23.2% higher over previous year
the disbursement target of the government-established India Infrastructure Finance Company Limited (IIFCL) will be raised by Rs 5. improved monitoring of the scheme to check leakages would have made these programmes more credible and effective.1% achieved in 2010-11.000 cr by March 31. The Budget has made an attempt to address all these issues. and absence of one-off gains.5% of the gross budgetary support to Plan expenditure.400 cr has been provided to social services and rural development in Budget 2011-12. the Budget reiterates its commitment towards medium-term fiscal consolidation. We believe that the fiscal deficit will settle around 5% of GDP in 2011-12 – a slippage of 40 bps – as we expect lower growth. To remove the funding constraints for the infrastructure sector. y-o-y growth of total budget support.8% in 2011-12 as compared to 27. As the Budget sets a lower deficit and net borrowing target.4% in 2010-11. On the infrastructure front. albeit through small steps. . the Budget has laid stress on providing reasonable allocation to the existing schemes. high current account deficit (CAD). the Budget estimates are conservative. refraining from announcing new schemes. the FII limit for investment in corporate bonds with residual maturity of over five years issued by infrastructure companies has been raised by an additional US$20 billion.14.3% in 2011-12. in order to curb fiscal deficit and provide room for the committed Right to Food Act. Its usefulness could have been multiplied if the scheme had been dovetailed with activities that create durable infrastructure and raise productivity in agriculture. Additionally.000 cr to Rs 18.3% higher than in 2010-11 and amounts to 48. An allocation of Rs 2. On the inclusiveness front. and does not conflict with the Reserve Bank of India’s measures to tame inflation. and fiscal consolidation. stands at 7. Some bold steps towards expenditure reforms were missing. In addition. taking the limit to US$25 billion.000 cr by various government undertakings. However. Despite the strong performance of the economy in 2010-11. By lowering the fiscal deficit target to 4. In order to facilitate the funding of rural infrastructure. The absence of rollback of stimulus (excise) was a bit of a disappointment. though. physical infrastructure has been accorded prime importance. Moreover. An allocation of Rs 1. Social sector spending too remains one of the top priorities of the government. the corpus of the Rural Infrastructure Fund (RIDF) was raised by Rs 2. While the Budget sets a lower nominal gross domestic product (GDP) growth target of 14%.000 cr to Rs 25.91. lower tax buoyancy. 2012. there was an expectation that the government would restart the reform process.000 cr for 2011-12. we believe that the real GDP growth target of 9% factored in the Budget is on the optimistic side. together with internal and extra budgetary resources (IEBR). given that economic growth has recovered. The issue is how realistic the target is. which is 23.6% in 2011-12 from 5. the Budget has inflation-indexed its flagship MGNREGA scheme to ensure stability in real wages. We expect GDP growth to moderate to 8. There are further risks of slippages on subsidy expenditure – on oil and fertilisers.000 cr has been provided for infrastructural development in 2011-12. at least in intent. However. and rising external risks.Budget Analysis Overview The three key macroeconomic concerns before the Union Budget 2011-12 were high inflation. the outlook for 2011-12 is clouded by stubborn and persistently high inflation. like in the previous Budget. along with issuance of tax free bonds worth Rs 30. and will have to be initiated through the year to keep a lid on the subsidy bill and maintain the fiscal space for increased spending on physical and social infrastructure. it is not expansionary.
000 crore under Sarva Shiksha Abhiyan. we expect the market to remain subdued due to concerns over high commodity prices. and negative on real estate. In the first half. Hence.would be positive for consumer discretionary items. inflation and earnings downgrade. We expect banking. we have tempered our expectations of returns. volatile market conditions could put a spoke in the government’s divestment wheel. The budget allocation for education too has been increased by 24%. The allocation to infrastructure has been raised by 23.5% to 5% is positive for corporates. The liberalisation of interest subvention of 1% on housing loans and enhancement of housing loan limit to Rs 25 lakh for units under priority sector lending would be positive for players in affordable and low income housing.3% for 2011-12 – which is less than the government’s target of 8. On the taxation front. the Direct Taxes Code (DTC) is expected to be rolled out as scheduled and the Goods and Services Tax (GST) Amendment Bill will be introduced in this parliament session. education and realty sectors are expected to boost sentiments and support players’ growth. We expect the Nifty to trade at 6200-6400 (Sensex 20700-21200) by the year-end (December 31). However. which includes Rs 21. In the light of global concerns and earnings downgrade. whereas in the second half we expect a potential absence or a bare minimum impact of most of these factors to provide buoyancy to the markets. IT and pharmaceuticals to deliver strong returns but we remain neutral on telecom and infrastructure. We expect FY12 to be a tale of two halves for the Indian market. However. the government has set a target of raising Rs 40. it is low on significant policy actions.5% is negative. increase in exemption limits . increase in MAT rate from 18% to 18.resulting in uniform tax relief of Rs 2. on the other. Expectation of strong GDP growth coupled with attractive valuation would support the market in the second half. We believe that allowing foreign investors to invest in the domestic market through the mutual fund route is a key positive.Budget Analysis Equity Market Although Budget 2011-12 has not rolled back the stimulus for the markets.6% and an effective revenue deficit of 1. the additional deduction of Rs 20.8% for FY12.000 crore through divestment of its stake in central public sector undertakings.14 lakh cr. Further. reduction in surcharge from 7. The markets are expected to cheer the lower-than-expected fiscal deficit target of 4. It would prove to be a shot in the arm for the domestic mutual fund industry in the long run. While these measures will facilitate financing of infrastructure projects. . The FII limit for investment in corporate bonds (with maturity over five years) issued in the infrastructure sector has been raised by US$20 bn.000 . but the overall impact on profitability may not be significant.25% growth. Further. we believe execution delays rather than financing pose a bigger challenge for infra companies.75-9.000 for investment in long-term infrastructure bonds would be extended in FY12. Increased capital outlay and other policy measures for infrastructure.6% to be challenging – based on GDP growth estimate of 8. On the one hand. we believe it is essentially neutral for the domestic equity markets. and will increase funds flow from foreign investors.3% to Rs 2. Continuing with its divestment agenda. we expect 4.
The launch of a ‘National Mission for Hybrid and Electric Vehicles’ and various excise and customs duty benefits proposed for hybrid. the limit for interest rate subvention of 1% on home loans would be increased from Rs 10 lakhs to Rs 15 lakhs.Rise in priority sector home loan limit to benefit banks As per the Union Budget 2011-12.8 lakh will aid two-wheeler sales.200 cr provided in the last 3 years) to maintain a minimum tier-I capital adequacy ratio of 8%.000 cr in 2010-11. The extension and enhancement of interest subvention on crop loans from 2 to 3%. IIFCL’s loan disbursal target has been set higher as well at Rs 25. However. given the low population of electric vehicles in India. the Union Budget has proposed a reduction in custom duties for gypsum and pet coke from 5% to 2.000.Increase in excise duty negative The Union Budget 2011-12 has proposed the replacement of existing excise duty rates with a 10% ad valorem rate and an additional Rs 160 per tonne of cement. cement players will not be able to pass on the increase in duty to customers. Hence.Budget to have neutral impact The Union Budget 2011-12 is not likely to have any significant impact on the Indian auto components and tyres industry. we believe that the impact of the budget on the construction sector is neutral. Hence. However. This results in an effective 2-4% increase in the excise duty for the cement industry. though it will aid alternate fuel vehicle sales over the longer term. Banking and Finance . The extension of tax slabs for individual tax payers from Rs 1. Further. the allocation for Bharat Nirman has been increased by 20% in 2011-12. Moreover. the reduction in custom duties is insignificant for the cement industry.Budget Analysis Sector Analysis Auto components & Tyres . Cement . The hike in interest rate subvention for agriculture loans from 2 to 3% and increased target for credit flow to farmers would facilitate availability of funds at cheaper rates. Gypsum accounts for a mere 2-3% of the total cost of sales for cement players.FII limit on corporate infrastructure bonds raised. In the current operating environment. Also.Budget to have no significant impact on automobile industry The Union Budget 2011-12 is not likely to have any significant impact on the Indian automobile industry. The overall impact on passenger cars and commercial vehicles segment will be largely neutral. revision of wage rates under the NREGA scheme and continued focus on rural development will have a marginally positive impact on rural two-wheeler and tractor sales. Automobiles . This will not have any significant impact on the landed cost of NR at current price levels. Further. these may not push up the bottomlines of construction companies.000 cr in 2011-12 (in addition to the Rs 23.000 cr for 2011-12 from an estimated Rs 20. pet coke is used as raw material by a select few companies only. . and could lead to a faster take-off of infrastructure projects. tax-free bonds permitted An increase in the foreign institutional investment (FII) limit by US$20 billion for investment in corporate infrastructure bonds will help mop up bond issues. select government undertakings like Indian Railway Finance Corporation have been allowed to issue tax-free bonds totalling Rs 300 billion. Natural rubber (NR) will attract customs duty of 20% or Rs 20 per kg (whichever is lower). fuel cell and hydrogen cell technology-based vehicles or their parts is unlikely to have any immediate impact. Construction . Also. These measures are expected to assist banks in accomplishing their priority sector lending targets and lower lending rates for borrowers.6 lakh to Rs 1. on investment in long-term infrastructure bonds has been extended to 2011-12. thus improving their ability to pursue loan growth more aggressively. this is not expected to have any significant impact on demand for auto components. Public sector banks will be provided Rs 6. electric.5%. for houses priced below Rs 25 lakhs. The exemption on customs duty on spare batteries for electric vehicles (cars and twowheelers) and concessional excise duty of 4% on these batteries will reduce the maintenance cost of these vehicles. housing loan limit under priority sector would be enhanced from Rs 20 lakhs to Rs 25 lakhs. provided in 2010-11. with effect from April 2011. The additional tax exemption of Rs 20. These proposals are expected to address the funding needs of the infrastructure segment.
270 cr is a positive for the sector. Pharmaceuticals . However. which constitute about 20% of the IT services revenues. This could negate the positive impact of the residential segment thus. Telecom .980 cr from Rs 2.000 cr from Rs 2. the government will increase its contribution towards the same. the government has indicated that it would gradually move towards direct transfer of cash subsidies on LPG and kerosene to people living below the poverty line. priority sector lending limit for housing loans provided by banks has been enhanced from Rs 20 lakhs to Rs 25 lakhs.5% each. This will lead to higher investments in affordable housing projects. The cut in the surcharge rate neutralizes the impact of the increase in MAT by keeping the effective rate of MAT unchanged. The budget has also proposed investment linked tax deduction for affordable housing projects. The rural housing fund has been enhanced to Rs 3.Increased focus on affordable housing The interest rate subvention of 1% has been extended for housing loans up to Rs 15 lakhs (for houses costing less than Rs 25 lakhs) from Rs 10 lakhs earlier (for houses costing less than Rs 20 lakhs). However. Information Technology . The exemption from basic.5% to 5%. Note: The proposal to levy 18. whereas surcharge has been reduced from 7. making the impact neutral for the overall real estate segment. The extension of duty exemptions would help in sustaining the current low prices of mobile handsets.Budget Analysis Housing .Neutral impact of the budget on the Pharmaceutical sector The impact of the Union Budget 2011-12 on the Pharmaceuticals industry is neutral.5% to 5%. Higher budgetary allocation under Technology Upgradation Fund Scheme (TUFS) to Rs 2. the cost competitiveness of viscose and acrylic will improve vis-à-vis cotton and polyester. .600 cr for 2010-11. Textiles . At the same time. will benefit acrylic and viscose fibre manufacturers respectively by reducing their raw material costs.000 cr while HUDCO has been allowed the issue of tax free bonds up to Rs 5.5%. countervailing duty (CVD) and special additional duty (SAD) on components and accessories of mobile handsets has been extended for the next financial year and a few more items have now been included in its ambit. This will reduce under-recoveries for oil marketing companies in the future. we believe that if under-recoveries increase significantly.No major impact on oil & gas sector The Union Budget (2011-12) will have no major impact on the oil & gas sector.5% minimum alternate tax (MAT) on developers of special economic zone will have a negative impact on real estate companies with a SEZ focus. Domestic IT services.000 cr. A mandatory excise duty of 10% is being imposed on branded readymade garments (RMG) and textile made-ups. it has reduced the surcharge levied from 7. from 5% to 2. The government has provided for Rs 23. Midsized players would be more affected as a larger proportion of their revenues accrue from STPI units vis-àvis tier-I players. are expected to get a shot in the arm from the planned government expenditures aimed at improving IT infrastructure and delivery mechanisms. These measures will provide a boost to affordable housing.MAT levy on SEZ and non-extension of STPI benefits to impact player profitability The proposal to bring SEZ units under the purview of the Minimum Alternative Tax (MAT) and the nonextension of tax benefits for STPI units is expected to adversely impact the profitability of IT players. MAT has been raised from 18% to 18. yarn and fabric manufacturers may have to pay an increased excise duty at 5% vis-à-vis an optional and concessional 4% duty paid earlier. keeping the effective MAT rate at the same level. As a result. The increase in excise duty on formulations from 4% to 5% will have negligible impact on the industry. Oil and Gas .5%. However.700 cr as its share in under-recoveries for 2011-12.Neutral impact on telecom services sector The government has marginally increased the Minimum Alternate Tax (MAT) from 18% to 18. Since it is under Cenvat Credit. Further. This is significantly lower than the revised estimates of Rs 38.Mandatory excise on branded garments negative for textiles The impact of the Union Budget 2011-12 is negative for the textiles sector. This will exert further pressure on the margins of RMG and made-ups manufacturers who are already struggling with an unprecedented rise in input costs. the reduction in customs duty on Acrylonitrile and rayon grade wood pulp.
3.3%. This would provide an expanding avenue for mutual funds to invest in. Increase in Dividend Distribution Tax (DDT) for money market and debt funds DDT increased to 30% from 25% on investments made by firms into money market and debt funds. In order to give a boost to infrastructure development in railways. ports.Budget Analysis Mutual Funds and Financial Market Budgetary measures and their impact 1. FIIs would also be permitted to invest in unlisted bonds with a minimum lock-in period of 3 years and will be allowed to trade amongst themselves during the lock-in period. Impact This would place corporate plans of debt and money market funds at par with bank fixed deposits and thus may impact inflows. 2.000 crore). this takes the limit to US$25 billion.14. Impact This will widen the investor base of mutual funds and give non-SEBI registered foreign investors an opportunity to invest in Indian equity markets. since infrastructure as a segment does not account for a major share of issuances in the corporate bond market in India. The focus on infrastructure projects is likely to result in an increasing number of corporate bond and equity issuances for fund raising by infrastructure companies and institutions. the corporate bond market is expected to remain range bound as the appetite for investment in infrastructure bonds by FIIs. For retail investors it stays unchanged at 12%. Impact The continued thrust on infrastructure funding is expected to result in an increasing appetite for infrastructure-oriented mutual funds.000 crore is being made for the infrastructure sector – a y-o-y growth of 23. Foreign individual investors allowed to invest in mutual funds To liberalise the portfolio investment route.2. The measure would also provide an avenue to boost equity mutual fund AUM. the government proposes to allow tax free bonds of Rs.30. Moreover. Increase in FII limit in corporate bonds To enhance the flow of funds to the infrastructure sector. the government has decided to permit SEBI registered mutual funds to accept subscriptions from foreign investors who meet the KYC requirements for equity schemes. only FIIs and sub-accounts registered with the SEBI and NRIs are allowed to invest in mutual fund schemes. the impact of the above measure is not expected to be significant in the movement of corporate bond yields. National Highway Authority of India (Rs 10. is being raised by an additional limit of US$20 billion.000 crore). which till now was US $5 billion. with residual maturity of over five years issued by companies in the infrastructure sector. Impact Although an increase in the FII limit is a positive factor. the FII limit for investment in corporate bonds. has not been utilized to its fullest. housing and highways development. Currently. It would also boost the .000 crore) and Ports (Rs 5.000 crore). an allocation of over Rs.000 crore to be issued by various government undertakings in the year 2011-12. This includes Indian Railway Finance Corporation (Rs 10. HUDCO (Rs 5. 4. Increase in allocation towards infrastructure bonds • • For 2011-12. This will raise the total limit available to FIIs for investment in corporate bonds to US$40 billion. More technology enabled products with enhanced risk management practices are expected to be launched for the global audience.
adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. CRISIL especially states that it has no financial liability whatsoever to the subscribers/ users/ transmitters/ distributors of this Report. Information has been obtained by CRISIL from sources which it considers reliable. The added tax incentives could lead to an increase in allocation of their investments into the emerging market debt through these funds. CRISIL is not liable for investment decisions which may be based on the views expressed in this Report.Budget Analysis investment avenues for major market participants such as insurance companies and PF trusts enabling them to utilize their investment limit in ‘additional category’ as defined in their investment guidelines in these bonds. Impact The proposal to prepone the exit age as well as government contribution being extended to five years from three years would help increase penetration levels in the PFRDA initiative. the government proposes to relax the exit norms whereby a subscriber under Swavalamban will be allowed to exit at the age of 50 years instead of 60 years. CRISIL Research. a Division of CRISIL Limited has taken due care and caution in preparing this Report. which may. An estimated 20 lakh beneficiaries are expected to join the scheme by March 2012. Impact This may have a negative impact on the bottom line of the insurance companies. No part of this Report may be published / reproduced in any form without CRISIL’s prior written approval. IDBI is not responsible for any error or inaccuracy or for any losses suffered on account of information contained in this report. Based on feedback. in its regular operations. 6. it is proposed to extend the benefit of government contribution from three to five years for all subscribers of Swavalamban who enroll during 2010-11 and 2011-12. obtain information of a confidential nature which is not available to CRISIL Research. The incremental impact can be more on insurance companies with a larger share of non-ULIP products. CRISIL does not guarantee the accuracy. Further. Impact The above measure could lead to fund flow from private equity players and major overseas hedge fund. 7. whichever is later. Set-up of notified infrastructure bonds To attract foreign funds for infrastructure financing. the government proposes to create Special Vehicles in the form of notified infrastructure debt funds. The income of these funds would be exempt from tax. CRISIL Research operates independently of. 5. and does not have access to information obtained by CRISIL’s Ratings Division. Disclaimer: The information contained in this report has been obtained from sources considered to be authentic and reliable. Penetration of “Swavalamban” The co-contributory pension scheme called “Swavalamban” announced in the previous budget has received over 4 lakh applications from workers in the unorganised sector. IDBI does not solicit any action and is not liable for any investment decisions if made on the basis of this report. However. . However. Life Insurance Companies come under service tax net Services provided by life insurance companies in the area of investment are proposed to be brought into the tax net on the same lines as ULIPs. or a minimum tenure of 20 years.
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