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MAKING MA RK
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Economy 1 .
the overall macroeconomic situation remains quite challenging on domestic as well as global fronts. 2 .6 per cent growth in revenue expenditure.1 per cent for 2012-13 is lower than 5.7 per cent as against 10. it was expected to take steps to set the fiscal house in order. but the bold expenditure reforms like de-regulation of petroleum prices are missing.reduce consumption expenditure and increase investment expenditure. These are steps in the right direction. This together with the high borrowings of the government will keep the 10-year bond yields at 7. Also. the proposed steps to improve access to funding and tax concessions will boost investments in the infrastructure sector and help address supply side constraints. But the risks of slippage remain high. The budget therefore. The projected higher borrowings of the government will limit the reduction in interest rates and decrease private investment if liquidity remains tight. Lower growth means lower tax collections. Persistently high inflation in the last few years constrains the monetary policy from being aggressive in rate cuts to support growth. The budget tries to offset this by raising service tax and excise duties.6 per cent GDP growth assumption and subsidy reduction targets are ambitious. This would have entailed reduction in deficit and improving the quality of expenditure . While the budget implicitly assumes increases in regulated fuel prices.CRISIL BudgetAnalysis Economy analysis Fiscal deficit continues to remain a constraint Budget 2012-13 did not enjoy the positive growth environment of the budget. CRISIL believes that achieving the fiscal deficit target is difficult as 7.9 per cent achieved in the current year. We expect 6. The excise duty increases and likely fuel price hikes create some upside for inflation. The commitment to cap subsidies within 2 per cent of GDP is good in intent. The fiscal deficit target at 5. Although inflation has come down a bit. was expected to do little to boost the short term growth prospects. The sharp slippage in fiscal and revenue deficits in 2011-12 means that fiscal policy could no longer assist economic growth. On the contrary.5-7. Has it been able to do so? The budget does attempt to tilt the balance towards investment: Capital expenditure is budgeted to grow at 30.2 per cent WPI-based inflation in 2012-13. reforms of subsidy regime would be credible only these reforms are undertaken in a transparent manner. 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.8 per cent by March 2013. We have retained our pre-budget projection of 7 per cent GDP growth in 2012-13.
Industry 3 .
a financial holding company is proposed to be set up to raise funds for PSBs. repair and overhaul (MRO) service providers. Banking Recapitalisation to benefit public sector banks Neutral In 2012-13. while basic customs duty for completely built units of such cars was increased to to 75 per cent from 60 per cent. and decrease in the customs duties for specified parts of hybrid vehicles will have no major positive impact on demand for auto components. Continued… 4 . the RBI’s ability to cut interest rates would be impeded by the high fiscal deficit. This could adversely impact investments and credit growth in 2012-13. The shift to ad valorem tax of 3 per cent on body-building of commercial vehicles from a flat Rs 10. as they already enjoy a 75 per cent abatement. Rs 100 billion will be allotted to NABARD for refinancing of regional rural banks (RRBs). On the flip side.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. Excise hikes for small cars and two wheelers will be partially offset by the increase in individual income-tax slabs. public sector banks (PSBs) are likely to receive a major portion of the Rs 159 billion allocated for recapitalisation of government financial institutions. which is a positive given the significant amount of capital required by them under Basel III norms. However. As per the Union Budget 2012-13. neutral for other segments Negative The increase in the excise duty on cars. as excise duties were hiked to 27 per cent from 22 per cent. demand for sedans and luxury cars will be hit. as it will bring down the cost of ECBs. We believe this is a positive step towards the goal of financial inclusion. Also. Automobiles Negative for cars.5 million has been extended for another year. 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. interest rate subvention of 1 per cent on home loans up to Rs 1. tyres and testing equipment is expected to bring down the costs of Indian maintenance. 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. Continued interest subvention on crop loans. 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. given the low population of eco-friendly vehicles in India. Additionally. commercial vehicles and two wheelers will be passed on to consumers.000 earlier will increase transporters’ costs only marginally. Hike in service tax to 12 per cent from 10 per cent will not hit transporters much. Further. a reduction in the excise duty on replacement batteries for electric vehicles from 10 per cent to 6 per cent.
For instance. aimed at improving availability of funds to the infrastructure sector. continued… 5 . improving revenues and profitability of fertiliser players. This is likely to increase the effective excise duty by 1-1. the impact will be positive for south-based companies such as India Cements and Dalmia Cements. the industry meets close to onefourth of its total coal requirement through imported coal. Currently. effectively lowering the interest rates. while reducing the specific duty component from Rs 160 to Rs 120 per tonne for non-mini cement plants.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. a central body — Irrigation and Water Resource Finance Company — is expected to be set up in 2012-13. Also.5 per cent on the cement industry’s operating profit. boost to irrigation sector Positive A slew of measures. have been announced. CRISIL Research believes that private participation in the industry will lead to faster and more efficient implementation of irrigation projects. as their proportion of coal imports is higher. Although the government has extended investment-linked benefits. The limit for taxfree bonds in the infrastructure sector has been doubled to Rs 600 billion for 2012-13 from that in 2011-12. The government will provide interest subvention to farmers who make timely payment of farm loans. proposed exemption of customs duty on capital equipment and provided viability gap funding for new projects. 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 reduction in basic customs duty on some water-soluble fertilisers and liquid fertilisers may increase their usage. The Budget has reduced the withholding tax on interest payments of external commercial borrowings for the roads sector. investment in urea plants will depend on domestic gas allocation.5 per cent for most cement companies. 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. to 5 per cent from 20 per cent. Secondly. The access to viability gap funding for irrigation projects will improve private sector participation in the sector. The net impact will vary for each company based on the extent of its dependence on imported coal. This will marginally benefit construction companies. Effect Neutral Construction Tax-free bonds limit doubled. to focus on providing finance to the irrigation and water sector. These measures will ease financing constraints faced by certain infastructure segments and spur investments.
5 million) has been extended for another year. which constitute about 20 per cent of IT services revenues. the effective service tax for hotel accomodation will increase to 7. many real estate developers will find it difficult to raise ECBs. are expected to get a shot in the arm from planned government expenditure aimed at improving IT infrastructure and enabling efficient delivery mechanisms. These factors will more than offset the 2 percentage point increase in excise duty. The service tax hike will push up prices of under-construction properties marginally. All these measures will support affordable housing projects. as they will pass on the same to the clients. as the cost of acquisition of computer hardware will increase. The increase in excise duty from 10 per cent to 12 per cent will have a marginally negative impact on input costs. Also. Given the intense competition in the industry. these projects form only a small proportion of the industry currently. thereby driving demand. However. A credit guarantee fund is proposed to be set up to improve housing loan disbursements to the low-income category. 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.8 million.000 would accrue for individuals with income higher than Rs 0. Housing Continued focus on affordable housing Neutral ECBs have been allowed as a funding option for affordable housing projects. However. An increase in the income tax exemption limit will raise the diposable income of the salaried class by Rs 2.5 million (for houses costing below Rs 2. given weak balance sheets. however. thus positively impacting the household appliances industry. The rural housing fund has been enhanced to Rs 40 billion from Rs 30 billion. The interest rate subvention of 1 per cent for housing loans up to Rs 1.000 annually. Domestic IT services. As a result.2 per cent from 5 per cent. an additonal benefit of up to Rs 20. 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. continued… 6 . the players will have limited ability to pass on the increase in service tax through higher room rates. the increase in service tax will be mildly offset by the tax credits allowed on the input services received by hotels. 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. The abatement provided for hotel accomodation has been reduced from 50 per cent to 40 per cent.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.
Oil and gas Cess increase and low budgeting of subsidies to impact profits Negative The proposed increase in cess on production of crude oil. continued… 7 . The government’s estimate of oil subsidies for 2011-12 and 2012-13 seems to be conservative. will increase the cost of domestic oil production by $5 to $6 per barrel. This is marginally positive for the industry. Further.500 per tonne from Rs 2. Newsprint makers will record an improvement in margins. Domestic newsprint manufacturers will benefit as imported pulp will now attract zero customs duty. 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. On the positive side. as they source coal from Coal India Ltd or through the e-auction route. The exemption of custom duty on non-coking coal may not have a significant impact on most aluminium companies. 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. as against 5 per cent for other paper varieties. and will see a further drop in their EBITDA margins. The budget is positive for domestic newsprint manufacturers. P&B companies will be unable to pass on the entire increase in duties. to Rs 4.000 crore in 2012-13. which will drive demand for W&P paper. the budgetary allocation for education has been increased by 21 per cent to Rs 74.500 per tonne for aluminium. 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. customs duties on imported wastepaper have been removed. Given the oversupply and weak domestic demand. The price increase is likely to be about Rs 2. 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. The government has also imposed an excise duty of 6 per cent on wastepaper. Given the mounting under-recoveries.500 per tonne. Copyrights relating to recording of cinematographic films by the film industry continues to be exempt from service tax. oil marketing companies and upstream public sector undertakings may have to absorb a higher share of under-recoveries.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.
continued… 8 . 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. Pharmaceutical companies are likely to pass on these hikes to consumers. on an average. The fiveyear extension of the 200 per cent weighted deduction for in-house R&D expenditure will only marginally benefit Indian pharmaceutical players. 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. 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. natural gas and liquified natural gas (LNG) will provide some relief to power generators reeling under high fuel costs. as R&D expenditure. 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. 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. 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. no major changes have been announced. 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. enhanced fund availability Positive The Union Budget 2012-13 is a positive for the power sector. Exemption of 5 per cent customs duty on thermal coal. Power Exemption of customs duty on fuel. while customs duties have been left unchanged.CRISIL BudgetAnalysis Overall sectoral impact …continued Industry Petrochemicals No significant impact on the industry Apart from an increase in excise duty. forms less than 5 per cent of their net sales. The Budget also enhanced the availability of funds for financing power projects through taxfree bonds.
however.000 per tonne. 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. to 5 per cent from 20 per cent. At the corporate level. A large portion of these funds are expected to flow into the roads sector. which will increase the price of steel by Rs 700 to Rs 1. This will. The move is expected to aid NHAI in implementing national highway projects. Neutral continued… 9 . 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.000 per tonne. there has been a reduction in the withholding tax on interest payments of external commercial borrowings (ECBs) for the roads sector. only marginally aid road developers as their exposure to ECBs is limited. 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.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. Steel companies are likely to pass on the increase in excise duty. 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.
the Textile Ministry has recommended the continuation of the scheme in the 12th Five Year Plan (2012-13 to 2017-18). Allocation for the Technology Upgradation Fund Scheme (TUFS) has been fixed at Rs 29. will stimulate demand.6 per cent from 4. fixed network for telecommunication and telecommunication towers have been made eligible for viability gap funding. it is not clear whether the TUFS benefits will be available even for fresh investments announced after March 31.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. with allocations rising to Rs 158. compared to the revised estimate of Rs 37 billion for 2011-12.9 billion for the plan period. the Government has estimated receipts of Rs 400 billion in 2012-13 from the auction of telecommunication spectrum. Effective excise duty on branded apparels and made-ups has been cut to 3. we expect operators to pass the increase on to subscribers. However. Under the scheme for support to public-private partnership (PPP) in infrastructure. 2012.1 billion for 2012-13. Further. This. from Rs 154 billion allocated in the 11th Five Year Plan. along with lower cotton prices. At this stage.5 per cent. 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. 10 .
Capital markets 11 .
though good for exchequer. 12 . Further. Easing of funding for stressed sectors through the ECB route. Outlook for S&P CNX NIFTY Improvement in GDP growth in H2FY13.CRISIL BudgetAnalysis Equity market Budget neutral for the capital markets The finance minister has delivered a neutral budget to Dalal Street. However.5850 by endFY13. positive global cues and earnings growth to push up Nifty to 5750. lower/nil customs duty on mining equipment and increase in personal tax slabs have cheered the markets. the across-the-board increase in indirect taxes by 2 percentage points. will worsen the already-high inflation and lower savings. on subsidies and strong reforms to bring India’s growth to 8% (CRISIL Research estimate of 7%) have raised investors’ concerns. lack of clear steps on fiscal consolidation.
Funds and fixed income Higher fiscal deficit could impact interest rate movement The fiscal deficit is pegged at Rs 5. The net market borrowing through dated securities to finance this deficit is Rs 4. as they only do delivery-based transactions.79 lakh crore. Impact: The price of gold per unit will increase and may impact the demand for gold / gold exchange traded funds.13. 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. which is 5. 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 is another step in the continued effort towards widening the investor base for capital markets.590 crore. it will bring greater efficiency and retail participation in financial products. 13 . 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. While avoiding duplication of efforts. Impact: This will deepen the equity markets in terms of retail penetration. Impact: The transaction costs for asset managers will reduce.000 directly in equities and whose annual income is below Rs 10 lakh. 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. 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. Impact: This may slow the pace of decline in interest rates. The scheme will have a lock-in period of 3 years.5 per cent) has been increased from 2 per cent to 4 per cent.1 per cent of GDP.
in case the limits are already met. 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. with consequential changes in rates for services that have individual tax rates. Impact: If the Bill gets passed. 2011 will be moved in this session. 14 . it will be a key milestone for speeding up the implementation of pension reforms in the country. this can impact the profitability of asset managers. Amendment to PFRDA Bill will help speed up implementation of pension reforms The official amendment to the Pension Fund Regulatory and Development Authority Bill. This will help expand the coverage of pension security to the unorganised sector. However. as the fund will have the necessary headroom to include the increased service tax rate as part of cost.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.
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