Religare budget special report


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Religare budget special report

  1. 1. Strategy & Economics INDIA 13 February 2013Union Budget FY14 PreviewHow to get 5.3%/4.8% fisc for FY13/14We believe and illustrate how the Govt. could meet its fisc targetsof 5.3% for this fiscal, and then a lower, 4.8% for FY14, using amix of a tight belt on plan expenditure, and some help fromaccounting this fiscal, with some subsidy rationalization in FY14.Our assessment would be 5.8%/5.2% for FY13/14. REPORT AUTHORS Tirthankar PatnaikLower subsidies are desirable, could be inflationary, and (91-22) 6766 3446negative for growth and consumption in the near-term, but on the tirthankar.patnaik@religare.comwhole are preferable to a higher-growth-high-fisc scenario. On Prerna Singhvithese lines, policy-based intervention would be the feasible (91-22) 6766 3413choice over fiscal pump-priming for the Govt., given its strained prerna.singhvi@religare.comfinances. Saloni Agarwal (91-22) 6766 3438Union budgets in India have progressively lost significance for agarwal.saloni@religare.comthe markets in the past few years. Despite being the next macrotrigger for the markets, we think this year may not be very Subsidy burden in FY13different, other than the sustained equity supply. The budget Actual subsidy FY13BE FY13E burden in FY13recipe is likely to be a sweet-and-sour mix of reform and Food 818 750 1,000populism in a pre-election year, with a potential dose of Fertilizers 988 610 610regressive policies thrown in. Oil 1,002 436 700 Expect to see a 5.3%/4.8% fisc for FY13/14: Meeting the fiscal target Others 105 105 105 is primal for the Govt. this year, and we believe it’s possible for these Total 2,912 1,900 2,414 seemingly optimistic estimates to be met, with subsidy deferrals, % of receipts 31.7% 19.4% 26.5% % of GDP 2.9% 1.9% 2.4% thanks to cash accounting, and a tighter plan expenditure being the Source: RCML Research likely tools of choice. Our estimates are more sedate at 5.8%/5.2% Fiscal deficit trend over this period as we factor in lower tax revenues and lower (%) deferrals. 8.0 6.0 6.3 Potential consequences of a lower fisc: Apart from the obvious 6.0 5.9 5.1 5.8 5.2 4.6 benefits, we believe a lower subsidy-led fisc would be negative for 4.0 3.3 growth and consumption in the near-term, with 5.3%/4.8% over 2.6 FY13/14 leading to a potential -25bps on growth, implying a lower 2.0 FY14 growth estimate to ~5.5% (from 5.8%). 0.0 For the market: While it remains the next macro trigger, the sustained PSU equity supply is likely to remain an overhang for the Source: RCML Research markets over the next few months, short of a substantial positive Govt. borrowings vs. incremental deposits – surprise. A 4.8% fisc for FY14 is structurally positive, save the higher reflects crowding out of private sector fuel/fertilizer inflation, potentially back to FY12 levels, delaying the Budgeted (Rstrn) (%) rate-cut cycle. On the bright side could be steps to channelize long- 6.0 Actual 100% Actual borrowings/incremental deposits term capital into investments (details in the note). Markets would look 5.0 at a lower fisc print positively as it improves Govt. finances in the long- 80% term. Sector-wise impact: Positive – Infrastructure, Energy, Industrials, 4.0 60% Banks; Negative – Consumer, Autos, Real Estate; Neutral – IT, 3.0 Telecom, Healthcare, Metals. 40% 2.0 20% 1.0 0.0 0% FY03 FY05 FY07 FY09 FY11 FY13 Source: Bloomberg, RCML ResearchThis report has been prepared by Religare Capital Markets Limited or one of its affiliates. If the analyst who authored the report is research.religare.combased in the United Kingdom, then the report has been prepared by Religare Capital Markets (Europe) Limited. For analystcertification and other important disclosures, please refer to the Disclosure and Disclaimer section at the end of this report. Analystsemployed by non-US affiliates are not registered with FINRA regulation and may not be subject to FINRA/NYSE restrictions oncommunications with covered companies, public appearances, and trading securities held by a research analyst account.
  2. 2. Union Budget FY14 Preview Strategy & Economics INDIA How to get 5.3%/4.8% fisc for FY13/14 A fight for fiscal consolidation Would the Govt. get the fisc to 5.3% in FY13 and 4.8% in FY14? If this year’s Union Budget has something that’s different from the dozen before it, it’s Meeting the fiscal deficit target is key the inordinate amount of attention given to the fiscal deficit figure. The finance minister for the budget this year, as is the fiscal has gone all out promising that the fisc for this year would be capped at 5.3%--marginally trajectory going forward higher than the budget estimate of 5.1%--come what may. Further, the fiscal roadmap proposed by the Govt. in October’12 also proposes a phased reduction in the fiscal deficit by 60bps each year till FY17, by which time it would have reached 3% of GDP, within FRBM guidelines. Can the finance minister pull this off? Could we really expect a secular downtrend in the Historical evidence is supportive of fisc over the next five years? Before we delve into the details, let’s examine the historical meeting fiscal deficit targets… evidence. As the chart below shows, budgeted fisc estimates have mixed chances of being met. Until the GFC hit us in FY09, budgeted fiscal deficit figures were largely likely to be met. Actual deficits have been higher about 4/10 times since FY02. It’s when the UPA-II Govt.’s domestic mismanagement coalesced with a global slowdown, leading to a sharp drop in growth, that fiscal management became difficult, and conversely relevant, in terms of getting the economy back on track.Fig 1 - Fiscal deficit trend (%) Budget Estimate Actual 8.0 6.8 7.0 6.7 6.1 5.9 6.0 5.9 6.0 5.6 5.5 5.3 5.1 4.7 4.8 4.9 5.0 4.4 4.6 4.3 4.0 4.1 3.8 4.0 3.5 3.3 3.1 3.0 2.5 2.0 1.0 0.0 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13BE Source: India Budget, RCML Research So why the skepticism this time towards meeting the targeted figures? In a word, …but the macro slowdown has “Growth”. With GDP growth dipping ~250bps between FY11 and FY12, falling tax muddied the waters a bit revenues (and stubborn subsidies) have inflated the fisc, leading to the sharp miss from the budget estimates (5.9% vs. 4.6% in FY12). Macro environment in the new fiscal is unlikely to be very different, if a little better than what we have now, with 5.5-6% growth remaining an overhang on revenues, and pre-election year one on expenditure. In other words, conventional logic would point to a significant fisc in FY14 as well. Now for the details. We believe a downward fiscal trajectory is not an unthinkable scenario, and the Govt.’s figures for the fisc can be met over the medium term, with prudent policy-led initiatives on trimming non-plan expenditure, subsidy rationalization, and renewing investment focus. In the near-term, however, the Govt. could also employ use simpler, and more effective ways, like pruning plan expenditure, and deferring subsidy payments, the latter made possible by the cash (vs. accrual) accounting standards followed. What this means in simplistic terms is that the Govt. recognizes an accounting 13 February 2013 Page 2 of 23
  3. 3. Union Budget FY14 Preview Strategy & Economics INDIA How to get 5.3%/4.8% fisc for FY13/14entry or transaction only when the actual transfer of money takes place, as against taking Yes. The Govt. can meet its fiscalmeasure of receivables and payables, as companies usually do. deficit target of 5.3% for FY13, and could actually also promise and meetCash vs. Accrual accounting an FY14 target of sub-5% fisc: 4.8%Cash accounting considers transactions on actual transfer of money, like a withdrawal, ora deposit, as against what’s called accrual accounting, which recognizes receivables andpayables, assets and liabilities. Considering income/expenditure over profit/loss, a cashaccounting framework appears to be clean and simple at first hand, but is usuallyconsidered suboptimal given shortcomings like missing obligations like interest/pensionpayable, depreciation, and delayed receivables. For the Govt., this translates into tax andcapex volatility, and to some extent an unreal fiscal picture. For instance, a ‘healthy’scenario of high tax off-take in one period might simply be undone by large-refunds inthe next. Alternatively, subsidy announcements made in one period could actually bepaid in the next quarter or fiscal. Govt. across the World have shifted to accrualaccounting in recent years, and in India, plans to shift were put in place in November2011 by the GASAB (Government Accounting Standards Advisory Board), appointed bythe CAG, and are expected to take six years to be completed. Till then, the Govt. canalways defer subsidies and hope for a better fiscal next time around.The Finmin therefore might actually show a fiscal deficit of 5.3% in FY13 and 4.8% in Cash vs. Accrual accounting would beFY14, by reducing subsidy paid in each period. part of the trick, potentially a meaningful partDeferring/reducing subsidy disbursals:The Govt. could choose to defer subsidies to FY14 (see table 4 for details) and hope to cutdown on subsides then, through sustained Diesel price hikes, urea hike, and withtrimming leakage with Direct Cash Transfers. Not to worry if political compulsions in apre-election year limit the extent to which these measures could be undertaken.Subsidies payments could always be deferred to the next fiscal, cutting down on subsidyburden in FY14. Let’s see the numbers this year. The actual subsidy burden for FY13 hasreached Rs2.9trn—almost Rs1trn more than the budgeted subsidy figures of Rs1.9trn.Assuming no further fertilizer subsidy disbursal in FY13 and Rs550bn for oil (disbursed in9MFY13, Q4 figure to be paid in Q1FY14), the Govt. is expected to release only Rs2.1trn,thus potentially deferring Rs845bn to FY14. While this would make the FY13 fiscal printlook rosy, it raises concerns on the FY14 finances.Overall, our scenarios suggest that the Govt. could defer as much as Rs845bn to FY14 Subsidy deferral could be substantialtowards meeting the targeted fisc for this year. And then with a series of positive steps this year, as much as Rs845bn, double(details in table 5), restrict subsidies in FY14 to just Rs1.3trn, thereby restricting the that of the last fiscaloverall burden to Rs2.2trn, about 1.8% of GDP. The Food Security Bill could be deferred,or watered down, so that expenses are not front-loaded, Diesel hikes are takenreligiously so as to narrow the under-recovery per litre to zero, LPG, kerosene prices areraised, as are urea prices.Of course, we’ve painted a blue-sky scenario, and FY14 could also see deferral ofsubsidies to FY15. The point we make is that it’s possible to optically improve the fiscalindicators of the country, and current politico-economic conditions do not preclude thatpossibility. 13 February 2013 Page 3 of 23
  4. 4. Union Budget FY14 Preview Strategy & Economics INDIA How to get 5.3%/4.8% fisc for FY13/14 Fig 2 - FY13 subsidy – actual burden vs. potential disbursal (to reach 5.3% fisc) Actual Subsidy Potential subsidy Actual subsidy disbursed Potential amount Rs bn FY13 BE subsidies burden in FY13 disbursal in FY13 till now deferred to FY14 Food 750 818 818 443 0 Fertilizers 610 988 594 594 393 Oil 436 1,002 550 550 452 Others 105 104.61 104.61 105 0 Total 1,900 2,912 2,067 1,692 845 % of receipts 19.4% 31.7% 0.2% 0.2% 0.1% % of GDP 1.9% 2.9% 2.0% 1.7% 0.8% Source: RCML ResearchFig 3 - FY14 subsidy disbursal to reach 4.8% fisc Actual subsidy Rs bn FY13 FY14 Potential Govt. action incurred in FY14 1) No Food Security Bill, and 2) Firm roll-out plan on Direct Cash Transfer which would Food 818 725 725 help reduce leakages 1) Steep hike in urea prices or possibly a gradual de-control, and 2) reduction in subsidies Fertilizers 594 693 300 on complex fertilizers Best case scenario in the absence of any subsidy deferral to FY15 (though highly Oil 550 610 158 unrealistic) could be 1) complete diesel de-control (Rs9.9 hike), 2) LPG price hike of Rs450, 3) Rs3 hike in Kerosene prices Others 105 150 150 Total 2,067 2,178 1,332 % of receipts 0.2% 20.5% % of GDP 2.0% 1.8% Source: RCML Research Reducing Plan expenditure The Govt., as also pointed out earlier, could reduce its plan expenditure by 10% at the Reducing Plan Expenditure is another expense of growth (where expectations are already falling), especially in defence and step towards meeting fiscally tight outlay on roads. Non-plan expenditure, representing payments, subsidies, etc. is targets inherently harder to control, given extant political and economic compulsions. 13 February 2013 Page 4 of 23
  5. 5. Union Budget FY14 Preview Strategy & Economics INDIA How to get 5.3%/4.8% fisc for FY13/14Fig 4 - Fiscal deficit math –How the Govt. can achieve 5.3% in FY13 and 4.8% in FY14 FY13 revised to FY14E toRsbn FY12 FY13 BE % diff. % yoy % yoy reach 5.3% reach 4.8%Central govt. net tax revenue 6,423 7,711 7,322 -5.0% 14.0% 8,566 17.0%Non-tax revenue 1,247 1,646 1,446 -12.1% 15.9% 1,584 9.5% Telecom auctions 400 400 200 -50.0% -50.0% - -100.0%Central govt. revenue receipts 7,670 9,357 8,768 -6.3% 14.3% 10,150 15.8%Non-debt Capital Receipts 298 417 417 0.0% 40.0% 427 2.5% Divestment proceeds 155 300 300 0.0% 93.6% 300 0.0%Total Receipts 7,967 9,773 9,184 -6.0% 15.3% 10,577 15.2%Non-plan Expenditure 8,921 9,699 9,866 1.7% 10.6% 10,917 10.6%Of which Capital Expenditure 764 1,043 1,043 0.0% 36.6% 1,172 12.4%Of which Revenue Expenditure 8,157 8,656 8,823 1.9% 8.2% 9,744 10.4% Subsidy outgo 2,163 1,900 2,067 8.8% -4.4% 2,178 5.4% Food 728 750 818 9.1% 12.3% 725 -11.4% Fertilizers 672 610 594 -2.5% -11.5% 693 16.5% Oil 685 436 550 26.2% -19.7% 610 10.9% Others 78 105 105 0.0% 34.2% 150 43.4%Plan Expenditure 4,266 5,210 4,689 -10.0% 9.9% 5,273 12.4%Of which Capital Expenditure 804 1,005 905 -10.0% 12.5% 1,034 14.3%Of which Revenue Expenditure 3,462 4,205 3,785 -10.0% 9.3% 4,239 12.0%Total Expenditure 13,187 14,909 14,555 -2.4% 10.4% 16,189 11.2%Nominal GDP 89,749 101,599 101,599 0.0% 13.2% 117,836 16.0%Fiscal Deficit (5,220) (5,136) (5,371) 4.6% 2.9% (5,613) 4.5%Fiscal Deficit as % of GDP 5.8% 5.1% 5.3% 4.8%Source: RCML ResearchWhat do we think? – A more realistic pictureWe’ve justified odds of the Govt.’s meeting its target of 5.3% for this fiscal, andpotentially stretching to 4.8% for the next, and its impact on the macro/markets. Whathappens if the Govt. does not resort to aggressive payment deferral, or restrict planexpenditure?We believe the fiscal calculations then would be fairly different, with the FY13 fisc spiking Our estimates for the fisc trajectoryto 5.8%, missing the Govt. target by a wide margin. And one can be excused for being ovr FY13/14 are higher than Govt.conservative on reforms in a pre-election year, and with muted expectations of a fiscally estimates at 5.8/5.2% vs. 5.3/4.8%prudent budget, we would expect the fisc to improve only marginally to 5.2% in FY14 vs.the Govt.’s potential target of 4.8%.Our estimates differ from what we believe the Govt. would do, primarily on more sedateassumptions of lower tax revenue, and a subsidy burden, with lower deferrals. Corporatetax growth has been lagging budget estimates, expectedly so, and our conservative viewof FY14 growth (5.8% vs. street expectations of 6.5%) translates into weaker growthfigures for income, and corporate taxes.On subsidies, our estimates do not include the Food Security Bill as of now, given the lackof clarity on the targeted spend, and the level of front-ending possible as a politicalexigency. 13 February 2013 Page 5 of 23
  6. 6. Union Budget FY14 Preview Strategy & Economics INDIA How to get 5.3%/4.8% fisc for FY13/14Fig 5 - Fiscal deficit math – RCML estimatesRsbn FY12 FY13E % yoy FY14E % yoyCentral govt. net tax revenue 6,423 7,252 12.9% 8,383 15.6%Non-tax revenue 1,247 1,446 15.9% 1,583 9.5% Telecom auctions 400 400 0.0% - -100.0%Central govt. revenue receipts 7,670 8,698 13.4% 9,966 14.6%Non-debt Capital Receipts 298 417 40.0% 428 2.8% Divestment proceeds 155 300 93.6% 300 0.0%Total Receipts 7,967 9,115 14.4% 10,394 14.0%Non-plan Expenditure 8,921 10,213 14.5% 11,129 9.0%Of which Capital Expenditure 764 1,043 36.6% 1,172 12.3%Of which Revenue Expenditure 8,157 9,170 12.4% 9,957 8.6% Subsidy outgo 2,163 2,414 11.6% 2,450 1.5% Food 728 1,000 37.3% 1,000 0.0% Fertilizers 672 610 -9.3% 600 -1.6% Oil 685 700 2.2% 700 0.0% Others 78 105 34.2% 150 43.4%Plan Expenditure 4,266 4,819 13.0% 5,419 12.4%Of which Capital Expenditure 804 921 14.6% 1,053 14.3%Of which Revenue Expenditure 3,462 3,898 12.6% 4,366 12.0%Total Expenditure 13,187 15,033 14.0% 16,548 10.1%Nominal GDP 89,749 101,599 13.2% 117,836 16.0%Fiscal Deficit (5,220) (5,918) 13.4% (6,153) 4.0%Fiscal Deficit as % of GDP 5.8% 5.8% 5.2%Source: RCML Research thGovt.’s fiscal consolidation roadmap for the 12 plan looks overly optimistic thIn a press statement on October 29 , the Finance Minister unveiled a five-year fiscal The Govt. expects to bring down fiscalconsolidation roadmap for the period FY13-FY17 with an aim to contain India’s twin- deficit to 3% by FY17 – we believe thisdeficit problem and high inflation, spur investments and boost economic growth. As per is overly optimisticthe roadmap, India’s fiscal deficit would come down from 5.3% expected in FY13 to 4.8%in FY14, 4.2% in FY15, 3.6% in FY16 and finally to 3% in FY17.While supportive of it at a broad, policy level (as we are of the Direct Cash Transfer, andthe Food Security Bill etc.), we find roadmap overly optimistic, especially in the absenceof key recommendations of the Kelkar Committee, such as price increases in food andfertilizers, sugar de-control, actual (as opposed to announced) price hikes of petroleumproducts, and postponement of the food security bill. Recent commentary from the FMon sticking to the fiscal target, and lowering the fisc steadily (~60bps annually) is apositive indeed, but now implementation is key. 13 February 2013 Page 6 of 23
  7. 7. Union Budget FY14 Preview Strategy & Economics INDIA How to get 5.3%/4.8% fisc for FY13/14Fig 6 - Fiscal consolidation roadmap during period FY13-17 (%) 6.0 5.3 4.8 5.0 4.2 4.0 3.6 3.0 3.0 2.0 1.0 0.0 FY13 FY14 FY15 FY16 FY17Source: Ministry of Finance, RCML Research Fiscal policy roadmap looks overoptimistic, as do the targets for the XII Five Year Plan, given the current growth trajectory thFig 7 - Key economic targets for the 12 Five Year Plan% Eleventh plan (FY08-12) Twelfth plan (FY13-17)Economic growth (avg.)Real GDP 7.9 8.2Agriculture 3.3 4.0Mining and Quarrying 3.2 7.2Manufacturing 6.9 8.0Electricity, gas & water supply 6.0 7.8Construction 7.3 8.6Services 9.8 9.1Savings, investment & consumption* (avg.)Investment 37.6 39.3Consumption 70.0 67.4Savings** 35.8 37.1External sector (avg.)Exports 14.7 18.0Imports 23.5 26.9Trade deficit (8.7) (8.9)Current account balance (CAD) (2.7) (2.9)Capital account balance (KAD) 4.1 3.2FiscalTax revenue (net of states share) as % of GDP 7.60 in FY12 8.79 in FY17Subsidies as % of GDP 2.44 in FY12 1.20 in FY17Fiscal deficit (avg.) 5.15 3.98 (to reach 3% by FY17)Gross budgetary support as % of GDP (avg.) 4.69 5.23Infra Investments as % of GDP (avg.) 7.10 8.26Source: Planning Commission, RCML Research 13 February 2013 Page 7 of 23
  8. 8. Union Budget FY14 Preview Strategy & Economics INDIA How to get 5.3%/4.8% fisc for FY13/14 Implications on the macro and markets A lower fisc in India is clearly desirable, as we show below, but we are also worried with Everybody loves a low fisc. but be the direction and implications of tighter Govt. spending on the overall macro, esp. in the prepared for ‘costlier’ consequences! near-term. We show that the impact of the Govt. meeting its fiscal targets for FY13/14 could be ~25bps on growth. Lower fisc is good for economy… There’s no debate on the benefits of a lower fiscal deficit in the economy, one needs only to examine the extent of ‘crowding out’ of the private sector over the last few years, as Govt. spending, and consequently, borrowing has exceeded budgeted targets. Fig 8 - Crowding out of the Private sector on rising Govt. borrowing Why lower fiscal deficits are desirable (Rstrn) Budgeted Govt. borrowings Actual Govt. borrowings (%) 6.0 Actual borrowings to incremental deposits ratio 5.7 90% 5.3 5.1 80% 5.0 4.54.5 4.6 4.4 70% 4.2 4.0 60% 50% 3.0 2.7 40% 2.0 1.5 1.6 1.51.5 1.61.7 1.5 30% 1.41.4 1.3 1.21.3 20% 0.8 1.0 10% 0.0 0% FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 Source: RCML Research Recent years have seen the Govt. take up a progressively higher share of the capital on offer in the market, as the previous chart illustrates, and this phenomenon is accentuated when actual borrowing exceeds targeted levels. The figure for FY13 at nearly 85% is given the front-ended borrowing program on one hand, and low deposit growth on the other. And negative surprises on borrowing have also been exacerbated in recent years with falling credit growth, as the chart below illustrates.Fig 9 - Budgeted and actual Govt. market borrowings vs. credit growth Exceeding borrowing targets hurts (Rstrn) Budgeted Actual Credit growth (%) more in a falling credit growth 6.0 5.7 40.0 environment 5.3 5.1 35.0 5.0 4.54.5 4.6 4.4 4.2 30.0 4.0 25.0 3.0 2.7 20.0 15.0 2.0 1.5 1.6 1.51.5 1.61.7 1.5 1.41.4 1.3 1.21.3 10.0 0.8 1.0 5.0 0.0 0.0 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 Source: India Budget, RCML Research A sustained rise in Govt. borrowing also implicates national income growth. In the chart below we juxtapose this indicator with GDP growth over the last decade, and see that 13 February 2013 Page 8 of 23
  9. 9. Union Budget FY14 Preview Strategy & Economics INDIA How to get 5.3%/4.8% fisc for FY13/14while a rise in Govt. spending was helpful during the GFC period in boosting economicgrowth (FY09-10), its sustained rise since then has only served to crowd out the privatesector in the economy, with the consequent negative implications for growth.Fig 10 - Share of Govt. borrowing in the economy and GDP growth Despite the help from fiscal pump-(Rstrn) (%) priming during the GFC, rising share of GDP growth (L) Actual Govt. borrowings to incremental deposits ratio (R) 12% 90% Govt. borrowing is inimical to growth, 80% very clearly so 10% 9.5% 9.6% 9.3% 9.3% 8.6% 70% 8.1% 8% 60% 7.0% 6.7% 6.2% 50% 6% 5.5% 5.5% 40% 4.0% 4% 30% 20% 2% 10% 0% 0% FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13ESource: RCML ResearchThe point is made: Relatively speaking, Govt. spending is inferior to private spending forgrowth.… and for the marketsWe believe therefore that the markets would cheer a lower fiscal figure for FY14, even aseconomic and fiscal performance this year would necessitate subsidy deferral and hencetrust in the final tally for FY13. A low FY14 fisc print, say below 4.8%, would we believe beviewed positively despite a potential hit on the economic growth as it improves andbrings Govt. finances on track in the long-term...and for the central bankThe Reserve Bank of India (RBI) has time and again voiced concerns over high fiscal deficitand CAD as being key constraints towards an easing monetary policy, besides obviouslyhigh inflation. A fiscally responsible Budget may also mean a more comfortable RBI oneasing rates—another positive for investment in the economy and the markets.…Expenditure cuts could however hurt in the near-termNow let’s for a moment examine the near-term consequences. Near-term pain from a sharp cut in Govt. spendingWhat we are interested here are in the aftermath of lower Govt. spending on theeconomy, and its growth prospects, even if the Govt. is no longer the significantcomponent of the economy it once was.A sharp reduction in FY14 subsidies (assuming no deferral) would happen only when the Govt.’s role in the economy has comeGovt. takes sharp fuel and fertilizer (urea) price hikes. While structurally a big positive for off over the last two decades, butGovt. finances, this also implies higher inflation as a necessary corollary with higher every bit counts in a slowdownfood/fuel/finished goods prices, which in turn would hurt not just consumption in thenear-term (we are worried about urban consumption), but could potentially also extendthe monetary easing on one hand, and a growth revival on the other.Moreover, a sustained cut in Govt. plan expenditure (esp. defence/infra) in FY13 couldhurt the potential growth trajectory over the next few years, despite near-term fiscalamelioration. Comparing RCML estimates with the Govt. numbers to achieve the ‘revised’ 13 February 2013 Page 9 of 23
  10. 10. Union Budget FY14 Preview Strategy & Economics INDIA How to get 5.3%/4.8% fisc for FY13/14 5.3% fisc in FY13, we estimate that the shortfall of Rs477bn in Govt. expenditure could negatively hurt growth by ~25bps (that too assuming no multiplier effect).Fig 11 - Impact of lower capex on growth The price to meet the fiscal deficit Rs bn Capex shortfall in FY13 Govt. vs. RCML est. target for this year and the next could Non-plan expenditure 347 be 25bps of growth Capital Expenditure - Revenue Expenditure 347 Plan Expenditure 130 Capital Expenditure 17 Revenue Expenditure 113 Total 477 % of Nominal GDP 0.5% GDP Deflator 1.9 Effective change in GDP 0.24% Source: RCML Research So what are we saying here? Clearly that given a choice, we would prefer a lower growth trajectory over a stubbornly high fisc, even if that means near-term pain. Sector-wise, higher inflation would hit consumption, esp. in the urban segment, and thus Near-term pain on lower fisc would be by negative for the Consumer sector (both discretionary and staples), i.e., Autos, Media, negative for consumption, esp. in the Household & Personal Products, Food & Beverages, and residential Real Estate (lower urban segment, with sector implications housing demand). The resultant drop in urban consumption could also impact private banks with significant retail exposures. However, an investment boost would be positive for Infrastructure, Energy, Industrials and to some extent the Banking space. A lower fisc print would have a neutral impact on Telecom, Healthcare, IT and Metals. 13 February 2013 Page 10 of 23
  11. 11. Union Budget FY14 Preview Strategy & Economics INDIA How to get 5.3%/4.8% fisc for FY13/14 What can the Govt. do to help investment? The central bank’s rate cut in January—we’ve maintained earlier—was more towards Money is not everything, prudent easing consciences about comfort on the inflation trajectory going forward, rather than decision-making is any significant change in the cost of funds for the economy. To spur growth, when inflation and a widening CAD restrict the support one can expect from the RBI, would take Govt. approvals on one hand, and sustained corporate capex on the other. We believe the fiscal balances do not allow the Govt. to spend money in this environment, or lower taxes as in during the GFC (FY0-10) years. The feasible route remains policy-based intervention that incites a constructive environment for investment, esp. for large-cap projects. Fiscal pump-priming for investments almost impossible this time around... Let’s face it: Growth is down to 5.5% in FY13E, and a little better in FY14E (we expect Fiscal pump-priming for investments 5.8%). The last time that happened was in FY09, with the fisc at 6% (except that FY10 saw looks difficult given messy state of 8.4% growth. i.e., no meaningful bounce this time around). While the Govt. has been finances cutting its planned spending at the expense of growth, subsidies and interest payments Continued push on reforms important remain high (despite large deferrals) and take up more than 75% of the total tax receipts to improve sentiments and attract (as per FY13BE). As such, bold moves such as urea de-regulation/price hikes, sugar de- investments control, are inevitable towards meaningfully meeting the fiscal prudence targets till FY17. Corporate investment in the economy has been flat over the last few years, but the Govt. is no position to take over especially when some social spending would be required ahead of general elections. The only tool that will not cost the bucks and still help improve sentiments, attract investments into India and facilitate growth remains the continued push on reforms. ...given the messy state of public finances in FY13 Corporate, excise and custom taxes have lagged Budget estimates thus far and the gross tax collection is likely to miss the budgeted target of 20%YoY (15%YoY so far) despite strong service tax collections (33%YoY so far versus the budgeted 30.5%). While revenue- collection is often back-ended, a sharp-pick is unlikely in FY13.Fig 12 - Tax collections growth in FY13 FY13 so far FY13BE 40% 34% 35% 30% 31% 30% 24% 25% 22% 20% 20% 17% 16% 14% 15% 15% 11% 10% 4% 5% 0% Income Corporate Custom Duties Excise Duties Service Gross Tax Revenue Source: RCML Research, CMIE 13 February 2013 Page 11 of 23
  12. 12. Union Budget FY14 Preview Strategy & Economics INDIA How to get 5.3%/4.8% fisc for FY13/14Fig 13 - Tax collections (Rsbn) FY13BE %YoY FY13E %YoY FY14E %YoY Direct Taxes 5,690 15.1% 5,621 13.7% 6,375 13.4% Income Tax 1,958 17.5% 1,983 19.0% 2,301 16.0% Corporate Tax 3,732 13.9% 3,637 11.0% 4,074 12.0% Indirect Taxes 5,086 24.9% 4,697 15.3% 5,503 17.2% Custom Duties 1,867 22.0% 1,607 5.0% 1,735 8.0% Excise Duties 1,944 29.5% 1,771 18.0% 2,090 18.0% Service Tax 1,240 30.5% 1,283 35.0% 1,642 28.0% Source: India Budget, CGA, RCML Research While we expect the Govt. to meet its divestment target of Rs300bn (Rs216bn already We expect Govt. to meet its achieved till now), we remain skeptical on the likely outcome of the second round of 2G divestment target of Rs300bn for FY13 auctions (first round generated only Rs94bn vs. target of Rs400-450bn). As such we but miss its target from telecom auctions of Rs400bn by a wide margin remain conservative on non-debt capital receipts in FY13.Fig 14 - Govt. disinvestments in FY13 so far Company Market cap (Rsbn) Govt. stake Actual stake sale No. of shares Amount (Rsbn) NTPC 1,221 75.00% 9.50% 8,245 115 NMDC 583 90.00% 10.00% 3,965 59.9 Oil India 322 68.43% 10.00% 601 31.4 Hindustan Copper 115 90.41% 9.59% 925 8.1 National Buildings Construction Co. 18 74.00% 10.00% 120 1.3 Total 216 Source: RCML Research Subsidy expenditure as a share of total receipts of the government has increased from ~13% in FY01-FY08 to ~26% in FY13E. While the Diesel price hike (Rs5 on 13 September and 45p on 18 January) has provided some support, the impact is expected to be only marginal at-least in this fiscal (~Rs140bn decline or 14% of total oil subsidy burden in FY13). However, further diesel hikes mean upside risks to inflation, thus delaying or reducing the quantum of rate cuts and consequently delaying the pick-up in investment cycle further.Fig 15 - Subsidy trend (breakup) for FY13 ( FY13 RCML Estimates FY13 Budget Estimates 1,200 1,000 1,000 800 750 700 610 610 600 436 400 200 0 Food Fertilizer Oil Source: Budget 2012-13, RCML Research The double whammy of lower tax/non-tax revenue collections (on lower growth) along Gross tax collections growth so far with higher subsidy burden translated into a huge Govt. borrowing target for FY13 at (9MFY13) at 15% have fallen short of Rs5.7trn, up sharply from Rs5.1trn last year, signaling little room for investment pick-up BE of 20% by the Govt. However, a gradual easing of the RBI’s monetary stance, along with further 13 February 2013 Page 12 of 23
  13. 13. Union Budget FY14 Preview Strategy & Economics INDIA How to get 5.3%/4.8% fisc for FY13/14reform push by the Govt., should result in a pick-up in private investments, albeit onlymarginally, in FY14.We expect borrowing levels to remain elevated in FY14, at around Rs5.7trn or so, butimportantly, as we’ve shown earlier, we do not expect the borrowing target of the be exceeded, and hence preclude any major negative surprise on yields in this regardin FY14.Fig 16 - Govt. borrowings via dated securities (Rs trn) The Govt. has raised Rs 5.1trn in FY136.0 so far via dated securities vs. the 5.1 5.1 budgeted Rs5.7trn5.0 4.4 4.24.0 2.73.0 2.02.0 1.7 1.7 1.5 1.4 1.1 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13TDSource: RBI, RCML ResearchFig 17 - Govt. borrowings via T-Bills (Rs trn) The Govt. has raised Rs 6.3trn in FY13 7.0 6.3 6.3 so far via T-Bills 6.0 5.0 3.9 4.0 3.6 3.4 3.1 3.0 2.2 2.0 1.7 1.5 1.0 0.5 0.6 0.4 0.0 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13TDSource: RBI, RCML ResearchOn the positive side, the Govt. can indirectly boost investment by‘non-monetary’ steps: 1. Announcing various measures to channelize long-term capital into infrastructure investment 2. A measured response on plan vs. non-plan expenditure rationalization in FY14, 3. Forcing PSUs to kick-start investment or pay dividends in order to help meet fiscal revenue targets.Moreover, a lower fiscal deficit would mean reduced Govt. borrowings which in turnwould dampen yields, and would induce a ‘crowding in’ effect on corporate credit/capex,and support the INR on sentiment. As the chart below clearly shows, higher Govt.borrowing over the years has been concurrent with rising yields. 13 February 2013 Page 13 of 23
  14. 14. Union Budget FY14 Preview Strategy & Economics INDIA How to get 5.3%/4.8% fisc for FY13/14Fig 18 - Actual Govt. market borrowings vs. 10Y yield(Rstrn) Actual market borrowings Avg. 10Y yield (%) 6.0 5.7 9.0 5.1 8.5 5.0 4.5 4.4 8.0 4.0 7.5 3.0 2.7 7.0 6.5 2.0 1.7 1.4 1.5 1.3 1.3 6.0 0.8 1.0 5.5 0.0 5.0 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13Source: RCML Research, FY13E are Budget estimatesPro-cyclical measures/monetary easing key to spur growthThe capital expenditure/total expenditure ratio—a measure of capital spends by the With falling Govt. investment toGovt.—has fallen from ~17% in FY01-FY08 to ~12% in Apr-Dec’13 as the Govt. cut down counter burgeoning subsidy burdenon its spending plan to counter ballooning non-plan revenue expenditure i.e. subsidies and subdued demand in the private sector, pro-growth policy incentivesand falling tax collections. This has meant that while Govt. borrowing has increased along with easing monetary policysubstantially at the expense of the private sector, the much-needed capital expenditure remain key to spur growthhas taken a hit (aggregate plan and non-plan capital expenditure in 9MFY13 at 12.4%versus 13.7% budgeted). This could in turn hurt FY14 growth, our estimate for which at5.8% is significantly below consensus and Govt.’s target of 6.5-7%.While gross fixed capital formation as a percentage of GDP has been gradually fallingover last few years, down from 33% in FY10 to 31% now, what is worrisome is that theprivate share of gross capital formation has also fallen from a high of ~39% in FY08 to~29% in FY12. New project announcements have fallen 55%yoy this fiscal till date toRs3.4trn. The share of private projects has also been stagnant over the years, highlightingthe subdued sentiment in the private sector which has been the key driver ofinvestments during the past decade. This fall in investments could likely affect India’spotential growth over the next few years.We reiterate that to turn sentiment around from such an investment-led slowdown,policy incentives are required in addition to an easy monetary policy, especially when thescope for pro-cyclical expenditure by the government is limited.Fig 19 - Private sector capex/GFCF (current prices) (%) Private share of the gross capital 45% formation has fallen from a high of 40% 39.1% ~39% in FY08 to ~29% in FY12 35% 32.5% 32.6% 29.9% 29.1% 30% 28.5% 26.4% 25% 21.1% 19.1% 18.3% 20% 15% 10% 5% 0% FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12Source: RCML Research, CMIE 13 February 2013 Page 14 of 23
  15. 15. Union Budget FY14 Preview Strategy & Economics INDIA How to get 5.3%/4.8% fisc for FY13/14Fig 20 - Annual trend of new project announcements Fig 21 - Public & Pvt. share of outstanding investments(Rstrn) (%) Govt. Private25.0 23.1 100 21.0 9020.0 18.1 80 33 35 16.5 16.1 44 70 56 58 61 61 61 57 60 59 6715.0 60 10.2 5010.0 8.8 7.6 40 30 67 65 4.1 56 5.0 3.0 3.4 20 44 42 39 39 39 43 40 41 2.3 33 10 0.0 0Source: CMIE, RCML Research Source: CMIE, RCML Research 13 February 2013 Page 15 of 23
  16. 16. Union Budget FY14 Preview Strategy & Economics INDIA How to get 5.3%/4.8% fisc for FY13/14Influence of the Budget on the marketsThe Union Budget has had progressively lower importance in the past as the last few Significance of budget on the marketsbudgets have avoided big-ticket policy reform announcements (unlike in the early 90s is falling as witnessed over last fewwhen game changing reforms were announced), which in any case tended to come years amidst lack of big-ticket reform announcementsthroughout the year instead of end-Feb. As such, we don’t expect this time to be anydifferent, especially given the recent reform rhetoric, as our table 24 on the followingpage comprehensively illustrates.The figures below suggest that budget influence on the market performance has beendeclining. In 6/12 years, markets have seen negative returns. Also, in 8/12 times we havedifferent pre-post movement. In other words, a positive return in the month prior to thebudget is generally followed by a negative return in the month post the budget. Whatcould be different this time is the sustained PSU equity supply overhang that’s likely tocontinue at least till the end of 1QFY14.Fig 22 - Pre- and post-Budget market performance PSU equity supply is likely to continue till June’13, as the Govt. tries to make ends meet as long as we have a favourable marketSource: Datastream, RCML ResearchFig 23 - Pre- and post-Budget market returns (1M) (%) Run-up Follow-up Eight out of 12 times we have seen 15 13.2 markets performing in different 9.0 directions 10 8.2 7.4 7.5 7.3 5.1 4.6 5 1.0 1.4 0.9 0.3 0 (1.0) (2.1) (5) (3.1) (2.4) (2.6) (4.0) (5.0) (5.1) (7.0) (6.9)(10) (9.0)(15) (15.1)(20) 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001Source: Bloomberg, RCML Research 13 February 2013 Page 16 of 23
  17. 17. Union Budget FY14 Preview Strategy & Economics INDIA How to get 5.3%/4.8% fisc for FY13/14Fig 24 - Key reforms initiated by the Govt. in FY13, should continue till 1QFY14, or till the equity supply is onDate Reforms Description Diesel hiked by Rs5 (12%), subsidized LPG cylinders limited to 6 per year. This would reduce fiscal burden13-Sep Diesel price hiked by Rs5/ltr by Rs200bn Cabinet approves FDI in multi- FDI allowed in multi-brand retail (upto 51%), aviation (upto 49%), broadcasting (49% to 74%), Power-14-Sep brand retail, aviation, broadcasting, trading exchanges (upto 49%) power trading exchanges Disinvestment approved in MMTC (9.33%), Oil India (10%), Nalco (12.15%), Hindustan Copper (9.59%).14-Sep Disinvestment in PSUs This would help the govt. meet Rs300bn disinvestment target for the year.21-Sep External borrowing made cheaper Withholding tax on overseas borrowings (ECBs, long term infra bonds) cut to 5% from 20% Rajiv Gandhi Equity Savings The FM approved the Rajiv Gandhi Equity Saving Scheme (RGESS) exclusively for the first time retail21-Sep Scheme approved for retail investors in securities market. The Govt. has expanded the scope of this scheme from stocks to mutual investors funds and ETFs, meaningfully changing the catchment area of funds for this scheme. The cabinet approved the increase in FDI limit for Insurance to 49% from 26%, opened the pension sector Cabinet approves FDI in Insurance,04-Oct to foreign investment and also cleared the Companies Bill. Parliamentary approval awaited, but prima Pension Funds and Companies Bill facie positive for overall market, specifically, Insurance plays, infra plays. Cabinet approves direct urea The Cabinet approved the new urea subsidy framework which proposes direct transfer of subsidies to end-11-Oct subsidy transfer and Rs50/t hike in users (farmers) in a phased approach and also hike in urea prices by Rs50/t (current price Rs5,310) with urea prices an aim to reduce the subsidy bill and address imbalance in use of soil nutrients due to the rising price gap. Prime Minister Manmohan Singh constituted a high-power National Committee on Direct Cash Transfers in PM sets committee on direct cash a bid to reduce corruption at the cutting edge. The committee is expected to facilitate the introduction of25-Oct transfer direct cash transfers to individuals eligible for benefits flowing out of the government’s many welfare programmes. Rajya Sabha clears FDI in multi- FDI in multi-brand retail cleared the final hurdle on 8th December when it got the approval of the Rajya08-Dec brand retail Sabha which voted against the motion to withdraw it. It has already got the Lok Sabha approval. Cabinet gives nod to Land The Union cabinet cleared the land acquisition bill with some changes to the draft version passed by the14-Dec acquisition bill GoM in October Cabinet Committee on Investment The Cabinet approved the formation of the much-awaited Cabinet Committee on Investment to provide14-Dec formation approved by the Cabinet fast-track approval to mega projects. This is the watered down version of the National Investment Board New Urea Investment policy gets14-Dec The CCEA approved the new urea investment policy nod from CCEA Lok Sabha passed the new Companies bill that brings the management of the corporate sector in line with global norms. It introduces concepts like responsible self-regulation with adequate disclosure and19-Dec Companies bill passed accountability, ushers in enhanced shareholders’ participation and provides for a single forum to approve mergers and acquisitions. Parliament paved the way for corporate houses to enter the banking sector by approving the banking bill20-Dec Banking Bill/Sarfesi law passed and also passed the amendments to the debt recovery laws or Sarfesi law. The RBI has raised ECB limit for infrastructure NBFCs to 75% of owned funds from 50% under the ECB limit on infra NBFCs raised07-Jan automatic route. This will apply to outstanding ECBs as well, and those above 75% will require approval from 50% to 75% from RBI. This reform comes at a time when the country needs $1trn investment in infra. The finance minister on 14th Jan outlined the Govt.’s final reponse to the ‘GAAR Report’— recommendations of the export panel headed by Dr. Parthasarathi Shome to examine the GAAR proposal14-Jan FInMin red-lights GAAR of the Finance Act 2013. Agreeing to most of the recommendations, the Govt. has now to some extent mitigated concerns on the topic. Govt decontrols diesel prices; cap The Govt. allowed the oil cos to raise the diesel prices by small amounts every month (45p/mth) and17-Jan on subsidised LPG cylinders raised announced inclusion of bulk diesel prices in WPI calculation. The Govt. also increased the subsidized LPG to 9 cylinders from 6 to 9 The Cabinet approved a 50% cut in the auction reserve price for CDMA spectrum. The decision could17-Jan Govt. halves CDMA reserve price prompt Russias Sistema to participate in the auction process schedule for March. The standing committee on food, consumer affairs, and public distribution on 17th Jan signed off on the Committee clears bill on food17-Jan food security bill that nearly matches the recommendation made by the Sonia Gandhi-headed National security Advisory Council (NAC). The Govt. has raised import duty by 2% (4% to 6%) in order to reduce CAD and hope for a moderation in Import duty on gold and platinum21-Jan gold demand. The Govt. wants people to cut down their gold purchases, but this will be difficult as India is raised to 6% the worlds largest gold importer. The Govt. has increased the debt market limit for investments in Govt. and corporate bonds by $5.0bn FII debt limit raised to US$25bn24-Jan each. This is expected by the market as it will boost FII inflows into India that will fund the widening CAD. from US$20bn to US$25bn This was announced earlier (Nov’12) by the Govt. and has been operationalized now by SEBI.Source: RCML Research 13 February 2013 Page 17 of 23
  18. 18. Union Budget FY14 Preview Strategy & Economics INDIA How to get 5.3%/4.8% fisc for FY13/14Wish-list/What can we expectMix of populist and reformist measures likely to be seenGiven slowing growth with no signs as yet of a sustained recovery yet on one hand, and A fiscally prudent, reformist and pro-deteriorating public finances with the fisc expected to remain at elevated levels in FY13 investment budget is the need of theon the other, the need for a highly frugal, reformist and pro-growth Budget is high, hourespecially when concerns on core inflation are slowly fading away. However, chances of But likelihood of the one is poor givenone are also relatively poor in a pre-election year. We expect the Govt. to announce a an election year. A mix of the twomix of prudent and populist measures in this year’s Budget. looksThe street is looking up to the FM (finance minister) to further boost market sentimentsvia a continued push on pro-investment reforms even as populist/inefficient expenditure(welfare programs – NREGS, IAY, SSA, JRY, JNNURM, farm loan waivers) goes up in theyear as the Govt. tries to gain public confidence ahead of the general elections (chartsbelow show a sharp pick-up in welfare spending during election years). On moremundane matters, we might see a dip in the STT (Securities Transaction Tax) for equities,or see one coming in for commodities at last. Also expected is some form ofadditional/incremental tax on high-net-worth individuals, particularly given the recentstatements of the FM on the topic.We believe the markets will give a thumbs-up to a budget with a genuine intent to pushthrough reforms, boost the investment cycle and reduce subsidies through steps such as: Improvement in revenue-receipts by bringing in further hikes in the indirect tax rates (preferably custom duties) and announcing a firm plan towards Goods and Service Tax (GST) implementation.What is GST?GST is a value added tax that would replace all indirect taxes levied on goods and servicesby the Indian central and state governments. However, due to non-consensus betweenthe central and state govt., the proposal is to introduce a dual GST regime – CGST andSGST. Roadmap for rationalisation of subsidies and ultimately, market-linked prices wherever possible, so that demand adjusts to the global commodity prices. While diesel has been partially de-regulated, a comprehensive plan like this for other fuels (kerosene, LPG etc) with clearly defined timelines for eventual de-regulation is important. Improvement in the subsidy distribution mechanism to avoid leakages and ensure targeted subsidy disbursal. Direct Cash Transfer (DCT) scheme is an important step towards this. While DCT implementation has started from 1 January 2013, issues like extensive Aadhaar coverage (only ~210mn people out of 1.2bn are Aadhaar card holders) and financial inclusion (bank accounts) need to be addressed quickly for faster and efficient roll-out of the scheme. The Govt. should announce a comprehensive plan towards extensive implementation of the scheme.What is DCT?Direct Cash Transfers (DCT) is a scheme wherein the Govt. subsidy payments and otherbenefits would be credited directly into the bank accounts of the beneficiaries. Thiswould help the Govt. reach out to identified beneficiaries, reduce leakages and henceenhance efficiency of the welfare schemes. 13 February 2013 Page 18 of 23
  19. 19. Union Budget FY14 Preview Strategy & Economics INDIA How to get 5.3%/4.8% fisc for FY13/14 Clear divestment agenda and policy and spreading the activity throughout the year instead of concentrating it towards the end of year and resulting in another ONGC episode in FY12. Opening doors for FDI to new sectors and expanding the limits further in the sectors where it’s already allowed. Abolishing or reducing the short-term capital gains tax on various asset classes.What are short-term capital gains?Investments in any asset class if held for a very short period (less than a year except forreal estate where the holding period is three years) is taxed as short term capital gains.Except equity, short-term gains on which are taxed at 15%, that from other assets isincluded in investors income and taxed at slab rate.Fig 25 - Short-term capital gain tax structure for various asset classesAsset Holding period for short-term gains Tax Rate*Equity < 1 year 15%Debt < 1 year Added to incomeGold Physical/e-Gold: <3 years Added to income ETF/Gold MF: <1 yearReal Estate < 3 years Added to incomeBonds/NCD < 1 year Added to incomeSource: RCML Research Lowering Securities Transaction Tax (STT) and addressing the issue of its double incidence (levied on every buy and sell transaction), thus helping broaden the market participation, boosting investor confidence amidst weak market sentiments, and ensuring adequate liquidity in the system.What is STT?STT, first introduced in 2004, is the tax levied on purchase or sale of equity shares andderivatives. Currently, 0.1% of the transaction value (revised downwards from 0.125% inJuly’12) is levied on the sale and purchase of equity shares. Boosting infrastructure investment by o Raising infra bonds’ issuance target for the year, o Allowing commercial banks to issue tax-free infra bonds. Currently only state-run infrastructure firms are allowed to issue these bonds. o Introducing separate limit/carve-outs for tax-free infra bonds. Tax exemption on tax-saving infra bonds up to a maximum of Rs20,000 was again included in the Rs1lac limit in the last budget. Increasing this limit to Rs50,000 and separating it from the Rs1lac investment limit for tax exemption would channelize retail savings into the infra sector and widen the investor base, thus providing much-needed long-term financing for the sector. o Allowing insurance companies to have higher exposure to infra bonds (providing tax breaks for debt funds). Easing bond issuance for the private sector thus promoting the bond market in India which is still very nascent compared to the equity market. 13 February 2013 Page 19 of 23