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CRIS INFAC ANALYSIS, FEBRUARY 28, 2005

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Foreword 1

Economy

Highlights 4

Detailed economic analysis 6

Industry

Overall sectoral impact 18

Overall company impact 24

Auto ancillaries 30

Capital goods 32

Cars and utility vehicles 34

Cement 36

Chlor alkalies 38

Cigarettes 40

Commercial vehicles 42

Consumer durables 44

Cotton and cotton yarn 46

Fertilisers 48

Hotels 50

Information technology 52

Man-made fibres 54

Non-ferrous metals 56

Oil and gas 58

Paints 62

Paper 64

Personal care and detergents 66

Petrochemicals: Basic and polymers 68Petrochemicals: Downstream 70

Pharmaceuticals 72

Shipping 74

Steel 76

Sugar 78

Tea and coffee 80

Telecom cables 82

Continued...

Contents

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Contents...continued

1) All domestic prices are ex-factory prices, unless indicated otherwise.

2) All international prices are cif prices, unless indicated otherwise.

3) Wherever the domestic prices are ex-factory prices, the landed costs do not include CVD. Wherever the domestic prices

are market prices, the landed costs include CVD.

4) Landed costs, customs and excise duties for 2004-05 include the education cess of 2 per cent.

Data notes

Telecom equipments 84

Telecom services 86

Tractors 88

Two-wheelers 90

Tyres 92

Diversified companies 94

InfrastructurePower 100

Port 102

Roads 103

Other infrastructure 105

Banking and financial sector

Banking and financial sector 108

Capital markets

Debt markets 112

Equity market 117

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It was quite clear before the Budget that Mr Chidambaram would have to deal with a number of

conflicting objectives. Increasing spending on rural development and infrastructure, in general, would

have to be tempered by the need to adhere to the fiscal responsibility targets. Tax reforms would

also be subject to the same constraint. The new awards by the Finance Commission would have to

be factored into the calculation. When all of these limits were recognised, how much room would

he actually have to manoeuvre?

Obviously, not a lot, but as things turned out, the leeway was used with a reasonable degree of

effectiveness. Tax reforms are something that are controlled by his ministry and are virtually certain

to be implemented as presented in the Budget. The Budget has to be judged to a large extent by

what has been done on this front.

On direct taxes, there has been a significant streamlining of the personal tax regime. The anomalies

have been ironed out, and the brackets have been re-structured. Section 88 exemptions, which gave

a tax rebate for savings channelised into post office and public provident schemes and infrastructure

bonds, have been eliminated. This is a very positive move, because other than the infrastructure bonds,

these savings were not really going into any kind of capital formation. This elimination has been

offset by a blanket exemption of Rs 100,000 on income for savings, presumably including pensionand other long-term instruments, which are more likely to be deployed in the creation of fixed assets.

The corporate tax rate has been reduced from 35 per cent to 30 per cent, without any elimination

of exemptions. This is clearly good news in the short term for corporate earnings, but we must remember

that the logic of tax rate reductions is tied to the phasing out of exemptions. Given the expected

buoyancy in earnings this year, the rate reduction should not result in a large revenue loss, if any,

but in the event of an economic downturn, the lower rates with persistent exemptions might upset

the fiscal calculations significantly.

It should be reasonable to expect that the exemptions will be eliminated sooner or later and, as a

consequence, the long-term prospect is for the effective tax rate to go up rather than down for many

corporates. Ultimately, an optimal tax rate for a zero exemption scenario has to be worked out and

the whole transition accomplished as smoothly as possible. Better sooner rather than later.

There are big spending initiatives on the social and infrastructure sectors, but clearly, the committed

resources have not kept pace with the aspirations. In fact, aggregate plan spending in this Budget

is actually lower than was budgeted last year, although it represents a Rs 6,000 crore increase over

the revised estimates. The slack in spending plans is, ultimately, what gives the government some

room to keep the deficit in check.

ForewordA delicate balance

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ForewordThe one sector that is proven to have delivered is highways. The Budget has wisely committed an

extra Rs 2,800 crore to this programme, taking the total government spending up to Rs 9,200 crore.

This will clearly sustain the momentum to industrial demand and employment that the programme has

provided over the last 3-4 years. It is sensible to place one's bets on tired and tested horses.

Overall, this is a Budget that finds the balance between fiscal and political compulsions. On many

fronts, it relies on the efficiency of various ministries and departments to deliver. But, that has always

been the case and is a broader problem for the government as a whole to address. The finance minister

cannot be expected to take the entire burden of the government on his shoulders.

Dr Subir Gokarn

Chief Economist, CRISIL

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HighlightsGrowth

The performance of industry and services is expected to remain buoyant during 2005-06. The indications

of a pick-up in the investment activity augur well for the growth prospects of industry in the coming

year, and services are expected to continue with their high growth performance. Overall, we expect

India's GDP to grow in the range of 6.75-7.00 per cent during 2005-06.

Inflation

This Budget will not have much impact on inflation. Indirect taxes have been estimated to be revenue

neutral, so the prices of inputs, especially petroleum and diesel, will not be impacted much. Also,

the inflation scenario is far more dependent on factors such as domestic capacity utilisation and global

commodity prices. We expect the inflation rate to be at about 5 per cent during 2005-06.

Fiscal scenario

This remains the area of concern. The government has not been able to meet the rolling targets of

2005-06 presented in the last year's Budget and has put the Fiscal Responsibility and Budget Management

Act (FRBM) on the back burner for the time being. In the 2005-06 Budget, the government expects

the fiscal deficit to GDP ratio to be 4.3 per cent. Our assessment is that the revenue estimates for

2005-06 are quite optimistic and we expect a revenue shortfall of around Rs 8,600 crore to Rs 12,400

crore. Consequently, we expect the fiscal deficit to be 4.5-4.7 per cent of GDP against the target of

4.3 per cent.

Interest rates

Driven by higher market borrowings of Rs 8,600-12,400 crore in conjunction with higher global interest

rates, continuance of wider coverage of the service tax net, revenue from dividends and profits and

interest cost savings, we expect the benchmark ten-year yield at 7.25 per cent by the end of March

2006.

Equity markets

Armed with tax rationalisation measures and the focus on infrastructure development, the Budget is

clearly a reform-oriented one. Lowering of corporate tax and custom tariffs will boost the earnings

of the corporates. This, together with the exemption on savings of Rs 100,000, will help channelise

the savings to the markets and will, thus, add a fillip to the market sentiment. We thus see the

Budget as substantially equipped to support the strong market sentiment.

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HighlightsExchange rates

While the Budget does not directly impact the exchange rate, the introduction of a special purpose

vehicle (SPV), which will utilise foreign exchange reserves for funding infrastructure projects, may ease

the pressure of appreciation on the rupee if the scheme increases the demand for forex. At current

levels, however, it will only absorb $2 billion out of the reserve of $133 billion - which is of hardly

any significance. More importantly, the reduction in import duties will increase the demand for forex

and ease the upward pressure. The rupee is expected to be stable around the Rs 44/$ mark during

2005-06.

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Detailed economic analysisI. Economic backdrop

The economic setting for the making of Budget 2005-06 could not have been better. The year 2004-

05 started with the spectre of drought, spiralling inflation and firming up of crude prices. But the

scenario has completely changed towards the end of the year. With inflation down to 5 per cent and

growth estimated at 6.9 per cent, the year is ending with good news on the growth and inflation

fronts. After initial jitters, the Sensex too has zoomed, buoyed by strong growth and foreign institutional

investor (FII) inflows. India's long-term currency rating has recently been notched up by S&P to BB+.

Improved growth scenario

The fears of the initial monsoon failure scaling down the overall GDP growth have been completely

warded off by the robust performance of the industrial and services sectors, which grew at 7.8 per

cent and 8.9 per cent, respectively, in 2004-05. Agriculture is the only sector to have witnessed growth

deceleration. What is noteworthy is that the poor performance of agriculture had no perceptible impact

on industrial activity, indicating a gradual insulation of industry from the vagaries of monsoons. Also,

the high crude prices failed to dampen industrial activity. The indications of a pick-up in investment

activity augur well for the growth prospects in the coming year. The overall GDP growth of 6.9 per

cent over a high base of 8.5 per cent is quite commendable. Buoyed by the recent growth patterns,

the Economic Survey notes a possible ratcheting up of the trend rate of growth of the economy,

from around 6 per cent to about 7 per cent per year. Given that the current growth pick-up is accompanied

by the upswing in saving and investment rates, the scenario is reminiscent of the growth performance

during the boom phase of 1994-95 to 1996-97.

Inflation moderates but interest rates firm

Inflationary pressures started building up in the beginning of this year, and by July 2004 inflation

had crossed 8 per cent. Inflation in the first 10 months of 2004-05 stood at 6.7 per cent. The price

rise was spread across all the three major categories, namely primary articles, manufactured products

and the fuel group. The recent downturn in inflation notwithstanding, the average inflation for 2004-

05 is expected to be 6.5 per cent. The current bout of inflation was primarily a cost-push phenomenon

led by a sharp upturn in petroleum and metal prices. Duty reduction and improvement in the agricultural

scenario, supported by a favourable base effect, has tamed inflation to around 5 per cent now. The

higher inflationary pressures translated into higher interest rates. The 10-year G-sec rates rose by 100

basis points in the current fiscal.

External scenario

Both exports and imports have maintained their buoyancy during April-January 2004-05. With exports

growing at 25 per cent and imports at 35 per cent the trade deficit widened to over $22 billion. The

ballooning of the import bill was on account of a sharp rise in crude prices and a genuine demandfor non-oil imports stemming from a pick-up in industrial activity. The current account position is,

however, comfortable due to a positive balance on trade in services. The foreign exchange reserves,

at $132 billion in mid-February, can support 15.5 months of imports.

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Detailed economic analysisBudget had pointed out a revenue shortfall of Rs 20,000 crore, which was later revised to Rs 12,000

crore in December.

Table 1: Fiscal marksmanship

Fiscal

deficit

Revenue

deficit

Plan

expenditure

Non-plan

expenditure

Total

expenditure

Gross tax

revenue

Industrial

growth

1999-00 31 24.8 -1.1 7.2 5 2.5 6.6

2000-01 6.8 10.1 -6.2 -3 -3.8 -2.5 5

2001-02 21.2 27.1 6.4 -5.1 -3.4 -17.5 2.7

2002-03 -3.1 13.1 -1.8 -2.7 -2.4 -8.3 5.8

2003-04 -19.8 -12.5 1.1 9.8 7.4 1.1 6.9

2004-05 1.3 11.8 -5.6 10.9 5.9 -3.7 7.9

Note

Figures for 2004-05 have been computed from revised estimates.

Source: Budget 2005-06

The deficit targets for 2005-06 have been specified a notch above what was anticipated in the FRBM,

thereby implying some dilution of the original FRBM targets. Table 2 presents the key budgetary arithmetic

for 2005-06.

Table 2: Budget at a glance 2005-06 (Rs crore)

2003-04 2004-05 2004-05 2005-06

Actuals BE RE BE

1. Revenue receipts 263,878 309,322 300,904 351,200

2. Tax revenue (net to centre) 186,982 233,906 225,804 273,466

3. Non-tax revenue 76,896 75,416 75,100 77,734

4. Capital receipts (5+6+7) 207,490 168,507 204,887 163,144

5. Recoveries of loans 67,265 27,100 61,565 12,000

6. Other receipts 16,953 4,000 4,091

7. Borrowings and other liabilities 123,272 137,407 139,231 151,144

8. Total receipts (1+4) 471,368 477,829 505,791 514,344

9. Non-plan expenditure 349,088 332,239 368,404 370,847

10. On revenue account 283,502 293,650 296,396 330,530of which

Interest payments 124,088 129,500 125,905 133,945

12. On capital account 65,586 38,589 72,008 40,317

13. Plan expenditure 122,280 145,590 137,387 143,497

14. On revenue account 78,638 91,843 89,673 115,982

15. On capital account 43,642 53,747 47,714 27,515

16. Total expenditure 471,368 477,829 505,791 514,344

17. Revenue expenditure 362,140 385,493 386,069 446,512

18. Capital expenditure 109,228 92,336 119,722 67,832

19. Revenue deficit 98,262 76,171 85,165 95,312

As a percentage of GDP 3.6 2.5 2.7 2.7

20. Fiscal deficit 123,272 137,407 139,231 151,144

As a percentage of GDP 4.5 4.4 4.5 4.3

21. Primary deficit -816 7,907 13,326 17,199

As a percentage of GDP 0 0.3 0.4 0.5


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Detailed economic analysis

III. The revenue arithmetic

The gross revenue targets in 2004-05 fell short of the Budget estimates by Rs 11,712 crore. Are the

revenue targets set for 2005-06 achievable?

Revenue targets in 2005-06

The Budget assumes a growth of 20.9 per cent in gross revenues in 2005-06BE over a high growth

of 20.3 per cent in 2004-05. This translates into an increase in the tax/GDP ratio to 10.5 per cent

in 2005-06 from 9.8 per cent in 2004-05. The implicit tax buoyancy is about 1.6. Table 4 documents

the share of major taxes in the gross tax revenues, their performance in 2004-05 and expectation in

2005-06BE.

Table 3b: Rolling fiscal indicators set in 2004-05

Budget estimates

2004-05 2005-06 2006-07

Revenue deficit as a percentage of GDP 2.5 1.8 1.1

Fiscal deficit as percentage of GDP 4.4 4 3.6

Gross tax revenue as a percentage of GDP 10.2 11.1 12.1

Total outstanding liabilities at the end of the

year as a percentage of GDP for the year

68.5 68.2 67.8

Source: Medium-term fiscal policy statement, Union Budget 2004-05

Targets for

Table 4: Tax revenues of the central government

Tax heads % Share

(2004-05) 04-05/03-04 05-06BE/04-05

Gross tax revenue 100 20.3 20.9

Excise 32.9 11 20.7

Corporate 27.1 30.6 33.2

Customs 18.4 15.7 -5.5

Income tax 16.6 23.1 30.1

Service 4.6 79.3 23.7Other taxes 0.3 -54 2.7

Net tax revenue (centre) 73.8 20.8 21.1


% Growth

The revenue buoyancy projected in 2005-06 relies heavily on the performance of corporate and income

tax. Significant increases of 33.2 per cent and 30.1 per cent have been budgeted in corporate and

income tax during 2005-06. The overall revenue receipts (net to the Centre) are budgeted to grow

by 21.1 per cent in 2005-06 as against the observed growth of 20.8 per cent in the previous year.

No target has been set for disinvestment receipts.

The overall tax buoyancy has improved significantly in the last 2-3 years. An important reason for

this is the revival of industrial growth on which the tax collections of the government critically depend.

Box 1 examines the recent shifts in tax buoyancy and its relation to the industrial growth patterns.

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Detailed economic analysisBox 1: Tax buoyancy and industrial growth

While reviewing the patterns in the overall tax buoyancy in the last couple of years, this section

attempts to examine the relationship between the buoyancy in tax collection and the industrial

activity. The following figure charts the changes in tax buoyancy (ratio of growth in tax collection

to GDP growth) against industrial growth based on Index of Industrial Production (IIP). We have

divided the period since 1993-94 into three sub periods: 1993-94 to 1996-97 (period of high growth)

followed by 1997-98 to 2001-02 (period of downturn) and ending with another recovery phase,

2002-03 to 2004-05.

Figure 1: Tax buoyancy and industrial growth

Source: CRISIL estimates

The overall tax buoyancy moved more or less in tandem with the industrial performance. It dipped

during the period of downturn and shot up again during the recovery period. However, the overall

tax buoyancy hit a high of 1.5 during period III, a sharper acceleration than dictated by the

acceleration in industrial growth. What had contributed to such an improvement in tax collection?

As we looked into performance of specific tax groups, buoyancy in direct taxes turned out to

be much higher than buoyancy in indirect taxes and direct tax buoyancy did not see a dip even

during the lean phase of 1997-98 to 2001-02. However, the trend over time reveals that the performance

of indirect taxes (consisting of customs and excise) is very closely related to industrial performance

- buoyancy in industry tends to improve the customs and excise duty collection.

But the relatively high growth in tax collection during the past couple of years actually came

about because of surge in corporate tax collection. Corporate tax buoyancy has improved substantiallyduring the ongoing industrial recovery - buoyancy in corporate taxes has moved up from 1.5

during 1997-98 to 2001-02 to 2.8 during 2002-03 to 2004-05. Income tax buoyancy, on the other

1.2

1.5

0.7

0.0

0.3

0.6

0.9

1.2

1.5

1.8

93-94 to 96-97 97-98 to 01-02 02-03 to 04-05

TaxBuoyancy

0

1

2

3

4

5

6

7

8

9

10

Indsutrialgrowth

Tax Buoyancy Industrial Growth

Continued...

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Detailed economic analysis...continued

hand, does not show any linkages with the industrial performance. The income tax buoyancy was

1.5 during the first high growth phase, went up slightly to 1.6 during the following lean phase

and came down to 1.4 during the industrial recovery onset since 2002-03.

Table 5: Tax buoyancy

Indirect tax

Income tax Custom + Excise

1993-94 to 1996-97 1.2 1.5 1.1

1997-98 to 2001-02 0.7 1.6 0.6

2002-03 to 2004-05 1.5 1.4 0.9

Source: CRISIL estimates

1.4

1.5

2.8

Tax buoyancy

Gross tax Direct tax

Corporate tax

The other important factor behind the high tax buoyancy is the widening of the tax base by inclusion

of new services into the tax net. The buoyancy in gross tax collection would fall to 1.4 during

2002-03 to 2004-05 from 1.5, if we exclude services tax from it. Though still contributing a very

small amount to total tax collection, the services tax elasticity with respect to services sector GDP

stood at 6.4 during 2002-03 to 2004-05. This shows that despite the recent attempts at wideningthe tax base there is excessive reliance of the exchequer on industry.

To sum up, there is no denying that tax collection is linked to the industrial performance, as

the overall tax buoyancy tends to pick up during high industrial growth phase. And the ongoing

recovery has witnessed much higher tax buoyancy than during 1993-94 to 1996-97. Part of this

can be explained by the structural change in tax collection - though still around 4.5 per cent

of the overall gross tax collection, services tax revenue has improved over the years (the share

was not even 1 per cent during the mid-1990s).

To examine the veracity of tax revenues, we link it with the implicit GDP growth for industry in the

Budget.

Growth assumptions

The Budget assumes a nominal GDP growth of 13.6 per cent for 2005-06. Under the assumption of

5.0-5.5 per cent inflation, this translates into a high real growth of over 8.0 per cent. Given the buoyancy

in the industrial and services sector, and under the assumption of normal monsoons, this could be

achieved. We expect real GDP growth at 6.9 per cent in 2005-06 if the monsoons are normal. Is the

growth target set in the Budget over-optimistic?

Neither the Budget nor the three accompanying documents provide sectoral growth patterns. It is important

to know the sectoral estimates of GDP to take a call on the revenue buoyancy in 2005-06. Given

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Detailed economic analysisgrowth deceleration in agriculture in 2004-05, growth in agricultural GDP in 2005-06 can be assumed

at 3 per cent. Assuming that the buoyancy in services will continue, 8.3 per cent growth is feasible.

The industrial growth required to deliver 8 per cent real GDP growth would be around 11 per cent.

Table 6 documents the expected shortfall in gross tax revenues under alternate assumptions of industrial

growth. The estimates of gross tax revenues (except the revenues from the services sector) have been

computed using the ratio of tax collections to nominal industrial GDP observed during 2003-04 and

2004-05. The service sector revenues have been assumed at the same level as budgeted.

If the average tax/industrial GDP observed in 2004-05 is assumed, we get a revenue shortfall of Rs

12,439 crore and Rs 8,689 crore for industrial growth of 7 per cent and 8 per cent, respectively. The

revenue shortfall factors in the positive revenue impact of direct tax proposals of Rs 6,000 crore.

Assuming the expenditure targets are met, the revenue shortfall will lead to a slippage of the fiscal

deficit from 4.3 per cent to 4.5-4.6 per cent of GDP.

Table 6: Tax revenues and industrial growth 2005-06

Industrialgrowth

Industrialinflation

Nominalindustrial

growth

Grosstax

revenue

(EST)

Grosstax

revenue

(BE)

Expectedshortfall

7 5.5 12.5 357,586 370,025 12,439

8 5.7 13.7 361,336 370,025 8,689

9 6 15 365,399 370,025 4,626

Source: CRISIL Simulations

2005-06

IV. Expenditure drivers

Expenditure patterns

A higher rise in Plan expenditure (4.45 per cent growth) vis--vis non-Plan expenditure (0.66 per cent)

has been budgeted in 2005-06. The overall expenditure (Plan and Non-Plan) on health and education

has gone up by more than 22 per cent and 36 per cent, respectively, in 2005-06 BE. While Plan allocations

have increased sharply (by 38 per cent), non-Plan expenditure has gone up by only 3 per cent on

health and education. As per the National Common Minimum Programme (NCMP), the spending on

education and health is to be raised to at least 6 per cent and 2-3 per cent of GDP, respectively,

over the next few years. Though the overall expenditure on health and education has increased, it

is still less than what was promised in the NCMP.

It was also mentioned in the NCMP that subsidies are not to be reduced but targeted better, with

immediate effect. Defence expenditure, another important item under non-Plan expenditure, has been

budgeted to increase by only 8 per cent.

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Detailed economic analysisAs per the Twelfth Finance Commission recommendations, the share of the states in the net proceeds

of shareable central taxes shall be 30.5 per cent during 2005-10, inclusive of additional excise duty

in lieu of sales tax. The total outgo to the states on this account works out to Rs 6,13,112 crore

as compared with the last Finance Commission where it was Rs 3,76,318 crore. The share of the states

in central tax increased by only 2.9 per cent and 8.5 per cent in 2001-02 and 2002-03, respectively.

In the present Budget, the share has increased to 21 per cent. The gross hit to the Central government

has been estimated at Rs 26,000 crore in 2005-06.

One important and new aspect of expenditure in the present budget is the value added tax (VAT),which has been proposed to be introduced with effect from April 1, 2005. The Central government

has agreed to compensate the states, according to an agreed formula, (Central government will provide

100 per cent compensation to the states in 2005-06, 75 per cent in 2006-07 and 50 per cent during

2007- 08 for the loss, if any, on account of the introduction of VAT) in the event of any revenue

loss. However, no provision for the same has been made in the Budget.

The government has increased allocation for the national food for work programme, mid-day meal scheme,

Sarva Shiksha Abhiyan, etc.

Plan outlay

The NCMP aimed at increasing expenditure on agriculture and rural development, infrastructure, social

sectors and employment generation. To fund the Plan outlays, there has been higher reliance on

internal and extra budgetary resources (IEBR) than on budgetary support. At the aggregate level, the

IEBR for the above-mentioned areas has been increased by 62 per cent as compared to a 33 per

cent rise in the budgetary allocation to Plan outlays.

The Plan expenditure for economic services and social services has been raised by 33 per cent and

35 per cent, respectively. As per NCMP, the public investment in agriculture, rural infrastructure and

irrigation will be increased. Within economic services, Plan expenditure for agriculture and allied activities,

rural development, irrigation and flood control has been increased sharply, along with the Plan expenditure

for industry & minerals, communication, science, technology and environment, and general economic

services. Increased Plan expenditure in agriculture and allied activities, rural development and irrigation

& flood control reflects the government's intention to fulfil promises made in the NCMP.

The Plan expenditure on social services has risen by a faster rate than economic services. Plan expenditures

for education and health have been budgeted to increase by 47 per cent and 25 per cent, respectively.

The central Plan outlay for infrastructure has been budgeted to increase by 52 per cent. Within infrastructure,the sharpest rise of about 200 per cent has been witnessed in road transport and shipping.

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Detailed economic analysis

V. Debt sustainability

A marginal slippage in fiscal deficit in 2004-05 is attributable to a number of factors - high industrial

growth, rise in corporate taxes due to a surge in corporate profits, and expenditure compression (on

the Plan account), together with a high base of national income.

Another welcome development has been the stabilisation or relatively slow growth in the debt/GDP

ratio in the last 2 years. The internal liabilities of the Central government increased sharply from 49.7

per cent of GDP in 1999-2000 to 60.9 per cent of GDP in 2002-03. They remained at 61.7 per cent

and 62.3 per cent of GDP in 2003-04 and 2004-05, respectively. For 2005-06, the internal debt/GDP

ratio is budgeted at 61.7 per cent. The stabilisation of the internal debt ratio (albeit at a high level)

is due to positive differential of growth rates over interest rates since 2003-04. While the average

cost of Central government debt has come down from 10 per cent in 99-20/02-03 to 8.8 per cent in

03-04/04-05, nominal GDP growth has gone up from 9.1 per cent to 12.3 per cent in the corresponding

period. This, together with the low deficit on the primary account, has permitted the stabilisation of

the internal debt/GDP ratio, which is budgeted at 61.7 per cent in 2005-06.

The declining trend of external liabilities in relation to GDP has continued in 2004-05 and the same

is expected in 2005-06. The stabilisation of debt/GDP, together with decreasing interest cost, has moderated

the growth in interest burden. Interest payments have come down from 4.8 per cent of GDP in 2001-

02 to 4 per cent in 2003-04. As a percentage of revenue receipts, they have come down from 73

per cent to 66 per cent in the corresponding period.

Table 7. Plan expenditure by key heads of development

2003-04 2004-05 RE 2005-06BE 2004-05 RE 2005-06BE

Economic services 43,426 46,704 62,152 7.55 33.08

Agriculture and allied activities 3,519 4,775 6,361 35.69 33.21

Rural development 11,369 8,589 11,494 -24.45 33.82

Irrigation and flood control 271 365 524 34.69 43.56

Energy 4,323 4,402 5,197 1.83 18.06

Industry and Minerals 2,850 3,472 4,841 21.82 39.43

Transport 14,701 17,020 21,614 15.77 26.99

Communication 224 276 507 23.21 83.7

Science, technology and environment 4,170 5,294 7,075 26.95 33.64

General economic services 1,999 2,511 4,539 25.61 80.76

Social services 28,021 35,404 47,665 26.35 34.63

Education art and culture 7,839 10,106 14,820 28.92 46.65

Health and family welfare 5,564 6,944 8,711 24.8 25.45

Water supply, sanitation, housing and urban

development

6,802 7,930 9,029 16.58 13.86

Welfare of SC/ST and other backward classes 1,128 1,250 1,490 10.82 19.2

Labour and labour welfare 118 157 208 33.05 32.48

Social welfare and nutrition 2,173 2,423 3,819 11.5 57.61

Source: Budget documents

Rs crore Growth

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Detailed economic analysisThe above positive developments, however, do not call for complacency. Although the ills associated

with high deficits have not manifested themselves in terms of rising interest rates, inflation and pre-

emption of private investment, now that private investment has perked up, the need to keep debt

and deficit under check gains significance. The Economic Survey notes that in 2004-05 there has been

a significant deceleration in investments in government securities by commercial banks following a

pick-up in demand for credit from the commercial sector and lower market borrowings by the Central

government. Between April 2004 and January 2005 the investments of commercial banks in Central

and state government securities increased by 4.9 per cent as against 20.1 per cent during the corresponding

period of the previous year. Thus, a scenario of high government borrowing can result in pre-emption

of private investment in future. Further, high deficits and debt have reduced the ability of the government

to spend in priority areas like infrastructure, health, education and employment guarantee.

Without a concerted effort, the gains in terms of a relatively better fiscal situation in 2003-04 and

2004-05 will prove to be shortlived. The FRBM Act was enacted and fiscal policy rules were notified

to put a legislative ceiling on deficits. The FRBM targets have not been belied by the fiscal outcome

of 2004-05. The proposed trajectory of debt suggests that government will have to generate a primary

surplus to bring down the debt/GDP. The trajectory of primary deficit/surplus has, however, not been

explicitly stated in the Medium Term Fiscal Policy Statement.

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Industry Effect

Overall sectoral impact

Auto ancillaries Marginally positive

The reduction in the peak customs duty from 20 per cent to 15 per cent will reduce the input costs

of auto ancillary companies who import sub-components for use in their final products, such as MICO

and Sona Koyo Steering Systems. The reduction in the peak duty on aluminium will marginally reduce

the input costs of auto ancillary and casting & forging companies such as Bharat Forge and Rico

Auto, which is likely to be passed on to original equipment manufacturers (OEMs).

The reduction in the customs duty on copper will marginally reduce the input cost of companies

manufacturing electrical components such as wire harnesses; for e.g., Motherson Sumi. The reductionin the customs duty on lead from 15 per cent to 5 per cent will reduce the input costs of automotive

battery manufacturing companies such as Exide and Amara Raja Batteries.

The extension of 150 per cent deduction on in-house R&D till March 2007 will benefit companies

such as MICO, PRICOL and Sundaram Brake Linings.

Banking Positive

The proposed amendment to the Banking Regulation Act, allowing banks to issue preference shares,

is a positive, as it will provide them with another source of capital, which will help them in meeting

obligations under Basel II.

The proposed removal of floor and caps on SLR and CRR requirements will give more autonomy tothe Reserve Bank of India in effective management of the banking system.

Allowing banks to appoint micro finance institutions (MFI) as banking correspondents will provide

transaction services will help banks in increasing credit flow to small sectors and meet priority sector

targets.

The proposal to levy a 0.1 per cent tax on withdrawal of cash on a single day of Rs. 10,000/- or

more will not have any significant impact.

The amendment to the definition of `securities' under the Securities Contracts (Regulation) Act, 1956

to include legal framework for trading of securitised debt will help deepen the securitisation market(asset-backed securitsation & mortgage-backed securitisation) in India. This is likely to benefit HFCs

and NBFCs.

The proposal to allow deduction of up to Rs 1 lakh on repayment of principal amount of housing

loan will positively affect housing finance.

Capital goods Neutral

The cut in peak duty from 20 per cent to 15 per cent will translate into higher competition from

imports. The cut in customs duty on textile machinery from 20 per cent to 10 per cent will affect

domestic players like LMW. The budgetary allocation of Rs 11 billion for rural electrification programmes

will benefit transformer manufacturers; however, an expected lag in implementation will not result in

immediate benefits. The cut in customs duties on copper, aluminium and alloy steel from 15 per centto 10 per cent will have a marginal positive impact. The rise in excise duty on steel, from 12 per

cent to 16 per cent, will not have any impact, as it is modvatable. Overall, the impact of these measures

will be neutral on the sector.

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Industry Effect


Cars and utility vehicles Marginally positive

The reduction in peak customs duty, from 20 per cent to 15 per cent, will lower the prices of imported

components. This reduction will bring down the prices of premium segment cars, which have higher

import content. The cut in the customs duty on aluminium, from 15 per cent to 10 per cent, will

marginally decrease the cost of production for cars and utility vehicle manufacturers. These measures

will increase the margins of players, as the savings in costs will be retained.

The extension of 150 per cent deduction, in terms of in-house R&D expenses, upto March 31, 2007,

will benefit companies such as M&M and Tata Motors.

Cement Marginally positive

The cement industry is set to benefit from the government's focus on irrigation, urban infrastructure

and roads. The cut in the customs duty on pet coke will encourage the use of alternative fuels.

Shree Cements and Gujarat Ambuja have a headstart in the use of alternative fuels and are set to

benefit the most. Mini-cement plants will be affected more by the hike in the excise duty on clinker.

However, the larger players (who purchase clinker) pay a higher excise duty on cement, and hence,

will be able to offset the increase.

The proposal to allow deduction of up to Rs 1 lakh on repayment of principal amount of housing

loan will boost housing demand and thereby cement consumption.

Chlor alkalies Marginally negative

The cut in peak customs duty rates, from 20 per cent 15 per cent, will marginally affect the caustic

soda and soda ash industry. Although the current domestic prices of both products are at a discount

to the landed cost, prices are expected to fall marginally.

As a large number of caustic soda manufacturers use captive power plants, which primarily use furnace

oil as fuel, the cut in customs duty from 20 per cent to 10 per cent on FO/LSHS will lower their

manufacturing costs marginally.

Overall, the impact of the above measures is marginally negative for the industry.

Cigarettes Neutral

An additional excise duty has been imposed on cigarettes at specific rates ranging from Rs 15 to

Rs 180 per thousand cigarettes. The increase is unlikely to affect cigarette companies, as they will

be able to pass on the hike to consumers.

Commercial vehicles Neutral

The reduction in the excise duty on tyres will reduce the operating costs of transport operators in

terms of lower tyre prices in the replacement market. The reduction in the peak duty on aluminium

is likely to marginally reduce the input costs for commercial vehicle OEMs. The extension of 150 per

cent tax deduction in in-house R&D expenses till March 2007 will benefit companies such as Eicher

Motors, Tata Motors and Ashok Leyland.

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Industry Effect


Consumer durables Positive

The expected rise in the disposable income of consumers (following the change in tax brackets and

norms) is expected to induce consumer durable demand.

The reduction in the customs duty on CPTs is expected to lower input costs which is likely to have

a marginally positive impact on CTVs (particularly the flat and large-sized CTV segments). Players

are expected to pass on a part of the cost benefits to consumers. Mirc Electronics, LG and Samsung

will benefit owing to increased demand. AC players are expected to pass on the reduction in excise

benefits to consumers. This will result in higher demand, as ACs have displayed significant price

elasticity in the past.

The reduction in the customs duty on consumer durables will have a negligible impact on the domestic

industry.

Cotton and cotton yarn Positive

The CENVAT exemption route has been maintained for natural fibres, including cotton, which is a

positive for the industry. The customs duty on specific textile machinery has been cut from 20 per

cent to 10 per cent; this will benefit the entire cotton textile sector. The de-reservation of 30 textile

products, including hosiery, from among 108 items, will boost the cotton knitwear sector. The textile-

processing sector will also benefit from the 10 per cent capital subsidy. The Rs 250 billion Technology

Upgradation Fund (TUF) scheme has been continued with an additional allocation of Rs 4.35 billion,

which will benefit the cotton yarn industry.

Fertilisers Marginally positive

Although the budget contained no direct provisions relating to the fertiliser industry, the increased

thrust on irrigation, higher farm sector credit and various other measures for the agricultural sector

augur well for the industry. The Budget has provided an allocation of Rs 162.5 billion as the fertiliser

subsidy for 2005-06 as against the provision of Rs 126.62 billion for 2004-05. This increase is expected

to cover the subsidy arrears for 2004-05.

Hotels Neutral

No impact on the sector.

Information technology

Software Neutra l

The government has introduced the National Urban Renewal Mission, to renew the infrastructure of

seven mega cities with a population of over 1 million. The deteriorating infrastructure in most Tier

1 and Tier 2 cities has been a cause for concern for various players within the IT and ITeS industry.

The above initiative is expected to benefit the IT sector in the long term.

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Industry Effect


Information technology

Hardware Marginally positive

The reduction of customs duties on all Information Technology Agreement (ITA)-bound items to zero

per cent from the current 10 per cent, as well as the abolition of customs duties on capital goods

and inputs required to manufacture these items will benefit assemblers, domestic hardware manufacturers

such as HCL Infosystems, Wipro, Zenith Computers, and players such as Dell, IBM and HP.

This benefit is, however, partially offset by the imposition of a CVD of 4 per cent on all imports

of ITA-bound items and their inputs, which attract zero duty. Credit for the CVD is available against payment of excise duty.

Man-made fibres Marginally negative

The reduction in excise duty on polyester filament yarn (PFY) from 24 per cent to 16 per cent will

be positive for the industry, as it will help revive PFY demand, which had turned uncompetitive vis-

-vis cotton yarn. There has been no rationalisation of excise duties on other man-made fibres.

The cut in customs duties on POY and PSF will bring down the landed costs and force domestic

producers to lower prices to match the landed costs. The overall negative impact on margins will,

however, be offset to some extent, as the duties on the feedstocks, PTA, DMT and MEG, have also

been brought down to 15 per cent. The duty cut on synthetic fabrics from 20 per cent to 15 percent will lead to increase in synthetic fabric imports. The overall impact will be marginally negative

for the industry.

Non-ferrous metals Marginally negative

The budget measures will have a negative impact on the non-ferrous metal (NFM) industry as the

import duties on aluminium, copper and zinc have fallen to 10 per cent from 15 per cent. However,

in the case of copper and zinc, the impact on margins in 2005-06 will be neutralised by the favourable

changes in global demand-supply dynamics. However, the margins of aluminium players are expected

to decline by 300 basis points. Hindalco will be affected the most, with overall operating margins

expected to decline by around 270 basis points. Nalco will be the least affected, because it has a

high share of alumina sales in its product mix.

Oil and gas Negative

The customs duty cut in crude oil (from 10 per cent to 5 per cent) and peak customs duty cut

on petroleum products (20 per cent to 10 per cent) has resulted in lower tariff protection for the

refining players (from 3.1 per cent to 2.6 per cent). The resultant lower gross refining margins will

result in oil marketing companies (oil marketing companies - OMCs, such as IOC, BPCL and HPCL)

seeing their operating profits take a hit of Rs 6.6 billion. The decline in customs duty on products

will have a positive impact on MS/HSD marketing margins (Rs 24 billion) and subsidy under-recovery

on LPG/SKO (Rs 11.3 billion). The zero excise duty on LPG (down from 8 per cent) and SKO (down

from 12 per cent) would result in lower subsidy under-recovery for the OMCs, to the extent of Rs

17 billion. However, the increase in excise duty on MS and HSD would have a major negative impact

on the marketing margins on these products, as these are not likely to be passed on to the end

consumers. We estimate that the OMCs will take a collective hit of Rs 75 billion. Overall, the three

major integrated OMCs are estimated to take an annual hit of Rs 29.4 billion while ONGC will see

its operating profits take a hit of Rs 1.5 billion.

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Industry Effect


Other infrastructure Positive

The Union Budget 2005-06 lays significant thrust on the overall development of infrastructure. The

Budget proposes to set up a special purpose vehicle (SPV) to the extent of Rs 100 billion, to fund

roads, ports, airports and tourism projects, which will be governed by the inter-institutional group.

In addition to this, foreign exchange reserves will be used to fund infrastructure projects. The government's

continued commitment to provide equity (Rs 140.4 billion) and debt support (Rs 35.54 billion) to public

sector enterprises in 6 infrastructure sectors, including railways and aviation, will benefit these sectors.

The passage of the proposed bill for regulating SEZs could boost private investment and help in

the speedy implementation of SEZ projects.

Paints Marginally positive

The reduction in peak import duty would improve operating margins by about 30 basis points.

Paper Marginally negative

The reduction in the import duty on paper, from 20 per cent to 15 per cent, will adversely affect

higher-end coated paper manufacturer, BILT. Other paper manufacturers are likely to be marginally affected

owing to the reduced differential between landed costs and domestic prices.

Personal care and detergents Positive

The reduction in peak import duty on raw materials will benefit the industry. The magnitude of theimpact would differ across players, depending on the extent of imports. The increase in disposable

income, following change in the direct tax structure, will aid more penetration and upgradation to more

value-added products.

Petrochemicals: Basic and Polymers Negative

The customs duty on naphtha has been retained at 5 per cent, while the duties on basic petrochemicals

and polymers have been reduced to 5 per cent and 10 per cent, respectively. Thus, the effective

duty protection (naphtha-polymer) for integrated polymer producers (RIL, IPCL, Haldia Petrochem and

GAIL) has come down from 10 per cent to 5 per cent. For non-integrated producers (Finolex, Chemplast

and DCW), though the duty differential is maintained, margins will be impacted negatively, as the

reduction of the duty on raw materials will not completely offset the impact of the duty cut on higher-priced end products. Domestic producers will also face greater competition from cheaper imports. Further,

the reduced duty differential between naphtha and basic products (not converted into polymers and

sold domestically, such as benzene and toluene) will also affect player margins negatively. Overall,

the duty cuts will have a negative impact on the industry.

Petrochemicals: Downstream Marginally negative

The government has cut customs duty from 20 per cent to 15 per cent on downstream petrochemical

products. However, it has also reduced customs duty on raw material (benzene, ethylene, naphtha)

from 10 per cent to 5 per cent. Although the duty differential is maintained at 10 per cent, the reduction

in raw material duty will not completely offset the decline in duty on higher priced end products.

It will thus have a marginally negative impact on downstream petrochemical companies like Thirumalai

Chemicals (phthalic anhydride), Tamilnadu Petroproducts (LAB), HOCL and Schenectady Herdillia (phenol/

acetone), PCBL (carbon black) and Vinyl Chemicals (VAM). Domestic producers will also face higher

competition from imports. However, end user industries like paints, plasticisers, detergent and tyre

manufacturers are expected to benefit with reduction in duties and hence, product prices.

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Industry Effect


Pharmaceuticals Marginally positive

The government has increased its focus on healthcare by increasing the allocation from Rs 84.2 billion

to Rs 102.8 billion under the National Rural Health Mission. The focus is on increasing the supply

of medicines and training medical personnel. The last date to avail of 150 per cent tax deductions

for research companies as well as 100 per cent deduction of profits of companies carrying on scientific

research and development and approved by the Department of Scientific and Industrial Research has

been extended to March 31, 2007. Besides, the government has announced reduction in imports duty

on a list of nine capital goods. It has announced formation of a corpus fund of Rs 5 billion called

the SME Growth Fund through the Small Industries Development Bank of India (SIDBI) to provideequity support for small and medium units in pharmaceuticals and biotech firms. Thus the overall impact

has been marginally positive.

Ports Neutral

The budget contains no specific measures for the ports sector. The establishment of a special purpose

vehicle to finance infrastructure projects such as ports will, however, serve to boost investments in

the sector. The imposition of service tax on dredging services will result in a marginal increase in

capital and operating costs for ports.

Power Marginally positive

The government has indicated that in 2005-06 it will provide equity support to the tune of Rs 140.40 billion and loans amounting to Rs 35.54 billion to central public sector undertakings in select sectors,

including power. This will help companies such as NTPC, NHPC and PGCIL in their capacity augmentation

plans. The reduction of customs duties on capital goods would primarily benefit medium and small-

scale power projects through lower project costs.

The government has announced a budgetary support of Rs 11 billion for 2005-06 under the Rural

Electrification Distribution Backbone programme for installing at least one 33/11KV substation in every

block, for electrification of 1,25,000 villages in the next 5 years. This is a positive indicator of the

government's overall commitment to reform the sector.

The cess of Rs 1.5 per litre on light diesel oil would increase generation costs by around 8 per

cent for captive power plants that consume the same.

Roads Positive

The Union Budget 2005-06 has provided a significant fillip to the roads sector, given its higher focus

on the infrastructure sector. The rise in allocations for the National Highway Development Programme

(NHDP) from Rs 65.14 billion in FY05 to Rs 93.20 billion in FY06 will result in more funds for the

programme. The focus on NHDP phase III will result in speedy implementation of the project.

An outlay of Rs 55 billion under the National Urban Renewal Mission, a special purpose vehicle (SPV)

to finance infrastructure projects with Rs 100 billion borrowing limit and a provision of Rs 15 billion

for viability gap funding for infrastructure projects, will boost the roads sector.

Shipping Neutral

No impact on the sector.

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Industry Effect


Steel Marginally negative

The excise duty on steel products has been increased to 16 per cent from 12 per cent. The excise

duty on steel is cenvatable for a majority of the steel consumers of flat products and will, hence,

will be passed on. Thus the impact on margins will be neutral.

However, the increase will be difficult to pass on in case of GP/GC steel and long products. SAIL,

Tata Steel (for long products) and GP/GC manufacturers will be partially affected; the least impact

will be on JISCO.

Lower duties on stainless steel will have a neutral impact because the landed cost (after the duty

reduction) is higher than the current domestic prices.

One factor that will mitigate the negative impact is the reduction in the duties on coking coal (with

more than 12 per cent ash content), refractories and ferro alloys, which will marginally lower the input

costs for the industry.

Sugar Positive

The proposed financial package for the revitalisation of the sugar industry, entailing a moratorium

of 2 years on the payment of both principal and interest, is expected to largely benefit those mills

in Maharashtra and South India, that are in financial distress. For the stronger mills, which have availed

of loans from the Sugar Development Fund (SDF), the reduction in the rate of interest on all outstanding

SDF loans is viewed as a positive. The reduction in the basic customs duty on molasses and industrial

alcohol from 15 per cent to 10 per cent is expected to be marginally negative for the industry.

Tea and Coffee Positive

The removal of surcharge of Re 1 per kg of tea will benefit the industry. The proposal to reframe

the price stabilisation fund and improve replantation and rejuvenation activity will benefit the industry

in the long term.

Telecom cables Negative

The abolition of the basic customs duty on jelly-filled telecom cables (15 per cent in 2004-05) and

optical fibre cables (20 per cent in 2004-05) under the Information Technology Agreement (ITA) is

a negative for the industry. Price realisations will decline, as competitive pressures will force Indian

producers to lower prices to compete with cheaper imports. The reduction in the customs duty on

raw materials like copper and optic fibre partly offsets the zero duty on finished products.

The pressure on the margins of domestic producers is expected to increase.

Telecom equipment Marginally negative

The customs duty on specified finished products and the capital goods required to manufacture these

products have been abolished; earlier a customs duty of 10-15 per cent was levied on these items.

The change in the customs duty on finished products will have a negative impact on domestic players,

although the abolition of duties on capital goods will mitigate the negative impact.

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Telecom services Negative

The continuation of the exemption presently available to telecom service providers for the import of

specified telecom network equipment and parts thereof is a positive for the sector. Zero import duty

on mobile and fixed wireless handsets to lower entry cost for customers.

The benefits under section 80 IA, wherein a telecom operator was entitled to 100 per cent exemption

on taxable profit for 5 years and 30 per cent exemption for the next 5 years during the initial 15

years from the date of commencement of commercial operations, have not been extended. This will

reduce the return on future capital investments in the industry.

Tractors Marginally positive

The overall thrust of the government on the agricultural sector, in terms of irrigation, agricultural

credit, crop insurance and schemes for the agri-marketing sector, augurs well for the long-term demand

growth in the industry.

The increase in the excise duty on steel from 12 per cent to 16 per cent is likely to be passed

on by the tractor manufacturers as the excise duty on inputs is not cenvatable for tractors (since

the agricultural tractors are exempt from excise duty).

The imposition of a 16 per cent excise duty on road tractors (of engine capacity more than 1,800

cc) for road trailers is not expected to impact the industry, considering its miniscule volumes when

compared with agricultural tractors.

Two-wheelers Marginally positive

The reduction in personal tax rates will increase household disposable income, which is a positive

for two-wheeler demand.

Tyres Positive

Customs on tyres and its raw materials - synthetic butadiene rubber, poly butadiene rubber and carbon

black - has been reduced from 20 per cent to 15 per cent. The domestic prices of raw materials

are aligned with landed costs, thus reducing the material costs. So the operating margins may improve

from 7.5 per cent to 10 per cent. The customs duty cut on tyres will not intensify the import threat

from China and South Korea, as they already enjoyed a preferential 15 per cent duty under the Bangkok

Agreement. The abolition of the specific excise duty of 8 per cent on tyres would have a neutral

impact, as the benefits are expected to be passed on.

Industry Effect


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Overall company impact

Continued...

Company Impact Industry

ABB Ltd. Capital goods

ACC Ltd. Cement

Aksh Optifibre Ltd. Telecom cables

Alfa Laval (India) Ltd. Capital goods

Andhra Pradesh Paper Mills Ltd. Paper

Apollo Tyres Ltd. Tyres

Arvind Mills Ltd. Cotton textiles

Ashok Leyland Ltd. Commercial vehicles

Asian Hotels Ltd. Hotels

Asian Paints India Ltd. Paints

Aurobindo Pharma Ltd. Pharmaceuticals

Bajaj Auto Ltd. Two wheelers

Bajaj Hindusthan Ltd. Sugar

Ballarpur Industries Ltd. Paper

Balrampur Chini Mills Ltd. Sugar

Bannari Amman Sugars Ltd. Sugar

Berger Paints India Ltd. Paints

Bharat Forge Ltd. Auto ancillaries

Bharat Heavy Electricals Ltd. Capital goods

Bharat Petroleum Corpn. Ltd. Oil and gas

Bharat Sanchar Nigam Ltd. Telecom services

Bharti Televentures Ltd. Telecom services

Bhushan Steel & Strips Ltd. Steel

Biocon India Ltd. PharmaceuticalsBirla Ericsson Optical Ltd. Telecom cables

Bombay Dyeing Ltd. Diversified

Bongaigon Petrochemicals Ltd. Oil and gas

Carrier Aircon Ltd. Consumer durables

Ceat Ltd. Tyres

Century Enka Ltd. Man-made fibres

Century Textiles Ltd. Diversified

Chambal Fertilisers & Chemicals Ltd. Fertilisers

Chemplast Sanmar Ltd. Petrochemicals: Basic and Polymers

Chennai Petroleum Corpn. Ltd. Oil and gas

Cipla Ltd. Pharmaceuticals

Colgate-Palmolive (India) Ltd. Personal care and Detergents

Coromandel Fertilizers Ltd. Fertilisers

Crompton Greaves Ltd. Capital goods

Dabur India Ltd. Personal care and Detergents

DCW Ltd. Petrochemicals: Basic and Polymers

D-Link(India) Ltd. Information technology

Dr Reddy's Laboratories Ltd. Pharmaceuticals

Eicher Motors Ltd. Commercial vehicles, Tractors

EID Parry Ltd. Sugar

EIH Ltd. Hotels

Escorts Ltd. Tractors

Essar Shipping Ltd. Shipping

Essar Steel Ltd. Steel

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Overall company impact...continued

continued...


Finolex Cables Ltd. Telecom cables

Finolex Industries Ltd. Petrochemicals: Basic and Polymers

Garden Silk Mills Ltd. Man-made fibres

Gas Authority of India Ltd. Oil and gas

George Williamson (Assam) Ltd. Tea and Coffee

GlaxoSmithkline Pharmaceuticals Ltd. Pharmaceuticals

Godfrey Phillips India Ltd. Cigarettes

Goetze India Ltd. Auto ancillaries

Goodlass Nerolac Paints Ltd. Paints

Goodricke Group Ltd. Tea and CoffeeGoodyear India Ltd. Tyres

Grasim Industries Ltd. Diversified

Great Eastern Shipping Co Ltd. Shipping

GTN Textile Ltd. Cotton textiles

Gujarat Alkalies and Chemicals Ltd. Chlor alkalies

Gujarat Ambuja Cement Ltd. Cement

Gujarat Heavy Chemicals Ltd. Chlor alkalies

Gujarat Narmada Valley Fertilizers Company Ltd. Fertilisers

Gujarat State Fertilisers C ompany Ltd. Fertilisers

Haldia Petrochemicals Ltd. Petrochemicals: Basic and Polymers

Harrisons Malayalam Ltd. Tea and Coffee

HCL Infosystems Ltd. Information technology

Hero Honda Motors Ltd. Two wheelers

Himachel Futuristic Communications Ltd. Telecom equipment

Hindalco Industries Ltd. Non-ferrous metals

Hindustan Copper Ltd. Non-ferrous metals

Hindustan Lever Ltd. Personal care and Detergents

Hindustan Motors Ltd. Cars and Utility vehicles

Hindustan Organic Chemicals Ltd. Petrochemicals: Downstream

Hindustan Petroleum Corpn. Ltd. Oil and gas

Hindustan Zinc Ltd. Non-ferrous metals

Hitachi Home & Life Solutions (India) Ltd. Consumer durables

Honda SIEL Cars India Ltd. Cars and Utility vehicles

Hotel Leelaventure Ltd. Hotels

Hutchison Max Telecom Ltd. Telecom servicesHyundai Motors India Ltd. Cars and Utility vehicles

IBP Co. Ltd. Oil and gas

ICI India Ltd. Paints

India Cement Ltd. Cement

India Glycols Ltd. Petrochemicals: Downstream

Indian Hotels Company Ltd. Hotels

Indian Oil Corpn. Ltd. Oil and gas

Indian Petrochemicals Corpn. Ltd. Petrochemicals: Basic and Polymers

Indian Rayon & Industries Ltd. Diversified

Indo Gulf Fertilisers Ltd. Fertilisers

Indo Rama Synthetics (India) Ltd. Man-made fibres

Infosys Technologies Ltd.

Information technologyIspat Industries Ltd. Steel

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continued...


ITC Ltd. Cigarettes

ITI Ltd. Telecom equipment

JBF Industries Ltd. Man-made fibres

Jindal Stainless Ltd. Steel

JISCO/JVSL Steel

JK Industries Ltd. Tyres

Kalyani Brakes Ltd. Auto ancillaries

Kesoram Industries Ltd. Diversified

Kochi Refineries Ltd. Oil and gas

Lakshmi Machine Works Ltd. Capital goodsMadras Cements Ltd. Cement

Madras Refineries Ltd. Oil and gas

Mahavir Spinning Mills Ltd. Cotton textiles

Mahindra & Mahindra Ltd. Cars and Utility vehicles, Tractors

Malwa Cotton Spinning Mills Ltd. Cotton textiles

Maruti Udyog Ltd. Cars and Utility vehicles

Matrix Laboratories Ltd. Pharmaceuticals

Mercator Lines Ltd. Shipping

Mahanagar Telephone Nigam Ltd. Telecom services

MIRC Electronics Ltd. Consumer durables

Moser Baer India Ltd. Information technology

Motor Industries Co. Ltd. Auto ancillaries

MRF Ltd. Tyres

Munjal Showa Ltd. Auto ancillaries

Nahar Exports Ltd. Cotton textiles

National Aluminium Co. Ltd. Non-ferrous metals

National Hydro Electric Power Corp. Ltd. Power

National Thermal Power Corp. Ltd. Power

Nicholas Piramal India Ltd. Pharmaceuticals

Nirma Ltd. Personal care and Detergents

Numaligarh Refinery Ltd. Oil and gas

Oil and Natural Gas Corpn. Ltd. Oil and gas

Oswal Chemicals and Fertilisers Ltd. Fertilisers

PCS Technologies Ltd. Information technology

Pfizer Ltd. PharmaceuticalsPhilips Carbon Black Ltd. Petrochemicals: Downstream

Power Grid Corporation of India Ltd. Power

Pudumjee pulp and paper Ltd. Paper

Punjab Alkalies and Chemicals Ltd. Chlor alkalies

Punjab Tractors Ltd. Tractors

Ranbaxy Ltd. Pharmaceuticals

Rashtriya Chemicals and Fertilisers Ltd. Fertilisers

Raymond Ltd. Diversified

Reliance Energy Ltd. Power

Reliance Industries Ltd. Diversified

Reliance Infocomm Ltd. Telecom services

Sanghi Polyester Ltd.

Man-made fibresSatyam Computer Services Ltd. Information technology

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Schenectady Herdillia Ltd. Petrochemicals: Downstream

Seshasayee Paper and Boards Ltd. Paper

Shipping Corporation of India Ltd. Shipping

Shree Cements Ltd. Cement

Shyam Telecom Ltd. Telecom equipment

Sona Koyo Steering Systems Ltd. Auto ancillaries

Southern Petrochemical Industries Corporation Ltd. Fertilisers

Steel Authority of India Ltd. Steel

Sterlite Industries (India) Ltd. Non-ferrous metals

Sterlite Optical Technologies Ltd. Telecom cablesSundaram Fasteners Ltd. Auto ancillaries

Supreme Petrochem Ltd. Petrochemicals: Basic and Polymers

TAFE Ltd. Tractors

Tamil Nadu Newsprint & Papers Ltd. Paper

Tamil Nadu Petroproducts Ltd. Petrochemicals: Downstream

Tata Chemicals Ltd. Diversified

Tata Coffee Ltd. Tea and Coffee

Tata Iron & Steel Co. Ltd. Steel

Tata Motors Ltd. Cars and UVs, Commercial vehicles

Tata Power Company Ltd. Power

Tata Tea Ltd. Tea and Coffee

Tata Teleservices Ltd.

Telecom servicesThirumalai Chemicals Ltd. Petrochemicals: Downstream

TVS Motor Company Ltd. Two wheelers

Ultratech Cement Ltd. Cement

Videocon Appliances Ltd. Consumer durables

Videocon International Ltd. Consumer durables

Videsh Sanchar Nigam Ltd. Telecom services

Vindhya Telelinks Ltd. Telecom cables

Vintron Informatics Ltd. Information technology

VST Industries Ltd. Cigarettes

West Coast Paper Mills Ltd. Paper

Whirlpool of India Ltd. Consumer durables

Wipro Ltd. Information technology

Wockhardt Ltd. Pharmaceuticals

Zenith Computers Ltd. Information technology

Zuari Industries Ltd. Fertilisers

Source: CRIS INFAC

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Auto ancillariesDomestic growth to slow down, surge in exports to continue in 2005-06

The auto ancillary industry is estimated to have grown by around 20 per cent in the first 9 months of 2004-05

in terms of value of production as compared with the same period last year. The growth was led by the strong

domestic growth posted by almost all the segments of the automobile industry and high growth in exports.

The passenger cars and utility vehicles segment grew by 27 per cent, commercial vehicles by 30 per cent, two-

wheelers by 14 per cent and tractors by 40 per cent in the first 9 months of 2004-05. For the full year of 2004-

05, the auto ancillary industry is expected to grow by 18-20 per cent, while exports are seen growing by 25-30

per cent.

In 2005-06, the auto ancillary industry is likely to post a relatively lower growth of 12-13 per cent. The lowergrowth will be due to the reduced growth rate in almost all the automobile segments. However, exports are

expected to continue the strong growth momentum in 2005-06 at 20-25 per cent. This will be led by the

continued thrust on exports by domestic manufacturers as well as increase in outsourcing of components

from India by global OEMs and Tier-I vendors.

Operating profit margins slipped marginally in the first 9 months of 2004-05, owing to a rise in input costs; the

margins are expected to remain under marginal pressure in 2005-06 as well, as CRIS INFAC expects average

steel prices to remain firm in 2005-06. But net profits of players have risen, on account of higher growth in net

sales and lower capital charges in the first 9 months of 2004-05; the net profits are expected to improve further

in 2005-06.

Auto ancillaries: Tariffs

(per cent) Customs Excise

2004-05 2005-06 2004-05 2005-06

Parts of four-wheelers 20.4 15.3 16.3 16.3

Parts of two-wheelers 20.4 15.3 16.3 16.3

Parts of IC engines 20.4 15.3 16.3 16.3

IC engines 20.4 15.3 16.3 16.3

Transmission shafts, gears and gear boxes 20.4 15.3 16.3 16.3

Auto gaskets/brake linings 20.4 15.3 16.3 16.3

Catalytic convertors 5.1 5.1 16.3 16.3GP/GC steel 5.1 5.1 12.2 16.3

HR steel 5.1 5.1 12.2 16.3

Aluminium 15.3 10.2 16.3 16.3

Copper 15.3 10.2 16.3 16.3

Lead 15.3 5.1 16.3 16.3

Nickel 5.1 5.1 16.3 16.3

HR: Hot rolled; GC: Galvanised coil; GP: Galvanised plate; IC: Internal combustion

Source: CRIS INFAC

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Auto ancillariesBudget measures marginally positive for the auto ancillary sector

Impact factors

A. The reduction in the peak customs duty on components will benefit companies that import sub-components

for manufacturing their final product, such as MICO and Sona Koyo Steering Systems.

B. The reduction in the peak customs duty on aluminium will marginally reduce the input costs of auto ancillaries

in terms of lower prices. The cut in the peak customs duty on copper will marginally reduce the input costs of

companies manufacturing electrical components such as wire harnesses. The reduction in the customs dutyon lead to 5 per cent will reduce the input costs of automotive battery manufacturing companies such as Exide

and Amara Raja Batteries. The benefit of the above measures will be passed on to the original equipment

manufacturers.

C. The increase in the excise duty on steel will not have any impact on the costs of auto ancillary manufacturers,

as the same is modvatable.

D. The extension of the 150 per cent tax benefit for in-house R&D will marginally benefit auto ancillary companies

undertaking research and development.

Company Impact Impact factors

Bharat Forge Ltd. D

Goetze India Ltd. B, D

Kalyani Brakes Ltd. B, D

Motor Industries Co. Ltd. A, D

Munjal Showa Ltd. A

Sona Koyo Steering Systems Ltd A, D

Sundaram Fasteners Ltd. A

Source: CRIS INFAC

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Capital goodsDemand to remain robust in medium term

The demand growth momentum in capital goods is expected to continue in 2005-06, driven by pick-up in

industrial activity, fresh investments in sectors like power equipment, metals, oil and gas and petrochemicals

and the continued spending thrust on infrastructure. Over the past 2 years, the demand for capital goods has

risen due to a rise in corporate profitability, leading to greater investment activity in the industry.

Unlike the negative growth rates seen in 2001-02, the sector grew by over 13 per cent in 2003-04 and 14 per cent

in 2004-05, driving industrial growth. The Index of Industrial Production (IIP) averaged 2.7 per cent in 2001-02,

6.9 per cent in 2003-04 and 8.1 per cent in the first half of 2004-05.

This is evident in the bulging order book for companies catering to these sectors. The players' export thrust,

to weather the downturn in domestic markets, has continued and the contribution of export revenues has been

steadily improving. We expect this trend to continue in the medium term. There are substantial capex plans

outlined by major players (ABB, Seimens, BHEL), due to the need to expand capacities to meet these orders

(the asset turnover ratios reflect higher capacity utilisation levels).

Competition in this sector is expected to intensify since the reduction, in January 2004, of peak customs duty

to 20 per cent, which has made imports cheaper. Capital goods imports grew by 31 per cent in 2003-04 vis--vis

24.7 per cent in 2002-03.

The profitability of domestic manufacturers has improved over the past 2 years after having hit a low in 2001-

02. We expect margins to be marginally affected in 2004-05 before stabilising in 2005-06 in spite of the improved

demand outlook on account of the increased competition from imports and rise in the prices of raw materials,

namely steel, aluminium and copper

Capital goods: Tariffs

(per cent) Excise

2004-05 2005-06 2004-05 2005-06

General machinery 20.4 15.3 16.3 16.3

Textile machinery 20.4 10.2 16.3 16.3

Textile machinery (Specified items) 5.1 5.1 16.3 16.3

Machine tools 20.4 15.3 16.3 16.3

CNC systems 20.4 15.3 16.3 16.3

Milking and dairy machinery 20.4 15.3 0.0 0.0High speed steel/alloy steel 15.3 10.2 12.2 16.3

Steel plates 5.1 5.1 12.2 16.3

Seamless steel tubes 20.4 15.3 16.3 16.3

Project imports

Fertilisers 5.1 + 10 CVD 5.1 + 10 CVD - -

Refining of crude petroleum 5.1 + 10 CVD 5.1 + 10 CVD - -

Coal mining 5.1 + 10 CVD 5.1 + 10 CVD - -

Captive power plants of 5 MW and above 20.4 + 16 CVD 15.3 + 16 CVD - -

Power generation project 5.1 + 10 CVD 5.1 + 10 CVD - -

(excluding captive power plants)

Power transmission projects of 66 KV and above 5.1 + 10 CVD 5.1 + 10 CVD - -

LNG regassification plants 5.1 + 10 CVD 5.1 + 10 CVD - -Other industrial plants or projects, including oil and gas 20.4 + 16 CVD 15.3 + 16 CVD - -

CVD: Countervailing duty

Note

1) Custom duty on steel plates revised from 10 to 5 per cent in August 2004

Source: CRIS INFAC

Customs

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Capital goods

Impact factors

A. The reduction in the peak customs duty from 20 per cent to 15 per cent will result in increased competition

from imports. This will have a marginally negative impact on domestic companies; but domestic companies

with strong technology platforms and relationships will be able to weather increased competition to an extent.

The reduction in the customs duty on specified textile machinery from 20 per cent to 10 per cent will have a

negative impact on domestic textile machinery manufacturers.

B. The reduction in customs duty from 15 per cent to 10 per cent on alloy steel, aluminium and copper will have

a marginally positive impact on raw material prices.

C. Increase in excise duty on iron and steel from 12 per cent to 16 per cent will not have any impact, as it will be

modvatable.

D. The budgetary allocation of Rs 11 billion for rural electrification programmes will benefit transformer

manufacturers; however, with an expected lag in implementation, we do not expect immediate benefits.

Customs duties cut on product and raw materials


ABB Ltd. A,B,C,D

Alfa Laval (India) Ltd. A,B,C

Bharat Heavy Electricals Ltd. A,B,C,D

Crompton Greaves Ltd. A,B,C,D

Lakshmi Machine Works Ltd. A,B,C

Source: CRIS INFAC

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Cars and utility vehiclesGrowth to be lower in 2005-06

Domestic passenger car sales rose by 22 per cent, while domestic utility vehicle (UV) sales increased by 20 per

cent in the first 9 months of 2004-05. Passenger cars and UVs are expected to grow at 17-18 per cent and 16-17

per cent respectively in 2004-05. The strong growth in sales was due to strong growth in family incomes,

higher aspiration levels of customers, price reductions and new models/variants launched by companies,

lower EMIs due to stable interest rates and higher tenures. The cut in EMIs also spurred tour operators to

replace old vehicles in their fleet.

The growth of passenger cars is likely to be lower at 10-11 per cent in 2005-06, due to increase in prices of cars

(owing to rise in input price), Euro III norms, and stable interest rates. The mid-size segment and compactsegment will continue to see growth, while the mini segment may see a fall in sales. Similarly, the growth in

utility vehicles is likely to be lower, at 4-5 per cent, mainly due to expectations of stable consumer finance

interest rates, which drove growth in the previous fiscal.

The operating margins of car and UV manufacturers have improved marginally, owing to strong demand

growth and higher capacity utilisation. Going forward, the operating margins are expected to increase slightly

in 2005-06, on the back of higher realisations, due to change in product mix in favour of compact and mid-size

segment cars. Net profits have grown substantially in the first 9 months of 2004-05, on account of higher

volumes and lower interest cost, and are expected to improve further in 2005-06.

Cars and utility vehicles: Tariffs

(per cent)

2004-05 2005-06 2004-05 2005-06

New cars

-CKDs 20.4 15.3 24.5 24.5

-SKDs 61.2 61.2 24.5 24.5

-CBUs 61.2 61.2 24.5 24.5

Second hand cars 107.1 102.0 24.5 24.5

Utility vehicles

-6-12 seater1 20.4 15.3 24.5 24.5

-12 seater and above1 20.4 15.3 16.3 16.3

Steel items 5.1 5.1 12.2 16.3

Engines and engine parts 20.4 15.3 16.3 16.3

Other components 20.4 15.3 16.3 16.3

CKDs: Completely knocked down units; SKDs: Semi-knocked down units;

CBUs: Completely built units1 Excluding driver

Source: CRIS INFAC

Customs Excise

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Cars and Utility vehicles

Impact factors

A. The cut in the import duty on used cars and utility vehicles from 105 per cent to 100 per cent will not have any

impact on the industry.

B. The reduction in the peak customs duty on components from 20 per cent to 15 per cent will lower the prices of

imported components. This reduction will bring down the prices of premium segment cars, which have a

higher import content. In addition, the cut in the customs duty on aluminium from 15 per cent to 10 per cent

will marginally lower the cost of production of cars and utility vehicles. The above measures will have a

positive impact on cars and utility vehicle manufacturers, as these benefits are likely to be retained by auto

original equipment manufacturers (OEMs), thereby increasing their margins.

C. The increase in the excise duty on steel from 12 per cent to 16 per cent and cut in the excise duty on tyres from

24 per cent to 16 per cent will not affect OEMs, as the excise on inputs are modvatable against the excise paid

by companies on their final product.

D. The extension of 150 per cent deduction up to March 31, 2007 in terms of in-house R&D expenditure will

benefit automobile OEMs.

E. The reduction in personal tax rates will increase household disposable income, which is a positive for car

demand.

Cost savings for cars & UV manufacturers to improve margins


Hindustan Motors Ltd. B, D, E

Honda SIEL Cars India Ltd. B, D, E

Hyundai Motors India Ltd. B, D, E

Maruti Udyog Ltd. B, D, E

Tata Motors Ltd. B, D,

Budget 0506

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Transcript of Budget 0506