Union Budget 2011-12: Balanced and growth oriented

The Union Budget 2011-12 presented today by the Finance Minister seems balanced and growth oriented. Agriculture, Infrastructure and Social
sector have been the focus areas. The budget has sought to promote growth with an inclusive agenda. Consequently, substantial plan outlay has
been devoted to social and rural development. The Finance Minister expressed his concern over the problem of generation and circulation of black
money in the Budget Session and announced the implementation of a Five Fold Strategy to deal with the problem. Besides this the Budget 2011-12
laid the foundation for the roll out of DTC and GST. Proposed increased exemption limit was in-line with market expectations. Investment reforms
for FIIs and FDIs came in as a surprise which has been a major cause of concern in recent months.

SECTORAL IMPACT:

INFRASTRUCTURE- POSITIVE: The development of world level Infrastructure remains the key focal area in the Union Budget 2011-12, with
budgeted spending in infrastructure estimated at Rs 2,14,000cr an hike of over 23% from Rs 1,73,000cr during 2010-11, providing 48.5% of the plan
allocation. The budget has proposed to provide the much needed foreign investment in Indian infrastructure by mountaineering their venturing
limit to $40bn from $20bn earlier. The total disbursement target for India Infrastructure Finance Company Limited (IIFCL) has been hiked to Rs
25000cr from Rs 20000cr. However, there is a marginal increase in allocation to rural infra fund to Rs 18000cr from Rs 16000cr.

The budget widens the classification of Infrastructure by including ‘Cold Storage facilities’ and ‘capital investment in Fertilizers’ as sub section of
Infrastructure. With the higher allocation in to Infrastructure coupled with GoI’s intentions to provide much needed long term money into
infrastructure, via, creating infrastructure debt fund, through tax free bonds worth Rs 30000cr and by extending deduction of Rs 20000 in Tax
liability by investing in long term infrastructure bond, this will clear the much longer debate to speed up Infrastructure development and will act as
highly positive for the Industry. However, no allocation has been made to ramp up the Transmission and Distribution capacity of power in the
country, which stands at 13.7% of the country’s power generation capacity at 21000 MW.

STEEL INDUSTRY- POSITIVE: Overall the union budget has been POSITIVE for the Steel sector considering our expectations. The budget provided for
enhancing infrastructure spending to Rs 2, 14,000cr which will boost the demand for steel products. However, hike in Iron Ore export duty to 20%
came in as a surprise, which will provide the much needed respite to domestic producers, as their margins were under pressure on grounds of high
raw material prices. Hike in Iron ore export duty will dent the margins of Sesa Goa and NMDC.

With increased focus of Government of India to build sound infrastructure, the domestic steel industry is expected to grow at a CAGR of 10% in
next five years against the average annual growth of 8% achieved between 1991-2010. Going forward we expect steel prices to remain firm on
account of strong demand lead by domestic markets coupled recovering global economies. We believe this scenario would be positive for steel
companies. No clear regulatory framework from Government of India with regards to environmental policies and land acquisition policies still
leaves ambiguity to foreign investment.

IT INDUSTRY-NEGATIVE: The Finance Minister announced some unexpected moves which will hurt the IT companies in the form of higher taxes
after the proposed higher Minimum Alternate Tax (MAT) rate of 18.5% for units operating in Special Economic Zones (SEZ) and on developers of
the SEZs. IT companies have been migrating to special economic zones as tax breaks under the Software Technology Parks of Indian (STPI) scheme
will come to end this year under which companies operating in these units had been given a 10-year tax break that was to end in 2010. In the FY 10
Budget, however, this was extended to March 31, 2011. The IT industry had been asking for an extension of one more year until the Direct Tax
Code is implemented in 2012

OIL & GAS INDUSTRY –NEGATIVE: The union budget provided no respite to the mounting under recovery for the Oil Marketing Companies (OMC’s).
We expected a decline in the import duty on grounds of rising crude oil prices and losses pertaining to the industry mainly due to the subsidy
sharing aspect. But with only consideration to the LPG and Kerosene, which would be provided as a direct cash subsidy to people under poverty
line and no concern for the rising Crude Oil prices, the budget is NEGATIVE for the entire sector including companies HPCL, BPCL and IOC. As we
expected the issue of Diesel Deregulation was not taken in the budget and no proposal was provided to deregulate it on the backing of rising
inflation.

TEXTILES-NEUTRAL: Union Budget 2011-12 has been positive for the Textile Sector. The Finance Minister has proposed to provide Rs. 3,000 crore to
NABARD, which will benefit 15,000 cooperative societies and about 3 lakh handloom weavers. The optional levy of duty on garment and made-ups
industry has been converted into mandatory duty of 10%.

BANKING INDUSTRY-POSITIVE: Union budget 2011-12 is positive for public sector bank in term of recapitalization. The Finance Minister proposed to
provide capital infusion of Rs. 6000cr in public sector banks (PSBs) to maintain Tier-I capital to CRAR at 8%. The finance minister proposed to raise
the target of credit flow to farmers to Rs. 475000cr in FY2011-12 as against of Rs. 375000cr in FY2010-11. This move will be increase the NPAs of
the PSBs. The FM proposed to bring suitable legislative amendments in the regards of more banking license to private player and NBFCs for the FY
2011-12. RBI is planning to issue the guidelines for banking licences for the financial year 2011-12. The FM proposed to enhance the additional
subvention to 3% in 2011-12. It would be negative for PSB in term of net interest margin.
PHARMA INDUSTRY-NEUTRAL: In Budget 2011-12, Government didn’t focus to reduce healthcare cost as they made no proposals on reducing
excise duty, tax holiday on healthcare infrastructure and weighted deduction for expenses incurred outside R&D facility like overseas trials,
preparations of dossiers, consulting & legal fees on healthcare and pharmaceutical sector. It also not extended the list of life saving drugs.
However, FM proposed to step up the plan allocations for Healthcare in 2011-12 by 20% to Rs. 26,760 crore as against Rs 22,300 crore in 2010-11.
Further, by considering the need of the industry for Innovation, it enhanced the weighted deduction on payments made to National Laboratories,
universities and Institutes of technology, for scientific research, from 175% to 200%. Increase in the rate of MAT to 18.5% from the current 18% and
inclusion of units operating in SEZs under MAT would negatively impact companies which presently have or are planning to set up manufacturing
units in SEZs. There were also no indications on the extension of the EOU benefit which is available only till FY2011, which could be a negative for
the sector.

FERTILIZERS INDUSTRY-POSITIVE: Fertilizer remains a prominent sector in Budget 2011-12. Government proposed to include capital investment in
fertilizer production as an infrastructure sub-sector as the sector requires higher capital. Also, to ensure greater efficiency, cost effectiveness and
better delivery for fertilizers, the Government proposes that it will take move towards direct transfer of cash subsidy to people living below poverty
line in a phased manner. Urea is the key focus in the industry, which represents around 50% of all fertilizer products consumed in the country with
an annual consumption of 27mt of a total fertilizer consumption of 55mt. During the year 2010-11, the Nutrient Based Subsidy (NBS) policy was
successfully implemented for all fertilizers except urea. Thus, government proposes active consideration of the Urea under the extension of the
NBS regime. This is a positive move by the government and will benefit both farmers and companies in the industry.

AVIATION INDUSTRY-NEGATIVE: Overall the Union budget has been NEGATIVE for the aviation industry as the domestic air travel will cost more
from the next financial year with the government raising service tax on it by Rs 50 and Rs 250 for domestic and international journeys respectively.
We expected a decline in the prices of ATF (Aviation Turbine Fuel) by bringing it under the regime of GST and making it uniform across the country.
Proposal of fog prone equipment was also not considered in the proposed budget. However, there was relief to the Air India as the Finance
Minister made a budgetary support of Rs 1,200 crore to the ailing national carrier as additional equity infusion. This would be the third tranche of
equity for Air India, which received Rs 800 crore and Rs 1,200 crore respectively in the 2009-10 and 2010-11 budgets.

HOSPITALITY INDUSTRY-NEGATIVE: The Hospitality industry contributes more than 8.6% to our country’s GDP, despite that our Finance Minister did
not came out with any positives for the sector, instead there was an added service tax which was levied on hotel accommodation , liquor and
healthcare and making it costlier. We expected that the hotel industry would be given higher depreciation allowances as the industry has to make
heavy investments in renovation and up-gradation and demands for massive capital investment but there was no such grants were given to the
concerned sector.

AUTOMOBILE INDUSTRY-POSITIVE: India’s automotive sector has some positive to take from the budget because Finance Minister proposed many
encouraging moves for the promotion of green technology, as per our expectation. FM announced to set up a National Mission, apart from several
incentives in the form of deduction in excise and custom duty, for Hybrid and Electric Vehicles to encourage manufacturing and selling of
alternative fuel-based vehicles. At present EV sales are just accounted at less than 1% of the petrol two wheelers sold in the country, so this all
proposed steps will help the industry to clock more numbers in this segment. Another welcome move to benefit carmakers and auto component
suppliers is the reduction of custom duty on raw steel which in turn will help to strengthening margins besides the excise duty remain intact on
vehicles. Moreover, broader measures like increased focus on rural and infrastructure spending would support long term growth of the sector.

Budget 2011: Banking

In the current fiscal (FY11), the Indian Banking industry has had to deal with tight monetary policy and low liquidity. This is despite the economy
expected to grow at a healthy pace of 8.6% this fiscal. The central bank raised interest rates 7 times, cumulatively increasing the repo rate (rate at
which banks borrow from the RBI) by 1.75% and the reverse repo rate (rate at which RBI borrows from banks) by 2.25%. However, with inflation
still off RBI's target 7% for the end of FY11, further rate hikes are still expected.

Liquidity still remains a major concern, with the level of tightness currently beyond RBI's comfort level. The widening gap between credit and
deposit growth was one of the major reasons for the same. Credit growth in the country has been rapid with non-food credit growing at 24.4% as
per December 2010 data. This is against a projection of 20%, showing a huge demand for funds in one the world's fastest growing economies.
However, deposit growth has lagged growing only by 16.5%, against a projection of 17%, leading to an unsustainable liquidity situation.

Budget Expectations

Clarification of stance with respect to issuing new back licenses, especially to NBFCs and industrial houses.

Tax benefits on long-term infrastructure bond investments could be extended till FY12. Banks are expecting to also be given this window for fund
raising. Previous budget allowed an additional Rs 20,000 deduction for investment such bonds; this limit may also see a hike.
Higher exposure limits for banks to finance UMPPs (ultra mega power projects) and other power projects.

Liquidity concerns need to be addressed as the situation has not completely eased yet.

Further recapitalization of certain PSU banks

Currently, rules limit voting rights of foreign entities to 10% irrespective of the actual stake they hold. Bankers expect the government to remove
this clause, allowing additional capital to flow into the sector.

Financial inclusion needs to be addressed - incentives/subsidies need to be provided for banks to set up accounts/ branches in Indian villages as
these have low transaction volumes and high servicing costs. More clarity on Microfinance Institutions (MFIs) also expected.

The Government set up a Financial Stability and Development Council (FSDC), a regulatory body to oversee issues related to regulation, financial
inclusion, and financial stability during the last budget. More clarity on the working of the same is needed.

Budget Measures

The RBI will be issuing guidelines on additional banking licenses before the close of the current financial year.

An sum of Rs 60 bn will be offered to under-capitalized public sector banks to ensure that all PSU banks are able to attain a minimum 8% Tier-I
capital ratio by FY12.

In order to step up agricultural credit the target for bank credit has been increased by Rs 1,000 bn to Rs 4,750 bn for FY12. Banks have been asked
to increase focus on credit lending to small and marginal farmers.

From the current market interest rate of 7% for crop loans, a 3% interest subvention (2% previously) has been given to farmers who pay their dues
on time. This effectively leads to a low interest rate of 4% on crop loans.

In order to promote regulation of microfinance institutions (MFIs) the government is considering putting a regulatory framework in place in order
to protect small borrower interests. Rs 1 bn ‘India Microfinance Equity Fund’ is to be created with SIDBI to help smaller MFI’s maintain growth and
achieve reasonable scale and efficient operations.

Under the financial inclusion target, banking facilities will be provided to all 73,000 habitations having a population of over 2,000 during FY12. This
year (FY11), 20,000 villages will be covered.

In order to help route banking funds into the rural infrastructure, the corpus of the Rural Infrastructure Development Fund (RIDF) XVII is to be
raised to Rs 180 bn in FY12 from Rs 160 bn currently.

IIFCL which refinances bank lending to infrastructure projects will enhance its disbursements Rs 200 bn in FY11 to Rs 250 bn by FY12.

Additional deduction of Rs 20,000 for investment in long-term infrastructure bonds is proposed to be extended for one more year.

In order to attract foreign funds to financing infrastructure in India, special vehicles in the form of notified infrastructure debt funds are to be
created. Interest payment on the borrowings of these funds will now be subject to a reduced withholding tax rate of 5% instead of 20% currently,
and the income of the fund will be tax-exempt.

Scheme of 1% interest subvention on housing loan extended for homes upto Rs 1.5 m (from 1 m previously), where the cost of the house does not
exceed Rs 2.5 m (Rs 2 m previously).

Budget Impact

Recapitalisation of PSU banks will mean that the under-capitalised banks do not fall short of capital to grow their loan book and at the same time
are able to comply with Basel III norms.

Clarity on sanctioning additional banking licenses could pave the way for participation of foreign banks and NBFCs in the financial inclusion motive.

Higher target for agricultural credit and may lead to some NPA problems in this sector. However the incentives for timely repayment of loans with
lower interest rates will help offset the same.
Discounted interest rates on low cost housing and increased limit for priority sector lending in urban areas will be beneficial for banks and housing
finance companies. Mortgage Risk Guarantee and the Rural Housing Fund will also help financing companies increase their presence in smaller
cities and villages.

Clarity on microfinance regulatory framework and funds to promote smaller MFIs and self help groups will help increase growth in this industry,
and help promote financial inclusion. However, there is a huge target for banking facilities to be added in rural areas. This may lead to additional
costs for the banks, as creating facilities such as these have not been incentivised.

Infrastructure financing companies are set to benefit from the higher allocation, extension of fiscal benefits for infrastructure bonds in addition to
foreign investor participation in infrastructure financing.

Company Impact

Banks like OBC, UCO Bank, Corporation Bank, Andhra Bank that currently stand undercapitalized will receive additional capital under the PSU
banks’ recapitalization scheme.

Various entities including Shriram Transport Finance, IndiaBulls, Religare, IL&FS, IDFC, IFCI , PFC, REC and some industrial houses, were all looking at
entering the banking space. With the RBI expected to dole out licenses in by the end of the fiscal, some of these entities will be huge beneficiaries.

Microfinance intuitions like SKS Microfinance will benefit from regulatory clarity, however this will also lead to more competition in the space.

Housing finance companies like HDFC and LIC Housing Finance, Dewan Housing Finance as well as PSU banks like SBI, PNB and Union Bank of India
that have extended presence in the semi urban and rural areas will benefit from the interest sops offered to loan on low cost housing.

Extension of fiscal benefits on long-term infrastructure bonds will be beneficial for companies like REC, IDFC, PFC, L&T Finance, as they can access
cheap domestic funds. They have already been in the market this year, so raising new funds next year should not be an issue.