Union budget fy14 feb'13


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Union budget fy14 feb'13

  1. 1. Union Budget 2013-14 FEBRUARY 28, 2013 A PERSPECTIVESALIENT POINTS• FY13 growth rate pegged at 5% down from 6.2% in the previous year and FY14 growth pegged at 6.1-6.7%• Inclusive growth remains a key theme, alongside investments• Planned expenditure stands increased by 29.4% - allocations increased to various programmes including urban infrastructure, roads, health and education• Capital Markets: Proposed launch of inflation indexed bonds; RGESS modified to include mutual funds and investments in three consecutive years; RGESS income limit raised to Rs. 12 lakhs; STT reduced and introduced commodities transactions tax• Provided Rs. 14,000 crore for recapitalization of public sector banks• Infrastructure: Additional 15% investment allowance for companies investing Rs. 100 crore or more on plant & machinery• Disinvestment:Target raising Rs. 55,814 crore• Fiscal Deficit:To be reduced to 4.8% in FY14 from the revised 5.2% in FY13• Taxation: - No change in taxation slabs or tax rates - Tax credit of Rs. 2000 for individuals with total income upto Rs. 5 lakhs - Surcharge of 10% on individuals with annual taxable income of over Rs. 1 crore - Surcharge increased to 10% from 5% on companies with annual taxable earnings of over Rs. 10 crore (5% for foreign companies) - Surcharge on dividend distribution tax raised to 10% from 5%The Union Budget was broadly along expected lines (given the constraints/fiscal deficit) and the governmentcontinued to focus on inclusive growth.Whilst there were no big bang populist measures ahead of next year’s elections,there were no reform oriented measures announced.There were some expectations of directional statements in termsof expenditure rationalization, boosting of investment activity and curbing of the current account deficit.Expenditure allocation was raised for various social/development schemes but no new schemes were announceddue to limitations of a high fiscal deficit. The budget arithmetic may however prove to be aggressive as theeconomic growth rate remains modest and there seems to an overdependence on tax revenues and divestments.The additional deduction of interest up to Rs. 1 lakh paid on home loans up to Rs. 25 lakhs could be positivefor the housing sector.With a view to boost savings rate, the government is working with the RBI to introduceinflation-indexed savings instruments. DTC is expected to be introduced in the current session of the Parliamentand there is a renewed push for GST in the form of allocation towards reimbursements to the states.On the capital markets front, the focus was on streamlining the procedures applicable to foreign investors -uniform registration for all categories, risk-based KYC, etc. It was proposed that a broad principle be adopted todifferentiate FDI (Foreign Direct Investment) from FII (Foreign Institutional Investment) – stake of 10% or lessto be treated as FII and above 10% as FDI. There were various measures to boost the depth and activity in thedebt markets. 1
  2. 2. The government acknowledged the need to boost investments but there were few definite measures. The focuson building further investment corridors across the country is a positive step. However, we could see measuresoutside the Union Budget to boost growth and investment activity. The third quarter GDP growth at 4.5%underscores the need to spur growth on all fronts. Given the limited room available on the fiscal front, monetarypolicy also needs to become accommodative. Consolidated Fiscal Deficit and Current Account Deficit 12 (% of GDP) CA deficit Consolidated fiscal deficit Actual Forecast 10 8 6 4 2 0 (2) (4) FY91 FY93 FY95 FY97 FY99 FY01 FY03 FY05 FY07 FY09 FY11 FY13 FY15 Source: CLSA Asia-Pacific Markets, CEICEQUITY MARKETSLack of big bang reforms and specific measures to address the current issues seem to have weighed on market sentimentand leading indices lost ground. The hike in exemption limits and increased rural spending gave a boost to FMCGstocks. Despite the hike in excise duties, auto stocks closed in the positive territory. Indications that RBI will announceguidelines for issuing banking licenses to private sector players boosted NBFC stocks.Amongst FMCG stocks, ITC wastrading firm as duty hike on cigarettes was lower than market expectations.The reduction in Securities Transaction Tax(STT) on delivery transactions is a positive for brokerages. % change From yesterday’s % change From yesterday’s close close S&P BSE Sensex -1.52% S&P BSE Realty -2.72% CNX Nifty -1.79% S&P BSE Power -4.29% S&P BSE MidCap -2.46% S&P BSE FMCG -0.37% S&P BSE SmallCap -1.97% S&P BSE IT 0.47% S&P BSE Bankex -3.59% S&P BSE Healthcare -0.68% S&P BSE Oil & Gas -1.64% S&P BSE PSU -2.81% S&P BSE Metals -2.95% S&P BSE CG -3.39%Lack of new policy initiatives alongside increase in dividend and corporate surcharge led equity markets to reverse earlygains and close in the red.The corporate surcharge is expected to bring down earnings estimates slightly. Power, bankingand capital goods stocks were the top losers – due to lack of major announcements to spur investment.The Budgetproposes 15% deduction for companies investing Rs. 100 crore or more on plant & machinery in 2013-15 and a newroad regulatory authority. To augment finances for infrastructure, the Budget provides for up to Rs. 50,000 crore tax 2
  3. 3. free infrastructure bonds and encouraged setting up of Infrastructure Development Funds.The Budget reiterated on theneed to adopt a pooled pricing policy for coal and proposed a joint public-private effort to reduce dependence onimported coal.The reduction in Securities Transaction Tax is a positive for brokerages.The additional surcharge on high incomeindividuals and rise in duties of luxury items is unlikely to have a significant impact on consumption. Retail sectorshould benefit from lower excise duty on apparels.DEBT MARKETSThe Union Budget delivered on the fiscal deficit front, but the gross market borrowings were higher than marketexpectations (partly due to the buyback).The FY14 targeted fiscal deficit at 4.8% of GDP is to be achieved throughtax revenues and divestments. At the same time, there have been no concrete measures to control expenditure andthis has increased quite sharply (especially planned expenditure at 29% yoy). This means that the achievement ofthe fiscal deficit projection would depend on tax revenues and we need to see concrete progress on subsidyrationalization. Given the expanding current account deficit, a lot depends on the global commodity prices, exportgrowth and currency movements. Given this uncertainty, debt markets have reacted negatively and yields havemoved up across the curve. 27/2/2013 28/2/2013 1-yr gilt yield (%) 7.88 7.93 5-yr gilt yield (%) 7.80 7.87 10-yr gilt yield (%) 7.80 7.87 5-yr AAA corporate bond yield (%) 8.86 8.90The announcement of new measures to boost the depth in the debt markets and reiteration of the old measures werepositive –• Stock exchanges to have a dedicated debt segment and insurance companies, provident funds and pension funds will be allowed to trade directly.• FIIs will be allowed to participate in currency derivatives (for their rupee exposure) and also use their bond/gilt investments collateral• Debt funds and ABS made eligible securities for Pension and Provident Funds• Securitisation Trust to be exempted from Income Tax – removes uncertaintyOverall, the sentiment in the debt markets appears to have been impacted by the heightened pre-budget expectationson the fiscal consolidation front. There has been disappointment over the absence of measures to address the CAD.Another factor to watch out for the potential flows into tax-free infrastructure bonds, which would impact the overallliquidity in the debt markets.We continue to remain cautiously optimistic amidst the various uncertainties, but are clearthat interest rates have to move down to support economic growth. RBI’s comfort with the government’s fiscalconsolidation measures will reflect in its monetary policy review measures in the coming months and investors will alsoclosely watch the reaction of global rating agencies.We would continue to recommend a portfolio of funds that offerexposure to corporate bonds and have the potential to benefit from any capital gains. 3
  4. 4. Franklin Templeton Asset Management (India) Pvt. Ltd. 12th and 13th Floor, Tower 2, India Bulls Finance Centre, Senapati Bapat Marg, Elphinstone (W), Mumbai – 400 013. website: http://www.franklintempletonindia.comFor any queries, our investor line is available to assist you at 1-800-425-4255 or 60004255 (if calling from a mobile phone, please prefix the city STD code; local call rates apply for both numbers) from 8 a.m to 9 p.m, Monday to Saturday. Alternatively, you can also e-mail us at service@templeton.com.The information contained in this commentary is not a complete presentation of every material fact regarding any industry, securityor the fund and is neither an offer for units nor an invitation to invest.This communication is meant for use by the recipient andnot for circulation/reproduction without prior approval.The views expressed by the portfolio managers are based on current marketconditions and information available to them and do not constitute investment advice.Risk Factors: Mutual Fund investments are subject to market risks, read all scheme related documents carefully. TheNAVs of the schemes may go up or down depending upon the factors and forces affecting the securities market including thefluctuations in the interest rates and there can be no assurance that the schemes’ investment objectives will be achieved. The pastperformance of the mutual funds managed by the Franklin Templeton Group and its affiliates is not necessarily indicative of futureperformance of the schemes. The names of the schemes do not in any manner indicate the quality of the schemes, their futureprospects or returns. The Mutual Fund is not guaranteeing or assuring any dividend under any of the schemes and the same issubject to the availability and adequacy of distributable surplus and the investment performance of the schemes. The investmentsmade by the schemes are subject to external risks..Copyright © 2013. Franklin Templeton Investments. All rights reserved 4