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MAKING MA RK
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Economy 1 .
Persistently high inflation in the last few years constrains the monetary policy from being aggressive in rate cuts to support growth. the proposed steps to improve access to funding and tax concessions will boost investments in the infrastructure sector and help address supply side constraints. The excise duty increases and likely fuel price hikes create some upside for inflation. Has it been able to do so? The budget does attempt to tilt the balance towards investment: Capital expenditure is budgeted to grow at 30. The intent to fully fund the food subsidy but limit the fertiliser and fuel subsidy bill to create fiscal space for investment spending is a right move. CRISIL believes that achieving the fiscal deficit target is difficult as 7.5-7. This together with the high borrowings of the government will keep the 10-year bond yields at 7.2 per cent WPI-based inflation in 2012-13. Although inflation has come down a bit. We have retained our pre-budget projection of 7 per cent GDP growth in 2012-13. but the bold expenditure reforms like de-regulation of petroleum prices are missing. Lower growth means lower tax collections.6 per cent GDP growth assumption and subsidy reduction targets are ambitious. While the budget implicitly assumes increases in regulated fuel prices.8 per cent by March 2013. 2 . These are steps in the right direction. it was expected to take steps to set the fiscal house in order.1 per cent for 2012-13 is lower than 5. On the contrary. was expected to do little to boost the short term growth prospects.6 per cent growth in revenue expenditure. the overall macroeconomic situation remains quite challenging on domestic as well as global fronts.CRISIL BudgetAnalysis Economy analysis Fiscal deficit continues to remain a constraint Budget 2012-13 did not enjoy the positive growth environment of the budget. The budget tries to offset this by raising service tax and excise duties. The sharp slippage in fiscal and revenue deficits in 2011-12 means that fiscal policy could no longer assist economic growth. The commitment to cap subsidies within 2 per cent of GDP is good in intent. reforms of subsidy regime would be credible only these reforms are undertaken in a transparent manner. The fiscal deficit target at 5. The budget therefore.7 per cent as against 10. The projected higher borrowings of the government will limit the reduction in interest rates and decrease private investment if liquidity remains tight.9 per cent achieved in the current year. This would have entailed reduction in deficit and improving the quality of expenditure . We expect 6.reduce consumption expenditure and increase investment expenditure. But the risks of slippage remain high. Also.
Industry 3 .
We believe this is a positive step towards the goal of financial inclusion.000 earlier will increase transporters’ costs only marginally. However. The shift to ad valorem tax of 3 per cent on body-building of commercial vehicles from a flat Rs 10. Excise hikes for small cars and two wheelers will be partially offset by the increase in individual income-tax slabs. demand for sedans and luxury cars will be hit. Banking Recapitalisation to benefit public sector banks Neutral In 2012-13. which is a positive given the significant amount of capital required by them under Basel III norms. Effect Neutral Auto components & tyres No impact on auto components as well as tyres industries Neutral Auto component and tyre manufacturers are expected to fully pass on the increase in basic excise duty. while basic customs duty for completely built units of such cars was increased to to 75 per cent from 60 per cent. Continued… 4 . Hike in service tax to 12 per cent from 10 per cent will not hit transporters much. as it will bring down the cost of ECBs.5 million has been extended for another year. This could adversely impact investments and credit growth in 2012-13. as they already enjoy a 75 per cent abatement. and decrease in the customs duties for specified parts of hybrid vehicles will have no major positive impact on demand for auto components. As per the Union Budget 2012-13. Rs 100 billion will be allotted to NABARD for refinancing of regional rural banks (RRBs). commercial vehicles and two wheelers will be passed on to consumers. given the low population of eco-friendly vehicles in India. a financial holding company is proposed to be set up to raise funds for PSBs. Also. Further. Automobiles Negative for cars.CRISIL BudgetAnalysis Overall sectoral impact Industry Airport infrastructure Neutral impact on airport infrastructure The proposal to allow full exemption from customs duty and countervailing duty for aircraft spares. a reduction in the excise duty on replacement batteries for electric vehicles from 10 per cent to 6 per cent. the RBI’s ability to cut interest rates would be impeded by the high fiscal deficit. tyres and testing equipment is expected to bring down the costs of Indian maintenance. interest rate subvention of 1 per cent on home loans up to Rs 1. Airport infrastructure companies are likely to benefit marginally from the reduction in the rate of withholding tax on interest payments on ECBs from 20 per cent to 5 per cent. On the flip side. neutral for other segments Negative The increase in the excise duty on cars. Continued interest subvention on crop loans. Additionally. repair and overhaul (MRO) service providers. public sector banks (PSBs) are likely to receive a major portion of the Rs 159 billion allocated for recapitalisation of government financial institutions. an additional subvention up to 3 per cent for prompt loan payments and a 21 per cent increase in agricultural credit will aid tractor sales. as excise duties were hiked to 27 per cent from 22 per cent.
the impact will be positive for south-based companies such as India Cements and Dalmia Cements. have been announced. Although the government has extended investment-linked benefits. The net impact will vary for each company based on the extent of its dependence on imported coal. aimed at improving availability of funds to the infrastructure sector. as their proportion of coal imports is higher. These measures will ease financing constraints faced by certain infastructure segments and spur investments. the industry meets close to onefourth of its total coal requirement through imported coal. CRISIL Research believes that private participation in the industry will lead to faster and more efficient implementation of irrigation projects. Secondly. to focus on providing finance to the irrigation and water sector. Effect Neutral Construction Tax-free bonds limit doubled. a central body — Irrigation and Water Resource Finance Company — is expected to be set up in 2012-13. This is likely to increase the effective excise duty by 1-1. Currently. The limit for taxfree bonds in the infrastructure sector has been doubled to Rs 600 billion for 2012-13 from that in 2011-12. For instance. The government will provide interest subvention to farmers who make timely payment of farm loans. investment in urea plants will depend on domestic gas allocation. effectively lowering the interest rates. the reduction in basic customs duty on some water-soluble fertilisers and liquid fertilisers may increase their usage. to 5 per cent from 20 per cent.Overall sectoral impact …continued Industry Cement Lower cost of imported coal to offset increase in excise duty The Union Budget 2012-13 has proposed to increase the ad valorem component of excise duty from 10 per cent to 12 per cent. continued… 5 .5 per cent for most cement companies.5 per cent on the cement industry’s operating profit. This will marginally benefit construction companies. The Budget has reduced the withholding tax on interest payments of external commercial borrowings for the roads sector. improving revenues and profitability of fertiliser players. boost to irrigation sector Positive A slew of measures. We expect the proposal to exempt imported non-coking coal from basic customs duty (earlier at 5 per cent) to have a positive impact of 1-1. The access to viability gap funding for irrigation projects will improve private sector participation in the sector. while reducing the specific duty component from Rs 160 to Rs 120 per tonne for non-mini cement plants. Also. proposed exemption of customs duty on capital equipment and provided viability gap funding for new projects. Fertilisers Fertiliser industry to benefit from cheaper farm credit Positive Fertiliser demand is set to get a boost on account of cheaper credit availability to farmers.
The interest rate subvention of 1 per cent for housing loans up to Rs 1. The service tax hike will push up prices of under-construction properties marginally. A credit guarantee fund is proposed to be set up to improve housing loan disbursements to the low-income category. The abatement provided for hotel accomodation has been reduced from 50 per cent to 40 per cent. The rural housing fund has been enhanced to Rs 40 billion from Rs 30 billion. the increase in service tax will be mildly offset by the tax credits allowed on the input services received by hotels. the players will have limited ability to pass on the increase in service tax through higher room rates. An increase in the income tax exemption limit will raise the diposable income of the salaried class by Rs 2. an additonal benefit of up to Rs 20.5 million) has been extended for another year. Information technology Increased service tax will be passed on to clients Neutral The proposal to increase service tax from 10 per cent to 12 per cent is unlikely to impact the profitability of Indian IT players. these projects form only a small proportion of the industry currently. as the cost of acquisition of computer hardware will increase. are expected to get a shot in the arm from planned government expenditure aimed at improving IT infrastructure and enabling efficient delivery mechanisms.000 would accrue for individuals with income higher than Rs 0. The increase in excise duty from 10 per cent to 12 per cent will have a marginally negative impact on input costs. However.2 per cent from 5 per cent. All these measures will support affordable housing projects. which constitute about 20 per cent of IT services revenues. As a result. The withholding tax rate on interest payments for these ECBs has been cut to 5 per cent from 20 per cent for the next three years. Effect Negative Household appliances Customs duty exemption on LCD/LED panels and higher disposable income to benefit industry Positive Complete exemption of customs duty on LCD/LED panels from 5 per cent in the previous year will lower panel TV prices.CRISIL BudgetAnalysis Overall sectoral impact …continued Industry Hotels Service tax increase to impact hotels negatively The reinstatement of service tax to 12 per cent from the earlier rate of 10 per cent will adversely affect hotel players. Domestic IT services. Housing Continued focus on affordable housing Neutral ECBs have been allowed as a funding option for affordable housing projects. These factors will more than offset the 2 percentage point increase in excise duty. thereby driving demand. the effective service tax for hotel accomodation will increase to 7. Also. Given the intense competition in the industry. however. continued… 6 .000 annually. thus positively impacting the household appliances industry. as they will pass on the same to the clients. many real estate developers will find it difficult to raise ECBs. given weak balance sheets. However.8 million.5 million (for houses costing below Rs 2.
Oil and gas Cess increase and low budgeting of subsidies to impact profits Negative The proposed increase in cess on production of crude oil. The budget is positive for domestic newsprint manufacturers. as they source coal from Coal India Ltd or through the e-auction route. Paper Higher excise duties to pull down margins Negative Excise duties on paper and paperboard (P&B) and pulp have been increased by 1 per cent. Copyrights relating to recording of cinematographic films by the film industry continues to be exempt from service tax. Newsprint makers will record an improvement in margins. Given the mounting under-recoveries. The price increase is likely to be about Rs 2. Further.500 per tonne. The impact is negative for P&B players as the impact of excise duty hikes on raw materials and finished goods will outweigh that of customs duty removal on wastepaper. This is marginally positive for the industry.000 crore in 2012-13. and will see a further drop in their EBITDA margins. P&B companies will be unable to pass on the entire increase in duties. customs duties on imported wastepaper have been removed.500 per tonne for aluminium. the budgetary allocation for education has been increased by 21 per cent to Rs 74. The government has decided to include oil and gas/liquefied natural gas storage facilities and oil and gas pipelines under eligible sectors for viability gap funding. On the positive side. Effect Neutral Non-ferrous metals Excise duty hike to be passed on Neutral The increase in excise duty to 12 per cent from 10 per cent will have a neutral impact on the non-ferrrous metal industry as the hike is expected to be passed on to customers. The government’s estimate of oil subsidies for 2011-12 and 2012-13 seems to be conservative. as against 5 per cent for other paper varieties. The government has also imposed an excise duty of 6 per cent on wastepaper. which will drive demand for W&P paper. Domestic newsprint manufacturers will benefit as imported pulp will now attract zero customs duty.500 per tonne from Rs 2. to Rs 4. The exemption of custom duty on non-coking coal may not have a significant impact on most aluminium companies. will increase the cost of domestic oil production by $5 to $6 per barrel. continued… 7 .Overall sectoral impact …continued Industry Media & entertainment Increased service tax will be passed on to consumers Service tax has been increased to 12 per cent from 10 per cent but we expect DTH and cable operators to pass this on to consumers. which will put severe pressure on their profits. Given the oversupply and weak domestic demand. oil marketing companies and upstream public sector undertakings may have to absorb a higher share of under-recoveries.
The cost of external commercial borrowings (ECBs) will decrease as the rate of withholding tax on interest payments on ECBs is proposed to be reduced from 20 per cent to 5 per cent for three years. Effect Neutral Pharmaceuticals Players to pass on excise duty hikes Neutral The impact of the increase in excise duty – to 6 per cent from 5 per cent on formulations and to 12 per cent from 10 per cent on bulk drugs – will be neutral. Pharmaceutical companies are likely to pass on these hikes to consumers. it will not have a major impact on the sector since the same amount was available last year and yet the ports sector was not able to issue any bonds. while customs duties have been left unchanged. natural gas and liquified natural gas (LNG) will provide some relief to power generators reeling under high fuel costs. The fiveyear extension of the 200 per cent weighted deduction for in-house R&D expenditure will only marginally benefit Indian pharmaceutical players. The excise duty has been increased to 12 per cent from 10 per cent. While this will facilitate fund availability for the development of port projects. as R&D expenditure. forms less than 5 per cent of their net sales. Exemption of 5 per cent customs duty on thermal coal. The Budget also enhanced the availability of funds for financing power projects through taxfree bonds. enhanced fund availability Positive The Union Budget 2012-13 is a positive for the power sector.CRISIL BudgetAnalysis Overall sectoral impact …continued Industry Petrochemicals No significant impact on the industry Apart from an increase in excise duty. continued… 8 . The extension of the sunset clause by one year to avail the 10-year tax holiday and additional depreciation of 20 per cent in the first year also bode well for new power projects. Ports Limited impact of tax-free infrastructure bonds Neutral Allocation of funds in the form of tax-free infrastructure bonds for the ports sector remains unchanged at Rs 50 billion. on an average. Power Exemption of customs duty on fuel. The proposal to allow external commercial borrowings (ECB) to part finance the rupee debt of existing power projects and reduction of withholding tax on interest payments on ECBs (from 20 per cent to 5 per cent) will reduce the cost of borrowings for the sector. no major changes have been announced.
The increase in customs duty on flat steel will provide Indian flat steel players the flexibility to increase prices further by Rs 500 to Rs 1. A large portion of these funds are expected to flow into the roads sector. Effect Positive Steel Steel players likely to pass on hike in excise duty Neutral The budget proposal to hike excise duty to 12 per cent from 10 per cent will have a neutral impact on the steel industry. Neutral continued… 9 . Steel companies are likely to pass on the increase in excise duty.000 per tonne. only marginally aid road developers as their exposure to ECBs is limited.000 per tonne. At the corporate level. The National Highway Authority of India (NHAI) has again been allowed to issue tax-free bonds totalling Rs 100 billion after the success of its fully-subscribed Rs 100-billion issue last year. which will increase the price of steel by Rs 700 to Rs 1. This will. however. The move is expected to aid NHAI in implementing national highway projects. there has been a reduction in the withholding tax on interest payments of external commercial borrowings (ECBs) for the roads sector.Overall sectoral impact …continued Industry Roads & highways Measures aimed at further improving fund availability The Union Budget 2012-13 has announced several measures to improve availability of funds for the infrastructure sector. to 5 per cent from 20 per cent. Sugar No impact of Union Budget 2012-13 on the sugar industry There is no impact of the Union Budget 2012-13 on the domestic sugar industry.
the Textile Ministry has recommended the continuation of the scheme in the 12th Five Year Plan (2012-13 to 2017-18). 10 . will stimulate demand. Under the scheme for support to public-private partnership (PPP) in infrastructure. This. Allocation for the Technology Upgradation Fund Scheme (TUFS) has been fixed at Rs 29.CRISIL BudgetAnalysis Overall sectoral impact …continued Industry Telecom Increased service tax will be passed on to subscribers Though the service tax rate has been increased to 12 per cent from 10 per cent. from Rs 154 billion allocated in the 11th Five Year Plan. fixed network for telecommunication and telecommunication towers have been made eligible for viability gap funding.5 per cent. However.9 billion for the plan period. the Government has estimated receipts of Rs 400 billion in 2012-13 from the auction of telecommunication spectrum. 2012. Effective excise duty on branded apparels and made-ups has been cut to 3.1 billion for 2012-13. along with lower cotton prices. Further. it is not clear whether the TUFS benefits will be available even for fresh investments announced after March 31. compared to the revised estimate of Rs 37 billion for 2011-12. At this stage. we expect operators to pass the increase on to subscribers. with allocations rising to Rs 158.6 per cent from 4. Effect Neutral Textiles Excise cuts on branded apparels beneficial Positive The Union Budget has reduced the Excise duty on branded apparels and textile made-ups and removed the customs duty on shuttle-less looms.
Capital markets 11 .
on subsidies and strong reforms to bring India’s growth to 8% (CRISIL Research estimate of 7%) have raised investors’ concerns.5850 by endFY13. However. Easing of funding for stressed sectors through the ECB route. lack of clear steps on fiscal consolidation.CRISIL BudgetAnalysis Equity market Budget neutral for the capital markets The finance minister has delivered a neutral budget to Dalal Street. lower/nil customs duty on mining equipment and increase in personal tax slabs have cheered the markets. though good for exchequer. will worsen the already-high inflation and lower savings. 12 . Further. positive global cues and earnings growth to push up Nifty to 5750. Outlook for S&P CNX NIFTY Improvement in GDP growth in H2FY13. the across-the-board increase in indirect taxes by 2 percentage points.
Impact: This may slow the pace of decline in interest rates.Funds and fixed income Higher fiscal deficit could impact interest rate movement The fiscal deficit is pegged at Rs 5.79 lakh crore. Reduction in STT would reduce transaction cost for mutual funds Securities transaction tax (STT) will be reduced by 20 per cent on cash delivery transactions. Hike in customs duty would increase price of gold Basic customs duty on standard gold bars (gold coins of purity exceeding 99. Impact: This will enable standardisation of KYC requirements across market participants regulated by separate regulators. Impact: This is another step in the continued effort towards widening the investor base for capital markets.000 directly in equities and whose annual income is below Rs 10 lakh. The net market borrowing through dated securities to finance this deficit is Rs 4.590 crore. Impact: The transaction costs for asset managers will reduce. Rajiv Gandhi Equity Savings Scheme would help increase equity penetration Rajiv Gandhi Equity Savings Scheme is proposed to allow for income tax deduction of 50 per cent to new retail investors who invest up to Rs 50. While avoiding duplication of efforts.1 per cent of GDP. Access for QFIs to debt market may help deepen the market Qualified foreign investors (QFIs) have been permitted to access the Indian corporate bond market.5 per cent) has been increased from 2 per cent to 4 per cent. Central KYC depository would help in standardisation and avoid duplication A central Know Your Customer (KYC) depository will be developed in 2012-13 to avoid multiplicity of registration and data upkeep. Impact: This will deepen the equity markets in terms of retail penetration.13. The scheme will have a lock-in period of 3 years. Impact: The price of gold per unit will increase and may impact the demand for gold / gold exchange traded funds. it will bring greater efficiency and retail participation in financial products. as they only do delivery-based transactions. 13 . which is 5.
However. it will be a key milestone for speeding up the implementation of pension reforms in the country. in case the limits are already met. Impact: If the Bill gets passed. Amendment to PFRDA Bill will help speed up implementation of pension reforms The official amendment to the Pension Fund Regulatory and Development Authority Bill. as the fund will have the necessary headroom to include the increased service tax rate as part of cost. with consequential changes in rates for services that have individual tax rates. This will help expand the coverage of pension security to the unorganised sector. Impact: This will increase the cost for investors of financial products where the expenses of the mutual fund are within the permissible limits allowed by regulations. 14 .CRISIL BudgetAnalysis Funds and fixed income Hike in service tax rate could increase costs for investors The service tax rate has been increased from 10 per cent to 12 per cent. this can impact the profitability of asset managers. 2011 will be moved in this session.
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