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Union Budget 2012-13 Preview
Union Budget 2012-13 Preview
Union Budget 2012-13 Preview
Union Budget 2012-13 Preview
Union Budget 2012-13 Preview
Union Budget 2012-13 Preview
Union Budget 2012-13 Preview
Union Budget 2012-13 Preview
Union Budget 2012-13 Preview
Union Budget 2012-13 Preview
Union Budget 2012-13 Preview
Union Budget 2012-13 Preview
Union Budget 2012-13 Preview
Union Budget 2012-13 Preview
Union Budget 2012-13 Preview
Union Budget 2012-13 Preview
Union Budget 2012-13 Preview
Union Budget 2012-13 Preview
Union Budget 2012-13 Preview
Union Budget 2012-13 Preview
Union Budget 2012-13 Preview
Union Budget 2012-13 Preview
Union Budget 2012-13 Preview
Union Budget 2012-13 Preview
Union Budget 2012-13 Preview
Union Budget 2012-13 Preview
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Union Budget 2012-13 Preview

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The Union Budget for FY13 is to be presented in the parliament on 16th March. This will be a crucial Budget as it sets the tone for policy stance relating to not just fiscal issues but also monetary …

The Union Budget for FY13 is to be presented in the parliament on 16th March. This will be a crucial Budget as it sets the tone for policy stance relating to not just fiscal issues but also monetary policy and economic reforms. Also, it is being announced at a time when the economy is looking for a boost from the government through appropriate policy announcements

In a scenario of high inflation, liquidity crunch, high interest rates and subdued business sentiment, the Budget is expected to provide certain policy directions which will shape the course of the economy in the coming months

Ideally, the response from the policymakers should be a quick reversal in less productive government spending, and at the same time initiating policy measures to boost private investments. Apart from this, the government should consider expediting the disinvestment process and ensure key reforms such as GST are implemented quickly

With this, we also need to tackle the implementation risk that has often been associated with the Indian economy for many years. Particularly, on the expenditure growth target, the implementation of the promise in the budget is more important than the promise itself

Industry expects the government to give policy directions to re-build investors' confidence. Yes, not all of the issues are directly addressable in a Budget, but the Budget this year can be a starting point towards such enabling policy making

If the Budget assures a certain degree of fiscal prudence, without compromising on growth excessively, the sentiment should improve. Nonetheless, in order to surge ahead, industry will seek signs of at least an optimistic outlook from the FM

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  • 1. Union Budget 2012-13 PreviewNidhi Kedia || Research Analyst || nidhi.kedia@bmastock.comMarch 06, 2012
  • 2. Topics The year that was... • Inflation taking a toll on growth • Burgeoning fiscal deficit Expectations from the Budget Detailed sectoral preview | 1
  • 3. Topics The year that was... • Inflation taking a toll on growth • Burgeoning fiscal deficit Expectations from the Budget Detailed sectoral preview | 2
  • 4. Inflation has been above the RBI’s comfort zone of 5-5.5%for over two years now… WPI YoY (%) ▪ Remained above 9% in each of the 11 months of 2011 up to November 2011 12% 11% ▪ Touched double digit in 10% September 2011 9% 2009 8% 2010 ▪ Each component of inflation, 7% 2011 viz., primary, fuel and 6% manufacturing remained above 5% 4% RBIs comfort level at 5% 3% ▪ Though core inflation has 2% started to come down, it needs 1% 0% to be tracked for some more time before we are confident it May Aug Mar Apr Jul Jan Jun Nov Dec Oct Sep Feb -1% will remain at lower levelsSOURCE: Bloomberg, BMA Research | 3
  • 5. RBI took an anti- inflationary stance to control inflation ▪ The constant increase in inflation Policy Rates(%) has forced the Central Bank to Repo Rate tighten its monetary policy 10% Reverse Repo Rate ▪ Repo Rate was hiked by 375 bps 9% Cash Reserve Ratio since Mar-10 8% ▪ In its recent monetary policy 7% review, it cut CRR by 50 bps in order to ease liquidity conditions 6% ▪ Though RBI has stalled with rate 5% increases and signaled that the 4% interest rate cycle has peaked, a cut in the interest rates would 3% depend on how the other macro- Jan-07 Jan-08 Jan-09 Jan-10 Jan-12 Jul-07 Jul-08 Jul-09 Jul-10 Jan-11 Jul-11 economic factors shape up in futureSOURCE: Bloomberg, BMA Research | 4
  • 6. Tight monetary policy took a toll on the economic growth… GDP(%) ▪ The high inflation and tight monetary policy maintained by the RBI have taken a toll on 11% growth 10% ▪ GDP slowed to its weakest 9% annual pace in almost three 8% years, as high interest rates and rising input costs constrained 7% investment and manufacturing 6% ▪ With GDP growth moderating 5% after significant monetary 4% tightening by the RBI, fiscal Sep-08 Sep-09 Sep-10 Jun-11 Dec-11 Mar-11 Sep-11 Jun-08 Jun-09 Jun-10 Dec-08 Dec-09 Dec-10 Mar-08 Mar-09 Mar-10 consolidation is the only alternative to maintain a sustainable growth rateSOURCE: Bloomberg, BMA Research | 5
  • 7. FY12 Deficit will likely be significantly higher than budgeted In FY11, the government was able to reduce the central fiscal deficit to 4.7% of GDP, on account of a significant revenue from 3G license fees. However, this year (FY12) the government has been facing several receipt gaps. We expect central government’s fiscal deficit to overshoot to about 6% of GDP in FY12 vs. budget estimate of 4.6% of GDP. Some of the factors that have contributed to the rise in fiscal deficit are as follows: ▪ Loss in revenue on account of cut in custom and excise duty on petroleum products: The government had cut excise duty and custom duty on petroleum products in June last year, which has resulted in a loss of revenue to the government ▪ The ensuing growth slowdown has weighed heavily on tax collections: Excise and customs duty growth which are directly related to the production levels has already slipped below budget estimates. Further, corporate tax growth has also slowed led by the on-going moderation in economic activity, washing off the optimistic revenue forecasts of the government ▪ Divestment shortfall from the budgeted target: Given the volatile capital market environment, the government found it difficult to raise sufficient revenue from the divestment program as was planned in the budget ▪ Subsidies over-run: Higher oil prices has resulted in an increase in oil subsidies beyond budgeted, thereby increasing the subsidy bill of the country | 6
  • 8. Topics The year that was... • Inflation taking a toll on growth • Increasing fiscal deficit Expectations from the Budget Detailed sectoral review | 7
  • 9. Expect policy reforms to improve the growth situation ▪ The macroeconomic conditions in India have been very challenging over the last few months. From inflationary pressures to high interest rate environment and slowdown in growth, from sovereign debt problems in the euro zone to the domestic issues, there were a multitude of factors that impacted sentiments negatively ▪ In the midst of decelerating economic growth, policy formation had been difficult on account of persistently high inflation clubbed with dwindling investments. Further, volatility in the foreign exchange market had added to the difficulties of the policy makers ▪ Till now, RBI had taken an anti-inflationary stance through its various monetary policies. However, in monetary policy, there is not much of a room for a further maneuver. Any further increase in interest rates will certainly impact growth and the consequences of a slowdown in growth can be really damaging. Therefore, fiscal consolidation is the only alternative to improve the growth situation ▪ The Union Budget for FY13 is to be presented in the parliament on 16th March. This will be a crucial Budget as it sets the tone for policy stance relating to not just fiscal issues but also monetary policy and economic reforms. Also, it is being announced at a time when the economy is looking for a boost from the government through appropriate policy announcements | 8
  • 10. Fiscal Consolidation to revive the growth momentum ▪ We believe the current macro economic backdrop warrants a reduction in fiscal deficit partly by cutting expenditure and partly by increasing tax rates. We expect a focus on balance between fiscal consolidation and public spending. The government must consider steps that strengthen confidence and encourage a faster recovery in growth ▪ Two major structural reforms to overhaul the direct and indirect tax system are on the agenda, a new direct tax code (DTC) and a uniform goods and service tax (GST). Though these tax reform measures are unlikely to be implemented in the FY13 budget, the FM might introduce some changes in the tax structure so that the move to the new system is staggered and non-disruptive ▪ The government can also initiate some long pending reforms such as allowing FDI in multi brand retail. This may however, require government’s conviction to move ahead with reforms, post assembly elections. ▪ Re-sale of 2G spectrum through auctions may also come in. ▪ The Budget may also help devise some serious strategy on selling PSU stocks that takes into account varying market conditions to raise sufficient revenue from divestment ▪ On the expenditure side, support to the five year plan will have to be kept to the bare minimum. This again has to be done without hurting infrastructure investments | 9
  • 11. Key focus of the upcoming Budget ▪ Subsidy Rationalization: The ultimate credibility test will lie in the FM’s ability to move on subsidies and take small but decisive steps towards pruning them. ▪ It may opt raising diesel, kerosene and LPG prices in order to control its oil subsidy bill. This will however result in higher prices of diesel and petroleum. ▪ Partial decontrol of urea prices may also be done in order to check the rising fertilizer subsidy bill. This will result in increasing the much needed investments into the fertilizer sector. ▪ Food subsidy however may be raised as government introduces food security bill. ▪ Withdrawal of fiscal stimulus: Given that there is a possibility of slippages in fiscal targets of the Government, the government might use the revenue side to drive the fiscal consolidation. One can expect that the Finance Ministry would try and increase revenue collections by ▪ Raising excise duty and service taxes, perhaps back to the pre-crisis levels of 12%, thereby also laying ground for a GST at 12%. ▪ Widening the service tax net by bringing more services under the tax umbrella and increase service tax collections | 10
  • 12. Key focus of the upcoming Budget ▪ Socialization of personal tax structure: The FM may introduce some changes in the personal tax structure in order to alter one’s disposable income substantially. ▪ It may raise the maximum income tax exemption limit to Rs. 2,50,000 from Rs. 1,80,000, thereby providing more disposable income into the hands of lower earning group. ▪ It is also likely that the government may re - introduce surcharge on personal income tax (10%) particularly for assesses with gross taxable income in the maximum tax bracket. ▪ The budget may also raise the MAT Rate to 20% (from 18.5%) and increase the surcharge on corporate taxes to 10% (vs. 5% currently) ▪ Deduction under section 80C may be revised to Rs. 1,50,000 from the existing limit of Rs. 1,00,000 to provide enhanced options of investments to the assessees. ▪ Accelerating retail investments in equity markets: Some of the key avenues that the FM can consider in this regard include: ▪ Lowering/ eliminating short term capital gains tax on equities ▪ Increasing tax allowances for retail investment in equity mutual funds | 11
  • 13. Topics The year that was... • Inflation taking a toll on growth • Increasing fiscal deficit Expectations from the Budget Detailed sectoral preview | 12
  • 14. Automobile sector NegativeBudget ▪ We expect a potential increase in excise duties by 200 bp for theExpectations sector, particularly for diesel powered vehicles. The duty is expected to be immediately passed on to the consumers ▪ The much-debated imposition of additional tax on diesel cars might go through as the step will not only add to the revenues for the government but may also restrict the growth in diesel subsidies. While the petroleum ministry is pushing for additional duty of Rs. 80,000 on diesel cars and UVs, we expect a lower hike ▪ Any further allocation to rural employment schemes such as NREGA would provide further strength to rural demand for tractors and other vehicles. Increase in allocation under Rural Development program is positive for auto companies with rural presence | 13
  • 15. Banking sector NeutralBudget ▪ Fresh budgetary allocation for recapitalization of PSU banks whichExpectations would improve tier-1 capital and provide adequate capital to support increased lending ▪ Further clarity on modalities of issuing new private sector bank licenses ▪ Any policy initiatives affecting infrastructure projects ▪ Increase in exemption limit for borrower on housing loans ▪ Potential reduction in the lock-in period of term deposits to be eligible for tax deduction from 5 years to 3 years. This would help in correcting the asset liability mismatch of the banks ▪ Tax benefits on long-term deposits may be taken out of 80C and provided as a separate tax exempt deduction | 14
  • 16. Capital Goods sector NeutralBudget ▪ The budget might levy import duties on Power Equipment at 10-12%Expectations or even higher, following demands from domestic power equipment companies like L&T, BHEL etc for a level-playing field ▪ A potential increase in excise duty rate from current 10% ▪ Any increased spending on major infrastructure projects would also revive demand for capital goods | 15
  • 17. Cement sector PositiveBudget ▪ We do not expect any industry-specific changesExpectations ▪ The outlook on infrastructure spending will be important. Better implementation of plan allocations could result in higher construction demand from infrastructure segments ▪ The industry also expects removal of import duty on coal, pet coke, gypsum and other fuels. Any import duty changes, if any, will give a positive boost to the sector | 16
  • 18. Construction & Infrastructure sector PositiveBudget ▪ A pickup in spending is expected across various segments of IndianExpectations infrastructure – Ports, Roads, Airports, Rail and Urban Infra, especially focused on social spending through schemes such as Bharat Nirman, JNNURM, etc. This will not just lead to higher investments but also bring about improvements in the quality of urban infrastructure ▪ We also expect that the budget will increase the tax exemption limit under Sec 80 CCF for infrastructure bonds from current Rs 20,000 to Rs.1,00,000 to address funding constraints ▪ Specialized institutions may be allowed to fund infrastructure projects since most banks are ill-equipped as it creates inherent Asset – Liability Mismatch (ALM) issues ▪ Given the coal shortage in the country, we expect that the current 5% import duty on coal may be abolished to reduce the cost of imported coal | 17
  • 19. FMCG sector NeutralBudget ▪ We expect specific excise duty on cigarettes to be raised by nearlyExpectations 10%. However, Companies will resort to price increases affecting volumes. We believe that ITC is best placed to absorb the hike in excise duties as it has demonstrated a track record of passing on excise duty hikes to the end consumer ▪ There might also be a 200 bp increase in excise rates for consumer products. While companies like Marico, Dabur etc won’t be affected, as they have manufacturing facilities in excise exempt zone, Asian Paints would get impacted and would have to pass it on ▪ Any increase in income tax slabs (particularly hike in the maximum exempt slab), which lowers tax outgo and increases disposable income will be positive for the consumer sector | 18
  • 20. Oil & Gas sector PositiveBudget ▪ We expect status quo to be maintained on customs and excise dutiesExpectations in the oil & gas sector in light of the tight fiscal situation and sustained high losses on sales of subsidized petroleum products at current retail selling price. The customs duty was cut in June 2011 by 5% to nil for crude oil and to 2.5% for petrol and diesel, and excise duty on diesel was cut by INR2.6/lit to INR2/lit. ▪ The budget might grant extension of the commissioning date of new refineries to avail the seven-year tax holiday. The exemption is currently available for only those refineries which have been/would be commissioned by March 2012. This will benefit Indian Oil Corporation (IOC) which is setting up a greenfield 15 mmtpa refinery in Orissa ▪ Deregulation of all administered prices on fuel products is unlikely to happen immediately but some price increases are possible to reduce the subsidy burden and signal policy direction. The increase in prices will be positive for the Oil Marketing Companies like HPCL, BPCL and IOC as it will reduce the under-recoveries to some extent. It will also reduce subsidy burden of ONGC, GAIL and Oil India | 19
  • 21. Pharmaceuticals sector PositiveBudget ▪ We expect increase in healthcare budgets which will be a positive forExpectations the sector ▪ Higher weighted deduction (currently at 200%) on R&D related costs and lower taxation on R&D incomes will be beneficial to the CRAMS players. ▪ Excise duty on Bulk Drugs may be reduced from 10% to 5% to bring it at par with formulations ▪ We expect an increase in MAT to 20% from 18.5%. This will affect most of the front-line companies, especially those having SEZ units | 20
  • 22. Real Estate sector PositiveBudget ▪ Incentives for affordable housing such asExpectations ▪ an increase in the limit for income tax deduction on interest on home loans, which is currently Rs1,50,000 and/or ▪ an increase in the limit for income tax deduction on home loan principal payments, which is currently Rs1,00,000. ▪ Thrust on infrastructure would be a longer term demand driver and positive for the market ▪ Lower FDI restrictions and facilitation of foreign borrowings will help companies overcome balance sheet issues | 21
  • 23. Utilities sector PositiveBudget ▪ Reduction of customs duty on imported coal which currently stands atExpectations 5% ▪ Financial relief for SEBs in the form of new schemes in power distribution ▪ Assistance to raise low‐cost long‐term resources to re‐finance power projects ▪ Tax holiday under section 80IA for power plants may be extended. ▪ Differential between MAT and Income Tax rate may come down | 22
  • 24. Positive hope of stimulating growth ▪ In a scenario of high inflation, liquidity crunch, high interest rates and subdued business sentiment, the Budget is expected to provide certain policy directions which will shape the course of the economy in the coming months ▪ Ideally, the response from the policymakers should be a quick reversal in less productive government spending, and at the same time initiating policy measures to boost private investments. Apart from this, the government should consider expediting the disinvestment process and ensure key reforms such as GST are implemented quickly ▪ With this, we also need to tackle the implementation risk that has often been associated with the Indian economy for many years. Particularly, on the expenditure growth target, the implementation of the promise in the budget is more important than the promise itself ▪ Industry expects the government to give policy directions to re-build investors confidence. Yes, not all of the issues are directly addressable in a Budget, but the Budget this year can be a starting point towards such enabling policy making ▪ If the Budget assures a certain degree of fiscal prudence, without compromising on growth excessively, the sentiment should improve. Nonetheless, in order to surge ahead, industry will seek signs of at least an optimistic outlook from the FM | 23
  • 25. Central Government Accounts All values in All values in INR Cr FY10 FY11 FY12BE* INR Cr FY10 FY11 FY12BE*REVENUE RECEIPTS 572811 783833 789892 REVENUE EXPENDITURE 911809 1053678 1097162 Tax Revenue 456536 563685 664457 Plan Expenditure 253884 326928 363604 Non-Tax Revenue 116275 220148 125435 Non Plan Expenditure 657925 726750 733558CAPITAL RECEIPTS 453063 447743 447836 CAPITAL EXPENDITURE 112678 162898 160567 Capital Recpt. (Borr.) 419869 415998 392816 Plan Expenditure 49507 68096 77943 Capital Recpt. ( Ex . Borr) 33194 31745 55020 Non Plan Expenditure 63171 94802 82624TOTAL- RECEIPTS 1025874 1231576 1237728 TOTAL EXPENDITURE 1024487 1216576 1257729Revenue Receipts 572811 783833 789892 On Revenue Account 911809 1053678 1097162Capital Receipts 453063 447743 447836 On Capital Account 112678 162898 160567 All values in INR Cr FY10 FY11 FY12BE* 338998 269845 307270 Revenue Deficit 418482 400998 412817 Fiscal deficit*Budgeted Estimates Source: Ministry of Finance, Government of India | 24
  • 26. Disclaimer This document is for private circulation only. Neither the information nor any opinion expressed constitutes an offer, or any invitation to make an offer, to buy or sell any securities or any options, future or other derivatives related to such securities. BMA Wealth Creators Ltd. or any of its associates or employees doesn’t except any liability whatsoever direct or indirect that may arise from the use of the information herein. BMA Wealth Creators Ltd. and its affiliates may trade for their own accounts as market maker, block positional, specialist and/or arbitrageur in any securities of this issuer (s) or in related investments, may be on the opposite side of public orders. BMA Wealth Creators Ltd. and its affiliates, directors, officers, employees, employee benefit programs may have a long or short position in any securities of this issuer (s) or in related investments no matter content herein may be reproduced without prior concert of BMA. While there report has been prepared on the basis of published/other publicly available information considered reliable, we are unable to accept any liability for the accuracy of its contents.Nidhi Kedia || Research Analyst || nidhi.kedia@bmastock.comMarch 06, 2012

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