Budget Expectations 2013-14 … promises to keep, And miles to go before I sleep*… *Courtesy Robert FrostNandan Chakraborty Sachchidanand ShuklaManaging Director - Institutional Equity Research Sr VP & Economist 11 Feb email@example.com 91 22 4325 1107 firstname.lastname@example.org 91 22 4325 1108
11 Feb 2013 PRE-BUDGET REPORTKey things to watch in this Budget BUDGET EXPECTATION 2013-14 STRATEGYThe FM has already stolen his own thunder by announcing a slew of measures outside the budget. Focus will nowbe on Stability, Credibility on fiscal consolidation and Reform intent in order to reposition India as an attractiveinvestment destination:♦ Stable policy regime to encourage normal business expectations and capital inflows♦ Fiscal deficits cannot be tackled in one year. It is the trajectory that matters. Thus the budget should stress: ● Revenue increases without hurting growth: A roadmap for implementing GST and DTC ● Expenditure control: Roadmap for reining in subsidies through Direct Cash Transfers etc ● Quality of fiscal adjustment: i.e. in April-December, non-plan expenditure rose 12% (budgeted ~9%) while plan expenditure rose <7% (budgeted 22%). Thus there are drastic capex cuts to make the fiscal deficit look better; but this may endanger economic recovery. The FM should be cutting wasteful expenditure instead♦ Roadmap for key bills: GST, DTC, Land Acquisition, Mining and the Insurance Bill♦ Propping Savings: Planned reduction in fiscal deficit, higher tax breaks and regulatory tweaks to channelize household savings into financial savings (ie MFs and Insurance)♦ And Investments: Deepening the corporate bond market and steps to improve the regime for foreign capital flows. Specific proposals include investment tax credit, depreciation benefits, a cut in the withholding tax rate for debt instruments and a holistic policy for foreign investments 2
11 Feb 2013 PRE-BUDGET REPORTTax measures BUDGET EXPECTATION 2013-14 STRATEGY Rates may remain broadly unchanged though there could be some selective duty rejig and pruning of exemptions: ♦ Customs duty: Expect reinstatement on Petro products, to provide ~Rs 490 bn inIndirect taxes revenues ♦ Excise duty: Selective hikes, lowering threshold for SMEs to Rs 10 mn. Also expect diesel price hikes to be front ended, given bunching of state elections Despite a clamour for higher tax rates for the rich, the budget may soften the blow by: ♦ Raising Income tax exemption limits for the middle classDirect Taxes ♦ Incentivizing investments into Financial assets : Offering tax incentives for Pension products/MFs or include Rajiv Gandhi Equity Savings scheme & Tinkering with LT capital gains tax on Infrastructure/ Corporate bonds 3
11 Feb 2013 PRE-BUDGET REPORT Has the FM made his own budget a non event already? BUDGET EXPECTATION 2013-14 STRATEGY The FM has announced a slew of measures since mid-Sep to soothe investor nerves 22000 Cabinet approves 49% FDI in insurance, 26% Banking Laws (Amendment) FDI in pension funds Bill, 2011; Companies Bill cleared in LS Govt approves FDI in Cabinet approves 10% multibrand retail, aviation, divestment proposal in 20000 GAAR introduced power exchanges and broadcast NMDC services, Disinvestment in 5 PSUs FM clears 49% FDI in insurance, Rail fareSensex pension sectors hike 18000 RBI cuts Repo RBI cuts CRR & CRR by 25bps by 25 bps PM formally announced launch of Direct Cash UPA Wins Vote Transfer Scheme from 16000 Govt hikes diesel prices by on FDI in Retail Jan 1, 2013 Rs 5/ltr, subsidised LPG cylinders capped in LS & RS RBI cuts CRR by 25 bps 14000 Jul-12 Mar-12 Apr-12 Dec-12 Jan-13 Jun-12 Jan-12 May-12 Feb-12 Oct-12 Feb-13 Aug-12 Nov-12 Sep-12 Source: Bloomberg, Axis Capital 4
11 Feb 2013 PRE-BUDGET REPORTPolicy Reforms pipeline – To do list BUDGET EXPECTATION 2013-14 STRATEGYGovernment ReformsUnder Consideration CommentsIncreasing FDI in insurance to 49% Parliament approval pending, opposition from BJP and LeftAllowing FDI in pension at 49% Parliament approval pendingLand Acquisition Bill Yet to be ratified by the Parliament post changesDirect Tax Code(DTC) The DTC, touted as a big facelift of the Income Tax law, has seen a number of its provisions get diluted. The govt is yet to give any firm indication on the new lawPreparation for implementation of Govt. has appointed two committees to prepare a report on implementation of GST. TheseGoods & Service Tax (GST) committees will examine the issue of compensation to states for loss of revenue and the design of GST 5
11 Feb 2013 PRE-BUDGET REPORTSectoral expectations: Summary... BUDGET EXPECTATION 2013-14 STRATEGYSector Key budget expectations Impact Positive for Tata Power/ Steel/ Motors, Hindalco,General ♦ Lower dividend distribution tax from foreign subsidiaries (current 15%) Sterlite, Sun Pharma, Godrej Consr, etc.Autos ♦ Increase in excise duties, esp on large diesel passenger vehicles Negative: M&M ♦ Elevated govt borrowing program to pressurise yields/ liquidity (-). Industry lobbying for full tax deductability on NPA provns (+). Positive for Insurance:Banks & Fin Serv ♦ Pub Sr banks: Recapitalisation (+)/ Agri loan target growth>15% (-) HDFC, ABNL ♦ Insurance: Increase in FDI limit to 49% ♦ Import duty hike on power eqpt by 5-10% from current 20-27% ♦ Higher depreciation rate on capex from 15% to 25% Positive: L&T, SuzlonCapital goods ♦ Restoration of subsidy for wind power Negative: BEL ♦ Outlays: decrease in Defence by 5%, Watch Railways (50% jump to Rs 300 bn) & JNNURM (urban devt: maintain at Rs 150 bn) 6
11 Feb 2013 PRE-BUDGET REPORT…Sectoral expectations: Summary... BUDGET EXPECTATION 2013-14 STRATEGYSector Key budget expectations Impact Negative: Cos may not beCement ♦ Reshuffle in excise duty structure leading to increase in net duty able to pass on the hike due to weak demand ♦ GST can reduce cascading taxes and decrease price differential withFMCG unorganised players Positive for all (GST) , ? ITC ♦ Increase in excise duty for cigarettes (mkt expectn~10% increase) ♦ Clarity on FY14 NBS subsidy: current DAP subsidy at Rs 14.5K/ te Positive: Coromandel, ZuariFertilisers ♦ Industry lobbying for regulation on DAP imports due to high inventory if DAP imports regulated ♦ Increase in limits in tax free bonds (Rs 600 bn, Rs 20K per individual) ♦ Freight hike for coal in Railway budget (-) Positive for all pvt infraInfrastructure and ♦ Decrease debt cost: Refinancing of INR debt thru ECBs. IIFCL to developers and pvt powerPower gencos guarantee pvt infra bonds ♦ Lower dividend distribution tax from SPV if re-invested in capex Positive for Dish TV andMedia ♦ Lower excise and customs duty on set top box Hathway Cable 7
11 Feb 2013 PRE-BUDGET REPORT…Sectoral expectations: Summary BUDGET EXPECTATION 2013-14 STRATEGYSector Key budget expectations ImpactMetals ♦ Hike in import duty for steel to 10% vs. 7.5% currently Positive for all steel cos ♦ Re-introduction of 5% customs duty on crude oil Positive: Cairn, RILOil n Gas ♦ Clarity on FY13 subsidy sharing formula (US$56/bl for upstream cos) Negative: BPCL, HPCL, IOC ♦ Clarity on domestic natural gas pricing ♦ Increase in limit for income tax deduction on interest on home loansRealty ♦ Extension of 1% interest subvention on home loans by 1 yr Positive ♦ Industry lobbying for infra status for affordable housing ♦ Infra status to Tower companies ♦ Reduction in multiple taxes/ leviesTelecom ♦ Auction mobilisation – amt and timeline? (-) Positive ♦ Many proposals may be addressed separately through the National Telecom Policy/ Spectrum Enactment Act 8
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