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Road ahead
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Governments Revenue & Expenditure Position.
National Common Minimum Programme.
Focus on Agriculture & Social Reforms.
Changes in Tax Structure.
Capital & Debt Market Reforms.
Impact on Mutual Funds.
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• Current revenue deficit had been pegged at 2.5% of the
GDP, as against 3.5% last year.
• The fiscal deficit is pegged at Rs1,374.07bn, which is 4.4%
of GDP.
• Capital expenditure stood at Rs334.03bn as against
budget estimates of Rs209.53bn.
• Non-plan expenditure has been lowered to
Rs3322.39bn as against Rs3497.85bn.
• Defence allocation was to be raised to Rs770bn as against
Rs653bn in budget estimates 2004-05.

Revenue and Expenditure
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Revenue and Expenditure
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• Additional provision of Rs.10,000 cr. for Gross
Budgetary Support(GBS) for programmes such as Food for
work , Sarva Siksha etc.
• Aims at Doubling agricultural credit in the next 3 years.
• To accelerating the completion of irrigation projects .
• To provide Rs. 2300 cr. for rural development prog.
• A cess of 2% has been imposed on corporate tax, excise,
customs, service tax and personal tax. This is expected to
amount to Rs 4000-5000 cr., which would be earmarked for
• Collateral for educational loan up to Rs.7.5 lakh has been
• Universal Health Insurance scheme to be re-designed &
made exclusive for persons & families below the poverty line.
Agriculture and Social Reforms
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Measures to attract FII’s
• Procedure for registration and operations in India would be
made simpler and quicker .
• Investment Ceiling for FIIs in debt funds be raised from
US$1bn to US$1.75bn.

Measures to develop market & enhance volumes
• Banks with strong risk management systems would be
allowed greater latitude in their exposure to the capital
• An alternative trading platform would be created for small
& medium enterprises to raise equity & debt from the
capital mkt.
• Steps would be initiated to integrate the commodities
markets and securities markets.

Capital and Debt Market Reforms
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Direct Taxes
• Abolished tax on Long-term capital gains from securities
• The rate of tax on short-term capital gains is proposed to be
reduced to a flat rate of 10%
• Imposed turnover tax on transactions in securities on stock
exchanges at the rate of 0.15% of the value of security.
• No one with a taxable income of less than Rs.1 lakh will
require to pay income tax.
• Tax exemptions on interest earned on Account & interest
paid by banks to a Non-Resident or to a Not-Ordinarily
Resident will cease from September 1,2004.
• Gifts received from unrelated persons , above the threshold
limit of Rs. 25,000 will be taxed as income.
Changes in Tax Structure
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Dividend Distribution Tax
• Equity-oriented Mutual Funds (MFs) would continue to be
• Rate of tax on corporate unit holders of debt-oriented
MFs would be raised to 20% from 12.5%, while it remains
unchanged for individuals and HUF unit holders.
Tax on Capital Gains
• Reduced Short term capital gains of 10% and exemption
from Long term capital gains would be applicable only for
securities sold on stock exchanges. Thus, these are not
applicable for MF units.
Impact on Mutual Funds
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Key Economic Objectives
 To achieve growth rate of 7-8% per year for a sustained
 To focus on agriculture and infrastructure.
 To provide gainful employment in agriculture, manufacturing
& services & promote investments.
 To provide universal access to quality education and health.
 To acceleration of fiscal consolidation & reform.
 To ensure higher and more efficient fiscal devolution.
 Set a 5-year road map to achieve the NCMP objective of
bringing growth & stability.
 To elimination Fiscal deficit by 2007-08 ahead of the 2008-09
target set in the Fiscal Responsibility & Budget.
National Common Minimum Programme (NCPM)
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Economic Health
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• Performance Highlights.
• Deficit Position.
• Areas of Focus.
• Challenges.
• Concerns.

Economic Survey 2004
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• Robust Growth - Real GDP growth is estimated to have
grown by 8.2% in FY04 (FY03-4.0%).
• Strong Performance - Growth of 9.1% seen in the
agricultural sectors.
• Stability of prices - Inflation, as measured by the WPI
stood at 4.6% at end-March and 5.5% on an average.
• Merchandise Exports grew by 17.1% in FY04 (FY03-20.3%)
, while merchandise imports grew at the rate of 22.8% in
FY04 (FY03- 9.4%).
• Forex Reserves - The levels of reserves crossed US $ 100
bn mark on December 19,2004 and rose to US $ 119.3 bn
by end of May.

Performance Highlights
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• Fiscal deficit in FY04 stood at 4.6% as compared to 5.3%
in FY03. Decline in fiscal deficit was largely due to sale of
stake in PSU’S during the NDA regime.
• Revenue deficit in FY04 declined to 3.6% from 4.4% in
• Combined fiscal deficit of the center and states, which
had been decreasing in the early 90’s, worsened
subsequently to reach a level of 10.1% in the revised
estimates for 2002-2003.
Deficit Position
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• Annual growth rate of 7-8% envisaged in the next 5 years.
• Annual inflation rate to be contained to single digit.
• Agricultural growth with emphasis on agro processing.
• Expansion of industry 10% annually proposed.
• Fiscal consolidation and removal of revenue deficit get
• Private sector involvement for enhancing Investment in

Areas of Focus
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In order to achieve higher 10% industrial growth, the 5 constraints
that needed to be tackled are:
• Reservation for small-scale industries.
• High customs tariff.
• Rigidity in labour laws.
• Reaping economies of scale.
• Friction in creation and closure of firms.
• Distortions in indirect tax structure.

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• Higher Interest Rates- Demand for funds from the govt.
to finance its deficit and the upturn in credit off take by
companies could push up interest rates.
• Achievability of Growth Targets- Higher interest costs
could make it harder to maintain 7-8% GDP growth. Thus,
efforts to cut the fiscal deficit "need to be stepped up.
• Burden of Fiscal Deficit- To lower the fiscal deficit , there
is a need to overhaul the regime of tax exemptions, reduce
the number of notifications, simplify procedures, move
towards a paper-less and transparent administration
• Fiscal Consolidation- To achieve 8% target in the 10

plan, there should be acceleration in savings & investment
rate to 32.3% & 24.4% respectively in 2006-07.
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Sectoral Impact
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• FDI participation increased from 26%-49% for
insurance companies
• Amendments to SARFEASI (Securities Act 2002)
• Small savings rate untouched
• Doubling of credit to the Agricultural sector
• Foreign Currency Deposits Taxable

Banking, Finance and Insurance Sector
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• Excise duty unchanged
• 150%Deduction on inhouse R&D activities
• Tractors have been exempt from Excise
• Increase of raw material cost( steel)

Auto and Auto Ancillaries
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• Implementation of VAT by 2005
• No changes in Sec 10A and 10B
• Abolition of excise duty on computers

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• Emphasis on rural housing and infrastructure
projects can initiate a higher demand
• Status quo remains on other expectations
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• Increase in excise duty on steel products from 8%
• Cut in import duty on non-alloy steel to 10 per
cent and alloy steel to 15 per
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• Customs duty on aluminum remained
• Customs duty declined on copper, lead and zinc
by 5 per cent

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• An additional depreciation of 15 per cent on new
plants and machinery, acquired or installed, in an
existing undertaking, has been continued
• the required increase in the installed capacity has
been cut to 10 per cent from 25 per cent.

Engineering and Capital Goods
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• Increase in additional depreciation of 15%

• Excise Duty on B&W TV increased from 8%-16%

Electricals and Electronics
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• FDI limit raised from 49%-76%
• Increase in service tax
• The customs duty exemption for imports of specified
capital goods for the manufacture of mobile
telephone handsets
• Extension of the tax holiday under section 80-IA for 1
more year,up to March 31, 2005,

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• CENVAT on power looms & handlooms
• Customs duty on specified machinery has
been cut to 5% subject to CVD
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• Health care has received some special concessions -
Rural hospitals with 100 beds will get 80(I)(B)
• Complete exemption from excise duties of diagnostics
for all kinds of Hepatitis.
• Dedicated biotech fund to provide seed capital to
scientist entrepreneurs.
• Exemption of excise duties and sales tax on
indigenously developed biotechnology products on both
raw materials and finished goods.
• Exemption of capital gains tax for VC funds investing in

Bio-Tech, Pharma and Healthcare
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• No major announcements in the Oil & Gas sector

• Custom duties unchanged in the Power sector

• Excise duty exemption has been extended to Naptha

Oil, Gas and Power
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Sector Excise Customs Revenue
Profitability Comment
Autos     Tractor industry benefits, R&D benefits
and lower input prices
Building &
    Higher demand as focus shifts to rural
    Farm incomes and tax exemptions to be
the key drivers
N/A N/A   Government borrowing under check and
benign interest rates to continue
Healthcare     CVD on life saving drugs imposed, tax
holiday on hospitals
Industrial -
    No change in duty and hence business
Industrial -
    Speedy implemetation of projects
IT Services N/A N/A   Kelkar committee reforms not being
Media     Service tax is now under MODVAT
implying that media service tax can be
Metals & Mining     Neutral for Aluminium and negative for
Copper and Steel
Exploration &
    Clarity on subsidy required, business
fundamentals positive
Gas &
    No change in duty and hence business
Integrated Oil     Impact on oil price increase is marginal
Key tax changes and benefits for sectors
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Road Ahead
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Sensex down 18.12% and Nifty down 20.61% YTD (Jul

Extreme volatility – speculation, fear and greed

 A spate of PSU equity issuances

National elections results and concerns about the reform

 FII flows continue albeit at a slower pace
India – The year 2004 so
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Budget’s impact on personal and corporate taxes has been
marginal over the years
Confidence to invest in fresh capacities to emerge on basis of
“economic” considerations and not fiscal sops
Indian industry in the pink of health and poised to capture
growth in India and overseas
Favorable demographics and rising per capita GDP to result in
growth of aspirational products such as mobiles, cars, two
wheelers and housing
Top Indian companies are insulating from domestic demand
fluctuations by exporting or acquiring overseas

India – Long term fundamentals intact
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India – The bottom line
The LONG & short of it……

Economic future is bright :
Per capita income expected to double by 2010 – will have cascading effect
on companies across sectors
India could emerge as the third largest economy in world by 2050
Medium to long term story strong
Paradigm shift in exports
Robust domestic demand
Improved efficiencies leading to higher wealth creation by Corporate India
Under ownership of equity assets will lead to higher allocation in future as
risk perceptions change
• Year 2004 :
Equity markets around the world unlikely to repeat 2003 performance
Earnings for FY05 will be robust, growth rate would be lower
Short term upside seems limited, but strong fundamentals continue to point
to a good long term performance

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Bull market in the debt markets coming to an end…..

•Economic momentum continues with expectations of a pick
up in credit demand going ahead

•Rise in global commodity and crude oil prices leading to
rise in inflation

•Rise in global interest rates impacting portfolio inflows into
the country

Domestic Fixed Income Scenario
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Inflationary pressure expected due to the rise in excise
duties on manufacturing imports
Higher spending on infrastructure & agricultural sectors could
increase credit demand over the medium to short term
FIIs investment limit in debt markets hiked by 75% to $1.75
billion, could improve liquidity. However rising global interest
rates and recent rupee movement might reduce impact
Confusion over applicability of turnover tax
Elimination of revenue deficit by 2008-09 and fiscal deficit at
4.4% of GDP are sentiment-boosting announcements
Liquidity to remain easy
Fixed Income markets and Budget
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Budget swings are normal
Budget Finance
Financial Year Date Minister 1w 1m 1w 1m
1991-92 (Final) 24-Jul-91 Manmohan Singh -1.9 -6.7 12.8 23.5
1992-93 29-Feb-92 Manmohan Singh -11 -21.3 28.6 48.3
1993-94 27-Feb-93 Manmohan Singh -5 -9.1 -12.1 -16.8
1994-95 28-Feb-94 Manmohan Singh -7.6 -6 -10.3 -13.2
1995-96 15-Mar-95 Manmohan Singh 1 1.5 -4.9 -0.1
1996-97 (Interim) 28-Feb-96 Manmohan Singh -1.9 -19.7 -3.3 -6
1996-97 (Final) 22-Jul-96 P Chidambaram -3 5.8 -5.4 -12.8
1997-98 28-Feb-97 P Chidambaram 1.9 3.9 13.1 9
1998-99 (Interim) 25-Mar-98 Yashwant Sinha -3.5 -11.3 -0.9 3.1
1998-99 (Final) 01-Jun-98 Yashwant Sinha 5.7 7.7 -7.3 -10.8
1999-00 27-Feb-99 Yashwant Sinha 3.7 2.3 12.8 11.2
2000-01 29-Feb-00 Yashwant Sinha 2.4 -7.1 -3.8 -10.2
2001-02 28-Feb-01 Yashwant Sinha 7.1 6.4 -0.6 -9.2
2002-03 28-Feb-02 Yashwant Sinha -4 -10.1 -2.5 -6.7
2003-04 28-Feb-03 Jaswant Singh 0.8 -0.9 -2.7 -4.9
2004-05 (Interim) 03-Feb-04 Jaswant Singh 2.1 1.7 1.6 -0.5
Adv ance/Decline 8adv /8dec 7adv /9dec 5adv /11de
5adv /11dec
Movements in Sensex before and after the budget
-------Change before --------Change after
Source: Bloomberg, HSBC
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Q & A

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