budget 2004-05

05/03/23 WAY2WEALTH 1


Highlights

Economy

Sectors

Road ahead

Q&A

Contents


Highlights


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.

Highlights


• 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


Revenue and Expenditure


• 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 education.

• Collateral for educational loan up to Rs.7.5 lakh has been waived

• Universal Health Insurance scheme to be re-designed & made exclusive for persons & families below the poverty line.

Agriculture and Social Reforms


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 market.

• 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


Direct Taxes• Abolished tax on Long-term capital gains from securities

transactions.• 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


Dividend Distribution Tax• Equity-oriented Mutual Funds (MFs) would continue to be

exempt.• 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


Key Economic Objectives To achieve growth rate of 7-8% per year for a sustained

period. 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)


Economic

Health


• Performance Highlights. • Deficit Position.• Areas of Focus.• Challenges.• Concerns.

Economic Survey 2004


• 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


• 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 FY03.

• 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


• 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

priority.

• Private sector involvement for enhancing Investment in

infrastructure

Areas of Focus


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.

Challenges


• 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 anchored.

• Fiscal Consolidation- To achieve 8% target in the 10th plan, there should be acceleration in savings & investment rate to 32.3% & 24.4% respectively in 2006-07.

Concerns


Sectoral

Impact


Announcements

• 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


Announcements

• Excise duty unchanged• 150%Deduction on inhouse R&D activities• Tractors have been exempt from Excise

duty• Increase of raw material cost( steel)

Auto and Auto Ancillaries


Announcements

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

IT and ITES


Announcements

• Emphasis on rural housing and infrastructure projects can initiate a higher demand

• Status quo remains on other expectations

Cement


Announcements

• Increase in excise duty on steel products from 8% -12%

• Cut in import duty on non-alloy steel to 10 per cent and alloy steel to 15 per

Steel


Announcements

• Customs duty on aluminum remained unchanged

• Customs duty declined on copper, lead and zinc by 5 per cent

Metals


Announcements

• 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


Announcements

• Increase in additional depreciation of 15%

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

Electricals and Electronics


Announcements

• 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,

Telecom


Announcements

• CENVAT on power looms & handlooms withdrawn

• Customs duty on specified machinery has been cut to 5% subject to CVD

Textile


Announcements• Health care has received some special concessions -

Rural hospitals with 100 beds will get 80(I)(B) concessions

• 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 biotechnology.

Bio-Tech, Pharma and Healthcare


Announcements

• No major announcements in the Oil & Gas sector

• Custom duties unchanged in the Power sector

• Excise duty exemption has been extended to Naptha / NGL

Oil, Gas and Power


Sector Excise Customs Revenue growth

Profitability Comment

Autos Tractor industry benefits, R&D benefits and lower input prices

Building & Construction

Higher demand as focus shifts to rural housing

Consumer Brands

Farm incomes and tax exemptions to be the key drivers

Financial Institutions

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 - Chemicals

No change in duty and hence business outlook

Industrial - Engineering

Speedy implemetation of projects

IT Services N/A N/A Kelkar committee reforms not being implemented

Media Service tax is now under MODVAT implying that media service tax can be offsetMetals & Mining Neutral for Aluminium and negative for Copper and Steel

Exploration & Processing

Clarity on subsidy required, business fundamentals positive

Gas & Distribution

No change in duty and hence business outlook

Integrated Oil Impact on oil price increase is marginal

K ey tax changes and benefits for sec tors


Road Ahead


Sensex down 18.12% and Nifty down 20.61% YTD (Jul 8th)

Extreme volatility – speculation, fear and greed

A spate of PSU equity issuances

National elections results and concerns about the reform process

FII flows continue albeit at a slower pace

India – The year 2004 so far


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


India – The bottom lineThe LONG & short of it……

Economic future is bright : Per capita income expected to double by 2010 – will have cascading effect

on companies across sectorsIndia could emerge as the third largest economy in world by 2050

Medium to long term story strongParadigm shift in exportsRobust 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 lowerShort term upside seems limited, but strong fundamentals continue to point

to a good long term performance


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


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


Budget swings are normalBudget FinanceFinancial Year Date Minister 1w 1m 1w 1m1991-92 (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 Yashw ant Sinha -3.5 -11.3 -0.9 3.1

1998-99 (Final) 01-Jun-98 Yashw ant Sinha 5.7 7.7 -7.3 -10.8

1999-00 27-Feb-99 Yashw ant Sinha 3.7 2.3 12.8 11.2

2000-01 29-Feb-00 Yashw ant Sinha 2.4 -7.1 -3.8 -10.2

2001-02 28-Feb-01 Yashw ant Sinha 7.1 6.4 -0.6 -9.2

2002-03 28-Feb-02 Yashw ant Sinha -4 -10.1 -2.5 -6.7

2003-04 28-Feb-03 Jasw ant Singh 0.8 -0.9 -2.7 -4.9

2004-05 (Interim) 03-Feb-04 Jasw ant Singh 2.1 1.7 1.6 -0.5

Adv ance/Decline 8adv /8dec 7adv /9dec 5adv /11de

c

5adv /11dec

Movements in Sensex before and after the budget-------Change before --------Change after

Source: Bloomberg, HSBC


Q & A

budget 2004-05

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