FY10Union Budget FY10-11 February 26, 2010 On the backdrop of the country’s recovery taking strong roots, rising inflationary

concerns and a high fiscal deficit, the much awaited budget was announced today. How the government would manage to reduce fiscal deficit concerns without jeopardising growth was something that has been of concern for a while. Keeping the above in mind there have been expectations that the government will announce increase in excise duties as a first step towards a gradual winding down of fiscal stimulus measures in an endeavour to boost tax revenue. In addition there was growing expectation that the finance minister would provide a road map of sale of 3G auction, divestment and introduction of key direct and indirect tax reforms. At the same time, there were remote expectations with respect to any big bang reforms being announced in the budget. As it is said, “When spending your money on your self you look at value for money , when you spend your money on someone else you look at cost , when spending somebody else’s money on yourself you look at indulgence and when you send somebody else’s money on some body else it is who cares”. Contrary to this the Finance Minster has demonstrated great rationality and responsibility while spending valuable taxpayer money. The Union Budget 2010 has been a consumption oriented budget and clearly leaves more money in the hands for the consumer through the revised tax i.e. almost up to Rs. 50000 saving for income up to Rs. 1000000. Secondly it is also put purchasing power by way of push on social and infrastructure sector allocation giving thrust to rural development. All of this is expected to provide a significant consumption boost in the economy and keep Indian economy less dependent on global economy.Some of the highlights of the budget are as under • Budget inflationary in nature: As expected the government announced increase in excise duties as a first step towards a gradual winding down of fiscal stimulus measures. The budget has been inflationary in nature. Rate reduction in Central Excise duties has been partially rolled back and the standard rate on all non-petroleum products has been enhanced from 8 per cent to 10 per cent ad valorem. In addition the budget proposed an increase in railway freight. The rise in the above would seep into inflation. This has been the only negative of the budget among the various positives. Fiscal Deficit: Concerns over a rising fiscal deficit, which is the difference between total expenditure and revenue, as percentage of Gross Domestic Product was finally addressed. It was not just the size of fiscal deficit but the high probability of not being able to control it even over the next couple of years that was causing anxiety. A higher growth figures has allowed finance minister to present a lower fiscal deficit at 5.5 % per cent of FY11 GDP. The budget has been a positive in terms of fiscal deficit as well as the vision to bring down fiscal deficit. Due stress was made on the need to review stimulus and go back to fiscal prudence. The finance minister pegged the fiscal deficit for FY12 and FY13 at 4.8% and 4.1% of GDP. This reduced level of deficit has meant lower market borrowing programme for FY11. The market gross borrowings and net borrowing for the next fiscal has been pegged at Rs 4.57 trillion and Rs 3.45 trillion respectively. Tax Reforms: The budget confirmed government plans to implement the consolidated nationwide goods and services tax (GST) system from April 1, 2011. Implementation of GST will result into transition from the current system of different types of indirect taxes and multiple rates of indirect taxes. The new law will cover a wider base including all goods and services. The current system taxes production whereas the GST will aim to tax consumption. Indeed, current law levies tax on movement of goods from one state to another, effectively creating borders within borders. It distorts the allocation of resources and inhibits productivity growth. In our view transition to GST will be an important milestone from a macro perspective. 1

Consequently has increased allocation to this segment by 13%. Setting up of Coal Regulatory Authority: The government has proposed to set up regulatory authority for the Coal Sector in order to create level playing field in the sector. In addition the government proposes to introduce a competitive bidding process for allocating coal blocks for captive mining. the government is increasing its budget share in a steady manner. the government has laid emphasis on road development. • Subsidies: The government has brought all subsidies in the budget framework and has ensured there are no off balance sheet items. the budget has enhanced additional deduction of Rs 20. In addition. This ahs been viewed positively as the same would assist in reducing the current fiscal deficit burden and ensure higher corporate governance of these enterprises. The same would ensure better transparency and would ensure that they would be given for economic consideration.4 billion in F2011. Given that infrastructure development in the form of road ports and railways is a must and constitutes one of the pillars for growth.000 crore in the next fiscal. Direct tax: Against expectations. The new code also aims to encourage longterm savings. 2010 The budget also confirmed the plan to implement the direct tax reforms as recommended in the direct reforms code (DTC) in F2012. in long term infrastructure bonds as notified by the central government. • • • • • 2 . The government has allocated 46% of the total plan allocation for infrastructure development. Thrust on Infrastructure: The thrust on sustained development of infrastructure by the government continues to grow. Divestment: The divestment is targeted to rake in Rs 40. The removal of these exemptions will improve tax to GDP and improve efficiency in allocation of resources. the budget revised the income tax slab with a view to increase consumption. This would ensure more transparency. These reforms aim to broaden the tax base and will minimize exemptions. Similarly.000 over and above existing limit of Rs 100. In addition. It has also attempted to contain systemic leakages and better utilisation of the budgeted amount by the implementation of UID. the spending under Bharat Nirman programme was increased to US$10.000 for investment. The government gave a big rural sector push under the National Rural Employment Guarantee Act (NREGA) with spending under this scheme. Tax reduction on account of change in tax slab would also benefit the industry indirectly as the same would result in a higher disposable income.FY10Union Budget FY10-11 February 26. Push: Social/ Rural Sector Push Higher allocation towards the social and rural sectors has been the key feature of the UPA government over the last few years.

ICICI Prudential Mutual Fund (the Fund) has used information that is publicly available on www.. reasonableness and/or completeness of any information. damage of any nature. inflation and fiscal prudence.2 lacs collectively. that are “forward looking statements”. Ltd. Liability: Investment Manager: ICICI Prudential Asset Management Co. 3 . unanticipated turbulence in interest rates.indiabudget. or phrases such as “will”. The Fund however does not warrant the accuracy. may have been obtained from members/persons other than the Fund and/or its affiliates and which may have been made available to the Fund and/or to its affiliates. the market would once again return its focus to micro factors from macro factors. We have included statements/opinions/recommendations in this document.” From here on it will depend on the execution of reforms and ability to deliver which will hold the key to future growth. shall not liable for any loss.indiabudget. The budget has clearly been pro-growth and has sensibly balanced the conflicting objective of growth. the market would take cues from the support offered by Reserve Bank Of India in terms of OMO. changes in domestic and foreign laws. deflation.nic.in. Trustee ICICI Prudential Trust Ltd. special. The same would be contingent upon inflation. As with any securities investment. regulations and taxes and changes in competition in the industry. the performance of the financial markets in India and globally.FY10Union Budget FY10-11 February 26. exposure to market risks. 22. As the finance minister rightly said ”The opportunity is great. Thus it would be critical to ensure the execution and realisation of the same. If RBI supports the government in the borrowing programme than yields would remain range bound else the yields would surge. 2010 Market Outlook The budget has been warmly accepted by the markets. “believe” and similar expressions or variations of such expressions.. From the debt market point of view. Now that the deficit is behind us due to the road map provided. it is worth mentioning that India’s interest to GDP ratio is at 36% as against Ireland. Greece Italy having a ratio of 13%.in. inflation. depending on the factors and forces affecting the capital markets. exemplary. punitive. Risk Factors: Mutual Funds and securities investments are subject to market risks and there is no assurance or guarantee that the objectives of the Schemes will be achieved. which contain words. Liability Sponsors liability limited to Rs. Some of the material used in the document www. We recommend investors use any sharp dips to increase their exposure towards equity.nic. Information gathered and material used in this document is believed to be from reliable sources. Actual results may differ materially from those suggested by the forward looking statements due to risk or uncertainties associated with our expectations with respect to. but not limited to. “should”. equity prices or other rates or prices. In the preparation of the material contained in this document. which have an impact on our services and / or investments. 16% and 12% respectively (source: Bloomberg). ICICI Prudential Asset Management Company Limited (including its affiliates). the Fund and any of its officers directors. including information developed in-house. Fund: Trustee: Statutory Details: Settlor of ICICI Prudential Mutual Fund ICICI Bank Ltd. The time is right. “expect”. Markets have rebounded as the covering of short positions created prior to budget. indirect. given the magnitude of the borrowing programme. While the government has attempted to address fiscal deficit concerns. However there are some risks to these numbers in the form of execution of divestment and 3G auctions. The recipient alone shall be fully responsible/are liable for any decision taken on the basis of this material. personnel and employees. the monitory and interest policies of India. general economic and political conditions in India and other countries globally. including but not limited to direct. as also any loss of profit in any way arising from the use of this material in any manner. consequential. and Prudential plc. foreign exchange rates. Consequently the only solution to the rising interest burden on the government is “Growth and only Growth”. the NAV of the Units issued under the Schemes can go up or down. The markets are trading at fair value albeit at higher end of the fair value.

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