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8/2/2019 Elara Securities_Budget - 1 March 2012 (1)
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Ashish Kumar [email protected] +91 224062 6836
GlobalMark
etsResearch
Elara Securities (India) Private Limited
FY13 Budget: Burdened w ith hopeUncannily, the Union Budget this time around is burdened with
expectations from the industry, the street and the aam admi alike. Mr
Pranab Mukherjee has the onerous task (once again!!!) to resurrectgrowth amidst uncertainties in the macros set-up and policy
environment both globally and locally. We believe that there are low
chances of a game changer of a budget given the weak macros and
political compulsions of the ruling UPA. We believe that budget 2012
will be centered on the follow ing themes:
1. Striking a mix of expenditure restructuring and fiscal consolidation2. Inclusive growth through centrally sponsored schemes like
MNREGA
3. A step towards taxation reforms: DTC and GST4.
Stimulating the investment cycle
5. Focus on reviving infrastructure and power sectorsWe believe that the government w ill target a fiscal deficit of ~ 5% over
FY13E compared to 5.6% for FY12E (initially budgeted at 4.6%). The
calculation is subject to balance sheet jugglery of deferment of a part
of subsidies bill to next fiscal. The budget will work on real growth of
~7.1% and inflation of around ~6.5-7%, implying a nominal growth of
~14%. We believe that the sharp deterioration in fiscal health will take
few years to mend. The transition to FRBM has to be in a phased
manner rather than by setting up an ambitious and unrealistic target
like in the current fiscal. We estimate the gross borrowing of the
Centre at INR5.3tn. Post the announcements of the borrowingprogramme coupled with signs of fiscal consolidation and monetary
easing, the yields should stabilise in ~8.0% range.
Subsidies hold the key: Even as the finance minister has made somestrong comments on the fallout of rising subsidy bill, it remains to be
seen if words are converted into action. The union budget to be
presented on March 16 could be the last serious attempt at fiscal
consolidation ahead of LS elections due in May-14. The level of subsidy
restructuring and timing the introduction (and extent) of food subsidy
bill are key events to w atch out for.
Fiscal consolidation to trigger monetary easing: The central bank willkeenly track the governments borrowing requirements and fiscal
consolidation which will determine its monetary policy in these
uncertain times. The RBI stance is now in favour of growth, though it
maintains that inflationary risks persist in the economy. We maintain
our stance that on March-15th, the central bank will cut the CRR by
50bps but the first cut (probably a token one) could only be seen in
the April meet of the central bank. Unlike the aggressive cuts seen in
2008, we foresee a total 100bps cut in policy rates over FY13E.
Sector w ise expectations: Our in-house analyst team expects thebudget to lay down a flurry of measures for the revival in infrastructure
capital spending. Power equipment import duties are unlikely to be
hiked in the current budget given limited ability of government to pass
on tariff hikes. Government is unlikely to deviate much from its socialschemes which will ensure that consumption will continue to hold
steady. However, consumer discretionary in form of two wheelers and
four wheelers will suffer from the governments effort to raise revenue
and target diesel subsidy accurately.
India Strategy | Economics 1 March 2012India Budget 2012
Exhibit 1: An impending slow dow n ahead
Source: CMIE, Bloomberg, Elara Securities Research
Exhib it 2: needs the Union budg et tofocus on revival of t he investment cycle
Source: CEIC, Elara Securities Research
Exhib it 3: A step tow ards fiscalconsolidation could be seen
(% to GDP) FY08 FY09 FY10 FY11 FY12E FY13ECenter FiscalDeficit
2.5 6.0 6.4 5.1 5.6 5.1
State FiscalDeficit
1.7 2.5 3.0 2.7 2.4 2.5
Inter-governmentadjustments
(0.1) (0.1) (0.1) 0.0 0.0 0.0
Combined Deficit 4.1 8.4 9.3 7.8 8.0 7.6Off-budgetexpenditures
0.8 1.6 0.2 0.6 0.9 1.1
Overall FiscalDeficit 4.9 10.0 9.5 8.4 8 .9 8.7Source: Various Budget documents, Elara Securities
Research
Exhibit 4 : added by of some subsidyrestructuring
Source : India Budget, Elara Securities Research
2.0
4.0
6.0
8.0
10.0
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
(%)
yoygrow
t
2000 2002 2004 2006 2008 2010
(5)
0
5
10
15
20
0
1
1
2
2
3
3
FY07
FY08
FY09
FY10
FY11
FY12BE
FY12E
FY13E
(%toGDP)
Food Subsidy Fertil ized Subsidy Fuel Subsidy
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FY12 Budget Preview : Not a GameChanger
The union budget 2012 is coming at a time when the
government is caught in an unenviable mix of slowing
growth, worsening fiscal, poor governance and a weakcurrency. Add to that rising crude prices amidst
unabated global worries and the Indian economy has a
perfect recipe for a slowdown. In this perspective, the
union budget 2012 is burdened with huge expectations
from market participants and policymakers alike.
The budget to be presented on March 16 could be the
last serious attempt at fiscal consolidation as LS elections
are due in May 2014 and the intervening budget in Feb-
13 (and a vote on account in Feb-14) are expected to be
populist as suggested by trends. Even as the finance
minister has made some strong comments on the falloutof rising subsidy bill, it remains to be seen if words are
converted into action. The key question is whether the
finance minister can deliver a game changer of a
budget-- aiming at raising revenues and lowering
expenditure that could lead to lower fiscal deficit,
simultaneously giving an impetus to ailing infrastructure
and pow er sector (key to the grow th revival in future).
From the perspective of political economy, we don't
think the government could maneuver the finances to a
great extent. Factors that led to slippages on the fiscal
side in FY12 are likely to persist over FY13 if credibleactions are not taken on fiscal consolidation. Even as the
government has run out of choices on revision of fuel
prices (expected post assembly elections), the resulting
savings could largely be offset by an early
implementation of the Food Security Bill. These together
with the restructuring of SEBs losses are key events to
watch out for in budget 2012. With the CSO forecasting
6.9% growth (AE) for FY12E and inflationary risks
restraining the central bank from monetary easing, these
are desperate times for policymakers in New Delhi.
Meanwhile, the INR 928bn additional borrowing
announcement led to sharp jump in the yield curves over
Q3FY12 and the central bank had to step in with open
market operations (OMOs) to buy back government
bonds. Expectedly, the central bank will need to track the
federal borrow ing requirements and fiscal consolidation
measures before embarking on rate cuts as a rising fiscal
deficit has inflationary implications. In this backdrop,
fiscal consolidation is one of the key triggers for a grow th
revival. Having said that, the political compulsions of the
ruling UPA will mean that the extent of consolidation
could be marginal, even if there is intent. And with this,
market's skepticism about the centre's will on fiscalconsolidation w ill get vindicated.
Exhibit 5: Grow th threshold low ered
Source: CMIE, Bloomberg, Elara Securities Research
Exhib it 6: amidst discussions of grow th inflat ion
trade-off
Source: CMIE, Bloomberg, Elara Securities Research
Exhibit 7: Aggressive monetary policy over FY12
Source: OEA, Elara Securit ies Research
Exhib it 8: Fiscal deficit w ill miss the budgeted target
by ~100bps in FY12
(% to GDP) FY08 FY09 FY10 FY11 FY12E FY13ECenter Fiscal Deficit 2.5 6.0 6.4 5.1 5.6 5.1
State Fiscal Deficit 1.7 2.5 3.0 2.7 2.4 2.5
Inter-governmentadjustments
(0.1) (0.1) (0.1) 0.0 0.0 0.0
Combined Deficit 4.1 8.4 9.3 7.8 8.0 7.6Off-budget
expenditures
0.8 1.6 0.2 0.6 0.9 1.1
Overall Fiscal Deficit 4.9 10.0 9.5 8.4 8.9 8.7Note: Off budget include Oil, food and fertilizer subsidy. Crude prices
assumed at USD 102.5/ bbl
Source: Various Budget documents, Elara Securit ies Research
2.0
4.0
6.0
8.0
10.0
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
(%)
0
2
4
6
8
10
12
14
FY93
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
(Yo
YGrow
th)
Real GDP grow th WPI Inflation
(2.0)
0.0
2.0
4.0
6.0
8.0
10.0
12.0
Apr-08
Jul-08
Oct-08
Jan-0
9
Apr-09
Jul-09
Oct-09
Jan-1
0
Apr-10
Jul-10
Oct-10
Jan-1
1
Apr-11
Jul-11
Oct-11
Jan-1
2
(%)
Repo rate WPI
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We have estimated the fiscal deficit of FY12E at 5.6% of
GDP against the budgeted 4.6%, mainly on the back of
low budgeting of subsidies and unrealistic revenue
targets in a year when the Indian economy showed
distinct signs of a slowdown. Assuming oil subsidies are
not (partially) rolled over into FY13, the current mix ofmacro signals suggest that our fiscal deficit targets for
FY12 might actually turn out to be a conservative
estimate.
Macro out look calls for credible fiscalmeasure
Indian economy has show n early signs of a slowdow n in
FY12. The macro environment was largely driven by a
monetary policy that remained hawkish on the
inflationary spiral. This sharp trade-off between inflation
and growth resulted in a significant sacrifice on thegrowth part. The ensuing industrial slowdown amidst
weakening investment climate created major hindrances
to growth. Amidst rising g lobal uncertainties and a flight
to safety, the domestic currency depreciated to an all-
time low which incidentally was the highest amongst all
emerging markets. We believe domestic factors are not
supporting an inflexion in growth cycle even as global
environment remains turbulent. The expansionary
policies of the government which were employed to
revive the economy after the 2008 credit crisis, fuelled
consumption without creating adequate capacities into
the system. The ensuing demand pressures in the
economy resulted in a headline inflation that is over 5%
for 24 months in a row. A consumption led growth is not
sustainable in the medium to long run as it fuels inflation
and raises the risks of twin deficits in the economy. In this
context, any measure that will boost the consumption
(through fiscal or monetary easing) in budget could pose
inflationary risks by reviving the demand pressures
amidst capacity constraints in the economy.
In th is backdrop, the government has to shift focus from
consumption to investment and design policies that will
revive the investment cycle in the economy. We believe
that under present circumstances, the fiscal policy
(through the budget) has a greater role to play (than the
monetary policy) to boost investments in the economy as
investment cycle remains key to next leg of growth. Anaggressive monetary easing is impossible if the central
bank sees consumption led demand pressures emerging
in the economy which in turn will mean prolonged
weakness in the capex cycle. It will depend a lot on the
emerging political environment post the assembly
election that could unleash the next wave of reforms
over FY13. But such a counter-cyclical push requires an
aggressive policy w ith a strong centre. Some actions are
already taking place at the Prime Minister's Office (PMO)but sustainability remains the key. We believe that some
key pending reforms like mining bills, GST and FDI in
multi brand retail could see the light of the day that
could revive the capex cycle if the assembly results favour
the ruling UPA.
Exhib it 9: Consumption led grow th is not sustainable
in medium to long run
Source: CMIE, Elara Securit ies Research
Exhibit 10: and th e focus has to shift to reviving
investment cycle
Source: CMIE, Bloomberg, Elara Securities Research
Expenditu re restructuring is the key
In this context, we expect a growth recovery in H2FY12
subject to policy commitment added by a monetary
easing in early FY13 and a stable global environment.
The budget will work on a real growth of ~7.1% and an
inflation of around ~6.5-7%, implying nominal growth of
~14% (we estimate nominal growth at 14.3% on the
back of 6.8% real growth and 7.5% inflation). We believe
that the sharp deterioration in fiscal health w ill take some
time to mend. The transition to FRBM has to be in a
phased manner rather than an ambitious and unrealisticmove like in the current fiscal. The phenomenon of large
expenditure and higher subsidy bill amidst a slowing
revenue growth has distorted all fiscal calculations. In
(25)
0
25
50
75
100
2005 2006 2007 2008 2009 2010 2011
(%)
Consumption Government Investments Net Exports
yoygrow
t
2000 2002 2004 2006 2008 2010
(5)
0
5
10
15
20
Running a fiscal deficit is not bad as long as it is used to
create capacities into the system. The problem in theIndian case however is that deficits usually finance the
unnecessary subsidies and populist schemes. This
phenomenon is too strong to be overcome in a short
eriod of time.
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this context, the budget has to aim not only at reducing
the fiscal deficit but also restructure the expenditure
patterns in a way that puts investments on priority.
Exhib it 11: Trends in revenue expend itu re suggest
% ofRevenueExpenditure InterestPayments DefenseExpenditure Subsidiesallocation OtherExpenditureFY05 42.8 14.8 15.5 27.0
FY06 40.5 14.7 14.5 30.3
FY07 40.4 13.9 15.3 30.4
FY08 40.6 12.9 16.9 29.6
FY09 34.4 13.1 23.2 29.3
FY10 32.4 13.8 21.5 32.3
FY11RE 33.1 12.5 22.6 31.8
FY12BE 36.5 13.0 19.6 30.9
Source: India Budget , Bloomberg, Elara Securit ies Research
We believe that the government w ill target a fiscal deficit
of around 5% over FY13E compared to 5.6% for FY12
(init ially budgeted at 4.6%). Some key movers of revenue
will be a 200bps rise in central excise across the board
and expanding the ambit of services tax. However, the
government may find it difficult to raise taxes in light of
the weak macro environment and weak business
confidence among private investors.
Exhib it 12: impendin g subsidy restructuring
Source: India Budget, Elara Securities Research
On the expenditure side, review of subsidy allocation
and expenditure restructuring hold the key. A full
decontrol of existing subsidised items is neither advisable
nor feasible (as it will create high inflationary risks in the
short run) but a sustained road map that will aim at
reducing (1) non-merit subsidy and (2) leakages in the
government s welfare schemes, is prudent. This is critical
to ensure that private corporate capex is revived in
addition to containing the aggregate demand pressures
and thus inflationary risks in the economy.
Exhibit 13: Expenditure on government welfare
schemes could remain at similar levels in FY13
(INR bn) FY08 FY09 FY10 FY11BE FY12BEMahatma Gandhi National
Rural EmploymentGuarantee (NREGA)
163 375 391 401 400
Swarnajayanti GramSwarozgar Yojana (self-employment for rural poor)
17 23 24 30 29
DRDA (District RuralDevelopment Agency)Administration
3 3 3 4 5
Rural Housing 39 88 88 100 100
Pradhan Mantri GramSadak Yojana (Rural roads)
65 78 120 120 200
Grants to National Instituteof Rural Development
0 0 0 1 1
Council for Advancementof People's Action andRural Technology
1 1 1 1 1
PURA (Provision of UrbanAmenities in Rural Areas)
- - 0 1 1
Management support toRural DevelopmentProgrammes
1 1 1 1 1
BPL (Below Poverty Line)Census
- - - 2 3
Non-Plan 0 0 0 0 0
Total: Department of RuralDevelopment 288 569 627 661 741Source: Various Budget documents, Elara Securit ies Research
The performance of the UPA on fiscal consolidation has
not been as bad. Over the past six years, it will only be
second time (in FY09, it floated an expansionary fiscal
policy aimed at reviving the economy in the backdrop of
the global credit crisis) when the government will not be
able to meet its projected deficit target. Obviously the
key to fiscal consolidation lies in implementation rather
than mere announcements.
Exhib it 14: Credibilit y of UPA on f iscal deficit t argets
Source: Various Budget documents, Elara Securit ies Research
0
1
1
2
2
3
3
FY07
FY08
FY09
FY10
FY11
FY12BE
FY12E
FY13E
(%toGDP)
Food Subsidy Fertil ized Subsidy Fuel Subsidy
3.32.5
6.8
5.5
4.6
2.5
6.06.4
5.15.6
0.0
2.0
4.0
6.0
8.0
FY08 FY09 FY10 FY11 FY12E
(%toGDP)
BE Actuals/ RE
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Borrow ing programme and bondyields
Exhibit 15: Negligible rise in market borrowing seen
over FY13
Source: India Budget, Elara Securities Research
Over FY12, the government has already borrowed
INR5.1tn from the market against the budgeted target of
INR4.2tn which put a lot of strain on bond yields over
Oct-Dec 2011 until RBI intervened and conducted large
OMOs (~INR 1000 bn) that helped stabilise the yields.
We believe that the market borrowing over FY13 will be
largely similar to FY12, around INR5.3tn assuming a fiscal
deficit of 5.1% is achieved. The gross market borrowing
will however be similar to FY12 if the state fiscal deficit
stabilises at 2.5% (of GDP). The financing will not be an
issue with growth in bank deposits, insurance andpension funds. The government could also go for a
further relaxation in foreign investment in government
bonds. As far as bond yields are concerned, they remain
artificially low as of now due to heavy OMOs. Post the
announcements of the borrowing programme coupled
with signs of fiscal consolidation and monetary easing,
yields should stabilise in ~8.0% range over FY13E.
What does a large fiscal deficit meanfor India?
Exhibit 16: Gross government liabilities has been
declining on t he back of high nominal growth
Source: CMIE, Bloomberg, Elara Securities Research
Even as a large fiscal deficit is a serious concern for an
emerging economy like India, the fact that it is largely
financed domestically means that it is not a sovereign
issue. The government bonds have a captive demand
from banks, insurance and pension funds. The domestic
economy funds its own deficit and chances of a largescale selling by overseas participants are small. However,
cut to present circumstances, a large fiscal deficit results
in a high aggregate demand in the economy that has
inflationary implications and significant spillover to the
current account deficit. This in turn puts pressure on the
monetary policy to firefight inflation even as loose fiscal
policy means rising bond yields. In such a scenario,
private sector funding is crowded out by government
borrowing and kills much needed capacity creation in
the economy. In the unforeseen circumstance of a global
shock, there is litt le scope for maneuvering.
Risks to our expectat ions
We continue to maintain that assembly elections results
hold the key to the fiscal consolidation. The downside
risks will emanate from a defeat of ruling UPA in majority
of assembly elections that will force the government to
go soft on subsidies restructuring (food, fuel and
fertilisers alike) and raise expenditures on MNREGA and
an early implementation of the Food Security Bill that in
turn will bloat the deficit further. Add to that rising crude
prices and a weak grow th scenario and the situation
could get w orse.
A second scenario where the government can make an
impact is through passthrough of oil prices and other
subsidy restructuring and revive the sentiments in the
economy by unleashing reforms that will aid (1) greater
buoyancy in tax revenues (2) raise receipts by meeting
the disinvestment targets and 2G auction.
Sectoral expectations
Construction , Infrastructure
[email protected] Tax exemption under section 80CCF for investments
up to INR20,000 in infrastructure bonds is expected
to be doubled or raised even further, with a need to
infuse additional liquidity to fund the ambitious
investment target of USD1tn envisaged for the XII
plan.
Approval to issue tax free bonds worth at leastINR300bn to various government undertakings in
FY13 (primarily railways, PFC & NHAI).
Final approvals to financial institutions like IIFCL,ICICI etc. to go ahead with their respective
Infrastructure Debt Fund proposals. IIFCL
disbursements target to be raised.
2,000
2,500
3,000
3,500
4,000
4,500
5,000
5,500
FY10 FY11 FY12E FY13E
(INRbn
)
Net market borrowings Repayments
35
45
55
65
F
Y00
F
Y01
F
Y02
F
Y03
F
Y04
F
Y05
F
Y06
F
Y07
F
Y08
F
Y09
F
Y10
F
Y11
FY
12E
(%toGDP)
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Due to high global price and shortage of domesticcoal, steps in the direction of easing the import duty
over coal to support power generation companies
and infrastructure utilities may be taken. At present,
there is 5% customs duty on non-coking coal and 1%
excise duty.
Corpus of Rural Infrastructure Development Fund(RIDF) expected to be raised from INR180bn to
INR200bn.
Pertinent issues relating to execution and ministriescomplying with annual targets need to be
addressed.
Hike in annual corpus of development schemes likeBharat Nirman, JNNURM and RGGVY.
Any further hike in MAT rates could be materiallynegative for asset owners which are already reeling
under the high interest rate burden.
Continuation of full exemption from basic customsduty to bio-asphalt and specified machinery for
construction of national highways; parallel excise
duty exemption for domestic suppliers producing
capital goods for expansion of existing mega/UMPP
pow er projects expected to continue as well.
Oil & Gas
Excise duty cuts in Jun11 might be rolled back asthe government looks for more revenue avenues
and th is impact might be equivalently offset through
a diesel retail price hike, leaving the under-recoveries
and OMCs unaffected.
Extension for eligibility dates for 7-year tax holidaysfor new refineries under construction. Beneficial for
IOC as it is setting up the greenfield 15MMT refinery
in Paradip.
Impact: If the excise dut ies on diesel are rolled back and ifthe government doesnt implement a price hike to offsetthe impact, it can be a huge short term negative for
OMCs. However, eventually the impact may be borne by
the government and upstream players for the added
under-recovery. Further, it would be interesting to see
the governments view on implementing a duty on
purchase of diesel vehicles and how these will be routed
to eventually offset the diesel under-recoveries.
Consumption
anand [email protected]
Specifics
Excise hike of ~10% in cigarettes (Impact partiallyve for ITC but discounted, anything higher wouldimpact stock, however ITC well placed to pass on the
same via price hikes)
Excise cut roll back by ~200bps (from 10% to 12%)would impact margins. However, expect most
companies to pass on the same to consumers
negating any material impact
Macro positives
Any increase in budgetary allocations foragriculture/farmers or implementation of food
security b ill
Change in tax slabs any increase leading to higherdisposable incomes
Clarity on roadmap for implementation of GSTAutomobiles
mohan.lal@elaracapit al.com
Excise duty hike on diesel vehicles Excise duty hike from 10% currently to 12% for small
passenger cars, three wheelers and two wheelers
Impact
Excise duty hike on diesel vehicles will be negativefor M&M, Tata Motors and Maruti, in that order.
Negative impact can be reduced if the excise hike is
2-5% as it can be passed on w ithout severely
impacting the demand for diesel vehicles. Maruti
may indirectly benefit from it too, if the demand for
passenger cars shifts back to petrol models due to
price hikes in diesel models, as it has strong petrol
model portfolio
If the overall excise duty is hiked from 10% to 12%, itwould be negative for the sector as a whole, as, if
passed on, it could mute the already modest
demand sentiments. If the players choose not to pass
or partially pass the hike, then two wheelers players
will be least impacted as they derive significant
production from excise free zones and thus pay the
lowest excise rates (6-7% as compared to 9-10% for
four wheeler manufacturers). Absorption of excise
hike, thus would be least margin dilutive for two
wheeler players v/s four wheeler players.
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Banking and Financial
parees.purohi [email protected]
On the macro front: A prudent fiscal budget andborrowing programme will facilitate price stability and
liquid ity of the g-sec market
Sector specific:
Commitment to capitalise PSU banks in the run up toBasel III conformation
Firm guidelines and intent on issuing fresh banklicenses
Passing of Insurance Bill, enabling insurancecompanies to increase foreign ownership to 49%
Tax code change with respect to increasing eligibilityamount of long term deposits under Section 80C.
Other:
Policy reforms in power sector, and infrastructure, which
will improve financial viability and assurance of project
completion. This will influence extent of restructuring
required by banks, improve overall asset quality and
improve scope for further bank lending.
Information Technology
Even though there is a persistent buzz aboutremoval/ low ering of MAT on SEZs, given the tightfiscal condit ions, we believe it is unlikely.
We expect clarification on taxation norms for theonsite portion of revenue to clear IT claims on
technology services firms.
Metals
Possible increase in import duty of steel to 10% from5% (doesnt materially affect Indian steel producers
as pricing is not aligned to import parity prices).
Increase in base rate of excise duty (negative for theindustry as ability to pass on increase for ferrous
players remains questionable).
Nothing material expected for the non-ferroussector.
Cement
Excise duty for cement may be hiked. (Neutral forthe industry as any increase in excise is likely to bepassed on by the industry due to strong seasonal
demand).
Increase in outlay for infrastructure projects couldimpact cement demand favourably.
Tours and Travels
Service tax exemption is expected on tour operator'sforeign exchange earnings
Increase service tax abatement to 90% for domestictour operators
Export industry status to tourism Domestic airfares- Taxes on ATF expected to be
revisited
Uniform state luxury tax at 5%. Infrastructure status for hotels and convention
centres.
Pharmaceuticals
suraji [email protected]
Seldom do we expect any significant benefit for
pharmaceutical sector as the budget does not venture
into specifics for the pharmaceutical sector except social
schemes/plans targett ing BPL families. Majority of the
policies which impact the manufacturing sector, apply to
the pharmaceutical sector. We, however, expect a few
specific policies targetting the pharmaceutical sector:
Rise in excise duty, which is expected across theboard would impact pharmaceutical sector,
especially API (active pharmaceutical ingredients)
producers in India (this would directly impact all
domestic pharmaceutical companies and some MNC
pharmaceutical companies as their low value
products are often produced through contract
manufacturers)
Rise in import duty (this would decrease profitabilityof MNC pharmaceutical companies as majority of
high value/ lifestyle drugs/patented drugs are
imported. Domestic pharmaceutical companieswould benefit from rise in import duty as it could
increase competitiveness of their drugs and
encourage more contract manufacturing business to
replace import drugs)
Corporate tax rate increase: This would impact thesector overall as tax outflow will impact net profit .
Increase in tax benefits rate for R&D expenses: Toencourage more clinical trials and fundamental
research in NCEs/NBEs, industry expect more tax
benefits from the current 150% of capital R&Dexpenses. This would benefit R&D focussed
companies such as Biocon, Glenmark, Dr Reddys
Lab, Lupin, Sun Pharma Advance Research, Piramal
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8 Elara Securities (India) Private Limited
Healthcare etc. Hike in tax benefits would also
encourage CROs (clinical research organisation)
such as Suven Pharma, Vimta Labs etc as well as
MNC CRO companies to expand Indian research and
clinical trials. Overall, this would expand CRO
segment in India. Rise in governments welfareschemes for polio and other epidemic diseases: This
would benefit vaccine producers such as Panacea
Biotech, Pfizer and Glaxo Pharmaceuticals. While
additional funds would encourage more vaccine
production in India, we believe that market cap ofpharmaceutical companies would increasemarginally as major beneficiaries are privatecompanies in vaccine and ATM (Anti-TB and Malaria)
segment.
Power
koushik [email protected]
Reduction of customs duty on imported coalexpected which currently stands at 5%.
Power equipment import duties are unlikely to behiked in the current budget given limited ability of
government to pass on tariff hikes.
Tax sops for setting up power projects based onrenewable energy expected to cont inue.
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India Budget 2012
Econ
omics
9 9
Exhib it 17: Government of India Accounts
(INR bn) (% to GDP)FY11RE FY12BE FY12EE FY13EE FY11RE FY12BE FY12EE FY13EE
1 Revenue Receipts 7,838 7,899 7,460 8,750 10.2 8.8 8.2 8.42 Tax Revenue (net to centre) 5,637 6,645 6,310 7,500 7.3 7.4 7.0 7.2
3 Non-Tax Revenue 2,201 1,254 1,150 1,250 2.9 1.4 1.3 1.2
4 Capital Receipts (5+6+7) 4,327 4,678 5,875 5,801 5.6 5.2 6.5 5.65 Recoveries of Loans 90 150 150 150 0.1 0.2 0.2 0.1
6 Other Receipts 227 400 300 300 0.3 0.4 0.3 0.3
7 Borrow ings and other liabilities 4,010 4128 5,425 5,351 5.2 4.6 6.0 5.2
8 Total Receipts (1+4) 12,166 12,577 13,335 14,551 15.9 14.0 14.7 14.09 Non-Plan Expenditure 8,216 8,162 8,870 10,025 10.7 9.1 9.8 9.7
10 Revenue Account 7,267 7,336 8,150 9,175 9.5 8.2 9.0 8.8
11 Interest Payments 2,408 2,680 2,680 2,950 3.1 3.0 3.0 2.8
12 Defense expenditure 907 952 952 1,050 1.2 1.1 1.0 1.0
13 Subsidies of which 1,641 1,436 2,480 2,450 2.1 1.6 2.7 2.4
14 Food 606 606 780 1,100 0.8 0.7 0.9 1.1
15 Fertilizer 550 500 950 800 0.7 0.6 1.0 0.8
16 Fuel 384 236 650 450 0.5 0.3 0.7 0.4
Others Subsidies 101 94 100 100 0.1 0.1 0.1 0.1
17 MNREGA 401 400 400 400 0.5 0.4 0.4 0.4
18 Capital Account 948 826 720 850 1.2 0.9 0.8 0.8
19 Plan Expenditure 3,950 4,415 4,136 4,450 5.1 4.9 4.6 4.320 On Revenue Account 3,269 3,636 3,636 3,700 4.3 4.0 4.0 3.6
21 On Capital Account 681 779 500 750 0.9 0.9 0.6 0.7
22 Total Expenditure (9+19) 12,166 12,577 13,006 14,475 15.9 14.0 14.3 14.023 Revenue Expenditure (10+20) 10,537 10,972 11,786 12,875 13.7 12.2 13.0 12.4
24 Capital Expenditure (18+21) 1,629 1,606 1,220 1,600 2.1 1.8 1.3 1.5
25 Revenue Deficit (23-1) 2,698 3,073 4,326 4,125 3.5 3.4 4.8 4.026 Fiscal Deficit (22-1-5-6) 4,010 4,128 5,096 5,275 5.2 4.6 5.6 5.127 Primary Deficit (26-11) 1,602 1,448 2,416 2,325 2.1 1.6 2.7 2.2
Source: India Budget, Elara Securities Research
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Elara Secur it ies (India) Private Limit ed
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Disclosures & Confident iality for non U.S. Investors
The Note is based on our estimates and is being provided to you (herein referred to as the Recipient) only for information
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Elara or any of its affiliates reserves the right to make modifications and alterations to this statement as may be required from
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GlobalMark
etsResearch
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Disclaimer for U.S. Investors
This material is based upon information that we consider to be reliable, but Elara Capital Inc. does not warrant its
completeness, accuracy or adequacy and it should not be relied upon as such.
This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument.
Securities, financial instruments or strategies mentioned herein may not be suitable for all investors. Any opinions expressedherein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue.
Prices, values or income from any securities or investments mentioned in this report may fall against the interests of the
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information contained in this report does not constitute advice on the tax consequences of making any particular
investment decision. This material does not take into account your particular investment objectives, financial situations or
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acting on any recommendation in this material, you should consider whether it is suitable for your particular circumstances
and, if necessary, seek professional advice.
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that are subject to significant uncertainties and contingencies. Actual future performance could differ materially from these
forward-looking statements and financial information.
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