CARE Report on Union Budget 2012-13

8/2/2019 CARE Report on Union Budget 2012-13

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The Government of India today released the Economic Survey for 2011-12, giving a backdrop of

macro-economic challenges and trends for India along with an outlook on growth for the next two

years. Although the past year has registered some weakness in the economy, the tone of the Survey

sets a rather positive view for the coming years, with economic activity having bottomed out and a

gradual upswing being imminent.

Challenges in FY12

On the domestic front managing growth and price stability has been a prime concern in policyformulation. While agriculture and services sector have provided support to overall growth,

weakening industrial activity (against monetary tightening causing borrowing costs to rise and

investments to fall) has pulled down economic performance.

Simultaneously, the global economic environment has been tenuous through the year, particularly

turning adverse post-September 2011, against the Euro-zone crisis, downgrades of sovereign credit

rating of euro-zone and other advanced countries (including the US), followed by political unrests,

currency wars and the more recent oil crisis.

Macro-economic Performance

The performance of the Indian economy, on the domestic front and external sector is captured in

the trends shown in the following table

Picture in FY12

GDP Growth estimated at 6.9%

Growth in Agricultural sector estimated at 2.5%, growth in services robust at 9.4%

Growth in industrial activity at 4.5% a concern, with contribution of this sector to GDP

slipping to 25% (as shown in table 1), a direct fall-out of lower rate of gross fixed capital

formation (GFCF). GFCF a proxy for investments was earlier estimated at 31.9% of GDP in

FY12 by MOSPI, when compared with 32.5% in FY11

The rate of both savings and investments has slowed in FY11. It may be expected that these

numbers continue to be low in FY12 as well, on account of monetary tightening pursued during

the year to control inflationary pressures

ECONOMIC SURVEY 2011-12


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Table 1: Domestic Macro-economic Indicators (%)

FY08 FY09 FY10 FY11 FY12 (E)

Growth RatesGDP 9.3 6.7 8.4 8.4 6.9

Agri. & allied 5.5 0.4 1.7 6.8 2.5

Industry* 10.3 4.7 8.6 7.4 4.5

Services 39.9 10.0 10.5 9.3 9.4

Share in GDP

Agri. & allied 19.3 18.1 17.0 16.8 16.0

Industry* 26.3 25.8 25.8 25.6 25.0

Services 54.5 56.1 57.2 57.7 59.0

Other IndicatorsInflation 4.8 8.0 3.6 9.6 9.1#

Savings 36.8 32.0 33.8 32.3 n.a.

Investment 38.1 34.3 36.6 35.1 n.a.

Government Finances

Internal Debt/GDP 36.3 36.3 35.7 34.7 n.a.

External Debt/GDP 4.2 4.7 3.8 3.5 n.a.

GFD/GSDP 2.5 6.0 6.3 4.8 4.6

Source: Economic Survey 2011-12

*Industry includes construction #April-January FY12

Fiscal management is crucial, the fiscal slippage in FY12 has halted fiscal consolidation, with

central spending on social services pegged at 18.5% this fiscal

Table 2: External Sector

FY08 FY09 FY10 FY11 FY12 (E)

Trade

Exports growth (%) 29.0 13.6 -3.5 40.5 23.5*

Imports growth (%) 35.5 20.7 -5.0 28.2 29.4*

CAD (% of GDP) -1.3 -2.3 -2.8 -2.7 -3.6#

Foreign Investment Flows (US $ bn)

FDI 15.9 19.8 18.0 9.4 n.a.

Portfolio Invt. (FII) 27.4 -14.0 32.4 30.3 n.a.

Reserves (US $ bn)

Forex Reserves 309.7 252.0 279.1 304.8 292.8//

*April-January FY12, #April-September FY12, //As at end of January 2012


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Between April and January FY12, exports have grown by 23.5% and imports by 29.4%

In H1 FY12 the current account deficit stood at 3.6% of GDP

Foreign investment flows, particularly FDI have slowed down in FY11 over FY10, the same

have been volatile in FY12 amidst uncertain global conditions

Forex reserves moderated below the $300 bn mark, with the RBI intervening in the forex

market this year to curtail the appreciation of the rupee against the dollar

Going Ahead? ...

Outlook for real GDP growth promising at 7.6% in FY13 and 8.6% in FY14

Recent decline in inflation is expected prompt ease in interest rates, which is likely to spurinvestments

Suggested Policy Measures

In the backdrop of the current domestic and global environment, uncertainty continues to prevail

thereby, rendering economic slowdown inevitable in India as in other countries across the globe.

The Survey thus identifies a need for innovative policy strategies on the fiscal and monetary side.

Some important suggestions have been enlisted below -

Progressive deregulation of interest rates on savings accounts to help mobilise financial savings

and improve monetary policy transmission

Deepening of financial markets, especially corporate bond market (for instance the introduction

of credit default swaps and increasing limits for FIIs in the corporate bond market)

Attracting foreign long-term investment flows, particularly dedicated infrastructure funds. The

process for institutionalising infrastructure debt funds has already begun through both mutual

funds and NBFCs

Whats New?

The Economic Survey this year has announced a methodology to rank sovereigns across the world,

through the launch of a new index, the Comparative Rating Index for Sovereigns (CRIS). Each

nations CRIS is calculated based on Moodys foreign currency credit rating and IMF GDP statistics

with no purchasing power parity correction.


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This new index suggests that countries with low per capita incomes tend to show greater

improvement over the years, emphasising the potential of the country. Paraguay, Indonesia,

Philippines, Brazil and Turkey are the top five countries, with the US having the 13th

rank. 27economies (largely in the Euro-zone) have recorded negative growths in this index.

India remains one of the fastest growing economies of the world, with the sovereign credit rating

registering substantial increase of 2.98% for the period 2007-12

The index and performance, there-from for select countries has been shown in table 3 below

Table 3: Sovereign Ratings The CRIS

2007 2012 % change

Paraguay 14.4 19.6 36.2

Brazil 22.7 26.0 14.4

India 23.8 24.5 2.9

China 28.7 30.8 7.2

US 32.1 32.8 2.1

UK 32.1 32.8 2.1

Japan 32.1 30.5

Portugal 30.5 20.5 -32.8

Greece 29.0 7.4 -74.5

Ireland 32.1 23.0 -28.4

Spain 32.1 27.3 -14.9

Conclusion

The Survey states that sustainable development would be vital for the Indian economy, with the

country actively and constructively partaking in global negotiations. The role of India has expanded

in the world economy along with other major emerging market economies.


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Overview

Table 1: Summary of accounts (` crore)FY09 FY10 FY11 FY12(RE) FY13(BE)

Revenue Receipts 5,40,259 5,72,811 7,88,471 7,66,989 9,35,685

Tax revenue(net to centre) 4,43,319 4,56,536 5,69,869 6,42,252 7,71,071

Non tax revenue 96,940 1,16,275 2,18,602 1,24,737 1,64,614

Capital Receipts 3,43,697 4,51,676 4,08,857 5,51,730 5,55,241

Recoveries of loans 6,139 8,613 12,420 14,258 11,650

Other receipts 566 24,581 22,846 15,493 30,000

Borrowing and other liabilities 3,36,992 4,18,482 3,73,591 5,21,980 5,13,590

Total Receipts 8,83,956 10,24,487 11,97,328 13,18,720 14,90,925

Non plan Expenditure 6,08,721 7,21,096 8,18,299 8,92,116 9,69,900

On revenue account of which, 5,59,024 6,57,925 7,26,491 8,15,740 8,65,596

Interest payments 1,92,204 2,13,093 2,34,022 2,75,618 3,19,759

On capital account 49,697 63,171 91,808 76,376 1,04,304

Plan Expenditure 2,75,235 3,03,391 3,79,029 4,26,604 5,21,025

On revenue account 2,34,774 2,53,884 3,14,232 3,46,201 4,20,513

On capital account 40,461 49,507 64,797 80,404 1,00,512

Total Expenditure 8,83,956 10,24,487 11,97,328 13,18,720 14,90,925

Revenue expenditure 7,93,798 9,11,809 10,40,723 11,61,940 12,86,109

Capital expenditure 90,158 1,12,678 1,56,605 1,56,780 2,04,816

Revenue Deficit 2,53,539 3,38,998 2,52,252 3,94,951 3,50,424

Fiscal Deficit 3,36,992 4,18,482 3,73,591 5,21,980 5,13,590Primary Deficit 1,44,788 2,05,389 1,39,569 2,46,362 1,93,831

Key Tax Proposals

Benefit to individual tax payer -

Personal Income tax exemption limit raised to `2,00,000/- from `1,80,000/-, resulting in taxrelief of`2,000/-

Deduction of up to `10,000/- for interest from savings banks account.

The 20% tax slab to be raised from

`8 lakh to

`10 lakh.


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Boost to government resource base -

Central Excise and Service Tax being harmonized

o Standard rate of excise duty raised from 10% to 12%

o Service tax levy on all goods except those on the negative list comprising 17 heads (by and

large all service provided by the Government or local authorities); rate increased from 10%

to 12%

Incentive to corporates in raising finances abroad -

Rate of withholding tax on interest payments on ECBs reduced from 20% to 5% for 3 years

for certain sectors viz infrastructure sectors

Deepening financial markets -

Reduction in Securities Transaction Tax (STT) by 20% from 0.125% to 0.1% on cash delivery

transactions

Tax Reform

The GST network to be set up as a National Information utility that would be operational by

August 2012

Policy Reforms

Permit the airline industry to raise working capital through External Commercial Borrowing

(ECB) up to US$1 bn.

To allow qualified foreign investors in THE Indian corporate debt markets.

ECB to part finance rupee debt in THE existing power projects.

Implementation of Advance Pricing Agreement in Finance Bill, 2012

Sector Spending

`25,360 crore has been allocated towards road transport and highways.

A provision of`1,93,407 crore has been made for defence sector in the Budget 2012-13.

Healthcare spending to be increased from `24,000 crore to `26,760 crore.

The allocation for defence under capital expenditure has been estimated at `.79,590.

To strengthen the financial health of Public Sector Banks (PSBs) and financial intuitions

`15,888 crore have been allocated for capitalization


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Revenue

The tax proposals announced this year have the objective of boosting the resource base of the

government. A comparative picture of the tax proposals of THE last year and this year are given

below in Table 2

Table 2: Tax Measures

Tax Measures 2011-12 2012-2013

Direct Taxes

Exemption limit for general category `1,80,000 `2,00,000

Corporate taxes 18.5% of book profits

(MAT rate)

retained

Investment in long-term infrastructure

bonds

`20,000 deduction retained

Deduction on interest from savings bank

accounts

- `10,000

Net revenue loss(direct taxes) ` 11,500 crore for year ` 4,500 crore for yearIndirect Taxes

Central Excise Duty 10% standard rate 12% standard rate

Service Tax 10% 12%

Peak Customs Duty on non-agricultural

goods

10% retained

Net revenue gain (indirect taxes) `7,300 crore `45,940 crore

Overall Net revenue gain (loss) ( 200 crore) `41,440 crore

Gross Tax Revenue `9,32,440 crore `10,77,612 crore

Impact

1. Although, the government has raised its sources of revenue/ revenue stream, its expenditure

still remains high, so any slippages in its revenue collection and disinvestment targets would


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have an adverse impact on its fiscal situation making the fiscal deficit target of 5.1% difficult to

achieve. The Budget 2012-13, has envisaged considerable improvement in revenue receipts

buoyancy, which is expected to move from the negative zone (-0.2 times) in FY12 to 1.6 timesin FY13. In particular if the GDP growth target of 7.6% is not attained, revenue collections will

be impacted.

2. Inflation is likely to be pressurized with the increases in excise duty and service tax (as a part of

the alignment process towards the GST) and the likely rationalization of fuel and fertilizer

subsidy. Moreover, the recent increment in railway freight charges could increase costs by 1-3%,

which too would translate into higher prices.

3. Given the risk associated with oil prices, in the scenario of rising prices, the under- recoveries

of oil marketing companies would see a commensurate increase wherein the budget envisaged

fuel subsidy of`43,580 crore would be inadequate and if oil companies increase prices as a

result it would translate into inflationary pressures.

4. With no substantial reforms being announced in the budget the expected policy boost to

economic growth has not been forthcoming. A close watch has to be maintained on the various

bills proposed to be moved in the budget session of parliament.

Expenditure Measures

Total plan expenditure allocation has increased by 22.1% over FY12 (RE), with non-plan

expenditure showing an increase of 8.7%.

Table 3: Expenditure (` crore)Expenditure FY11 FY12 (RE) FY13 (BE)

Non Plan expenditure 8,18,299 8,92,116 9,69,900

Revenue non- plan expenditure 7,26,491 8,15,740 8,65,596

Interest payments 2,34,022 2,75,618 3,19,759

Subsidies 1,73,420 2,16,297 1,90,015

Pensions 57,405 56,190 63,183

Social services 35,014 19,709 20,784


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Expenditure FY11 FY12 (RE) FY13 (BE)

Economic services 28,051 23,702 24,105

Capital non plan expenditure 91,808 76,376 1,04,304

Plan expenditure 3,79,029 4,26,604 5,21,025

Revenue plan expenditure 3,14,232 3,46,201 4,20,513

Capital plan expenditure 64,797 80,404 1,00,512

Total expenditure 11,97,328 13,18,720 14,90,925

Subsidies

Food, fertilizer and petroleum are the main components of the subsidies given by the

Government.

With subsidy rationalization as the road map, the Union Budget targets to reduce fertilizer

subsidy by 9.3% (to `60,974 crore) and petroleum subsidy by 36.4% (to `43,580 crore).

Food security would be fully covered by the Government.

Endeavour to keep subsides under 2% of GDP in FY13. Further bringing it down to 1.75%

in FY15

Agriculture

Plan outlay for Department of Agriculture and Co-operation increased by 18%.

Target for agricultural credit raised by`1,00,000 crore to `5,75,000 crore in FY13.

`200 crore set aside for incentivizing research with rewards

Food grains storage capacity is to be increased by 2 mn tonnes.

Continuation of lower farm interest rate (at 7%) and interest rate subvention of 3% for

prompt paying farmer.

Interest subvention on post harvest loans up to six months against negotiable warehouse

receipt. This will encourage the farmers to keep their produce in warehouses.


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Infrastructure

During 12th plan period, investment in infrastructure to go up to `50 lakh crore, half of

which is expected from private sector.

Telecom towers and irrigation projects to get viability gap funding.

Setting up of the infrastructure debt fund.

Tax free bonds of`60,000 crore to be allowed for financing infrastructure projects in FY13

Other Announcements

Proposal to lay a White Paper on Black Money

Interest subvention scheme for providing short term crop loans to the farmers at 7% p.a.

Additional subvention of 3% available for prompt paying farmers.

NREGA assistance is revised from `35,840 crore in FY11 to `31,000 crore in FY12 (RE).

The same is expected to increase to `33,000 crore in FY13 (BE)

Non-plan capital expenditure dominated by defence expenditure in FY13 which accounts

for 76% of total

Impact

1. Higher direct flow of credit to agriculture will help to improve the production and logistics

for various crops.

2. The interest rate subvention for the farmers will help to accelerate repayment. The

governments interest subsidy outgo is projected to increase by 37.5% in FY13 to `7,968

crore. The interest subsidy for providing short-term credit to the farmers has been set at

`6,000 for FY13, up 50% from the revised estimate of`4,000 crore in FY12.

3. The slew of initiatives and outlays for the agri -sector would aid in increasing productivity

and overall growth of the sector.

4. During 12th plan period, investment in infrastructure is estimated to increase to `50 lakh

crore, indicating emphasis on infrastructure and industrial development thereby relieving

structural bottlenecks. The allocation of tax-free bonds for financing infrastructure projects

in 2012-13 would improve funding for the sector.


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Deficit Position

Table 4: Deficit Position (as a % of GDP)

FY11 (A) FY12 (RE) FY13(BE)

Fiscal Deficit 4.90 5.90 5.10

Revenue Deficit 3.30 4.40 3.40

Effective Revenue Deficit 2.10 2.90 1.80

Disinvestment (`crore) 22,846 15,493 30,000

Fiscal balance has been adversely impacted in FY12 on account of lower than estimated direct tax

revenue collection (as profitability of corporate entities, impacted by high interest rates, shrunk) and

increased subsidy burden (on food bill on account of high inflation and on fuel and fertilizer on

account of rising global oil prices).Fiscal deficit is estimated to be `5,13,590 crore in 2012-13. It was

`5,21,980 crore(RE) in 2011-12 and `3,73,591 crore in 2010-11(A).

The budgeted fiscal deficit of 5.1% in FY13 is marginally higher than that of FY11 (at 4.9%) when

revenue receipts were backed by one-time windfall income through the auctioning of telecom

spectrum. Simultaneously, however, this estimate is lower than the 5.9% of FY12. The re-auction of

telecom spectrum, is expected to yield only `40,000 crore of receipts in FY13 (as against nearly

`100,000 crore in FY11). A slippage on account of this source would impact the deficit position of

the State. Prima facie, it appears that indirect tax revenues would perhaps be the major support factor

for curbing the deficit gap in FY13.

Effective Revenue Deficit is defined as the difference between revenue deficit and grants for

creation of capital assets. This bifurcation helps in reducing the consumptive component of revenue

deficit thereby creating space for increased capital spending. The revenue deficit stood at 4.4% in

FY12 and is budgeted at 3.4%, with the effective revenue deficit budgeted at a much lower 1.8%.

Performance on the disinvestments front has been rather subdued in FY12, where the State is

expected to mobilise `15,493 crore of funds (as against a budget estimate of `40,000 crore in

FY12). The budget estimate for the same in FY13 stands at `30,000 crore, perhaps a more

achievable amount (closer to the FY11 sum).


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Implications

1. Given the fiscal slippage in FY12 (fiscal deficit at 5.9% under revised estimates as against 4.6%

of budget estimates of FY12) the path of fiscal consolidation has been adversely affected.

However, Budget 2012-13 makes the much required attempt to balance a growth oriented

strategy whilst reverting to fiscal prudence.

2. The amount of resources actually mobilised through equity disinvestment in public sector

enterprises during the course of the year would be critical for the government to meet the

above-mentioned deficit targets, especially if liquidity conditions continue to remain tight.

3. The enthusiasm of telecom players in the second round of auctions of telecom spectrum in the

upcoming fiscal would be a crucial determinant of the fiscal gap that materialises at the end of

the year.

Fiscal Consolidation

Table 5: Borrowing Position (` crore)FY09 FY10 FY11 FY12 FY13

Actuals RE BE

Internal Borrowings

Net Borrowings 2,33,630 3,98,424 3,25,414 4,36,414 4,79,000

Gross Borrowings 2,73,000 4,51,000 4,37,000 5,10,000 5,69,616

Repayments 39,370 52,576 1,11,586 73,586 90,616

External Borrowings

Net Borrowings 11,015 11,038 23,556 10,311 10,148

Gross Borrowings 21,022 22,177 35,330 24,177 26,048

Repayments 10,007 11,139 11,774 13,866 15,900

The long-term gross internal market borrowing programme of the Government is envisaged at

`5,69,616 crore for FY13, 11.7% increase over the last year. Gross external market borrowings have

been estimated to grow by 7.7% to `26,048 crore in FY13.

Public debt for FY13 is expected to increase by 12% to `50,25,072 crore, of which internal debt

stock contributes 96% at `48,46,973 crore. Proportion of the external debt has been declining over

the years and stood at 3.5% in FY13 (BE). In order to maintain a healthy mix of internal and


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external debt the Government intends to explore other sources of external debt in the form of

sovereign bonds.

In FY12, the Government revised its borrowings upwards to `5,10,000 crore on account of the

shortfall in receipts. This brought about a sharp increase in the liquidity deficit leading to bank

borrowings of over `1,00,000 crore from the RBI through the LAF. The hardening of interest rates

alongwith the enhancement of the government borrowings in FY12 took a toll on the government

securities.

The Government is committed to prudent debt management in order to sustain public debt within

comfortable limits so that it does not crowd out private investment. Budget 2012-13 targets debt

stock to be 45.5% of the GDP, well ahead of the Thirteenth Finance Commission (TFC) targets of

50.5% of GDP.

Interest Payments Burden

Table 6: Trends in Interest payments of the Government

FY09 FY10 FY11 FY12 FY13

Actuals RE BE

Interest Payments (`crore) 1,92,204 219500 2,34,022 2,75,618 3,19,759

Growth (%) 12.4 14.2 6.6 17.8 16.0

Interest/Revenue Receipts (%) 35.6 37.2 29.7 35.9 34.2

The Governments interest payment burden increased by 17.8% to `2,75,618 crore in FY12 (RE).

However, Budget 2012-13 estimates a slight slowdown in this growth rate to 16.0%, with interest

payments burden amounting to `3,19,759 crore.

Implications

1. The implicit rate of interest on the government debt is expected to increase marginally from

6.6% in FY12 to 6.7% in FY13. Furthermore, the governments market borrowings are to

grow by`60,000 crore. This could add to the already prevailing liquidity pressures in the

system as well as interest rates.


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Current dividend liability of`6,735 crore to be fully discharged.

Excess of receipts over expenditure of`1,492 crore as against the budget amount of`5,258

crore

Operating ratio at 95%

Budget Estimates FY13

Freight load of 1,025MT

Passenger growth pegged at 5.4%

Gross receipts `1,32,552 crore

Ordinary Working Expenses `84,400 crore.

Dividend payment estimated at `6,676 crore

Operating ratio estimated at 84.9%

Surplus expected to be `15,557 cr.

Budget Implications

1. The expected decline in operating ratio in FY13 will need to be monitored as the drop expected

is quite sharp compared to the increase witnessed in FY12 (revised) over FY12 (budget). Share

of goods earnings could come down in case there is substitution to road transport.

2. With highest ever allocation of`60,100 crore, the budget looks positive on moving towards

building a strong infrastructure. The budget provides significant opportunities for private

investment through public-private partnership resources. In particular on account of the focus

being put on modernization, electrification, increasing the lines, use of solar energy etc, there will be a positive boost for related industries such as cement, steel, containers, carriages,

electrical equipment, cables, solar equipment etc.

3. The increase in freight rates across the board will have an impact on prices and will affect

goods that use railways as a mode of transport. A guesstimate is that for industry as whole the

average increase of over 20% in freight rates (will vary depending on the class as well as

distance) cost of production could increase by between 1-3% which will exert pressure on


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Industry Snapshot

India is the ninth-largest and one of the fastest growing aviation markets in the world. During

2011, domestic passenger numbers increased to 60.66 million passengers, a growth of 16.6%

y-o-y, primarily driven by Low Cost Carriers (LCC) segment (Source: Centre for Monitoring Indian

Economy).The growth momentum is expected to continue given the strong market fundamentals.

However, though the Indian aviation sector witnessed significant growth in passenger traffic over

the last few years, Indian carriers lost money in FY11 (refers to period April 2010 to March 2011)and are expected to post significant losses even during 12 months ending March 31, 2012. This is

primarily due to combination of low fares in a competitive market and sustained high costs on

account of high fuel cost, wages and rising debt levels. In these challenging circumstances, Indias

airlines are struggling to raise capital and even banks are wary of extending additional bank

facilities.

During January 2012, private carrier Jet group (Jet Airways + Jet Lite) was the market leader with

28.8% share, closely followed by Indigo with 20.8%, National Aviation Company of IndiaLimited (NACIL) with 17.1%, SpiceJet with 16.3%, Kingfisher Airlines with 11.3% and Go Air

with 5.8% (Source: Directorate General of Civil Aviation).

The key challenges for the industry are inadequate infrastructure, FDI restrictions, high taxation,

highly competitive domestic market, high fuel costs and rising debt levels.

Duty Structure

Travel Type Service Tax

(Before)

Service Tax

(After)

Impact

Domestic Travel (Economy Class) `150 Same as PY International Travel (Economy Class) `750 Same as PY Domestic Travel (Other than economy class) 10% 12% International Travel (Other than economy class) 10% 12%

AIRLINES POSITIVE


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The concessional rate on economy class is subject to a bar on taking CENVAT credit, but there is

no such bar for the tariff rate of 12% chargeable for first / business class passengers.

Sales Tax on Aviation Turbine Fuel (ATF):At present, sales tax on ATF varies from 4 per

cent to more than 30 per cent across the country.

Proposal and Impact

Budget proposals Impact on the industry

FDI in aviation not announced in Budget,

however, under active consideration

Airlines expected an announcement about

Government permitting FDI by foreign airlines in

the Indian aviation sector, which could have

eased tight liquidity position and provided the

much-needed relief.

Government has permitted direct import

of ATF by Indian Carriers, as actual users.

This will have positive impact on the profitability

on airlines as fuel cost comprises of around 40%

of total operating cost for airlines. However,

infrastructure & logistics challenges for

importing ATF remains a concern.

ECB for working capital requirements of

the airline industry for a period of oneyear, subject to a total ceiling of US

Dollar 1 billion.

Will help Airlines to get working capital at lower

rates. This should provide some respite to airlinesconsidering their huge debt position.

Withholding tax on interest payments on

ECB reduced from 20% to 5%.

Will help reduce the cost of borrowings.

Full exemption from basic custom duty on

import of parts of aircraft and testing

equipment. It is also proposed to fully

exempt both new and retreaded aircrafttyres from basic customs duty and excise

duty.

Will help Maintenance, Repair and Overhaul

(MRO) sector to become more competitive and

grow, which is presently at nascent stage.


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Excise Duty(%)

Before After Impact

Trucks 10+`10,000 12+`10,000 Two-wheeler 10 12

Three-wheeler 10 12

Proposal and Impact


Hike in excise duty

Small Cars : From 10% to 12% Other Cars*: From 22% to 24%

Other Cars#: From 22%+`10,000 to27%

The rise in the excise duty would result inprice hikes across all the segments in thepassenger car industry, which consecutively

would dent the demand by some extent.

Hike in custom duty for imported cars from 60%to 75%, where value of the vehicle exceeds USD40,000

Rise in custom duty on imported completelybuilt units (CBUs) on large cars and SUVs isalmost 25%. This will lead to considerable risein prices of luxury cars and UVs.

Imposing of 3% ad valorem excise duty on bodybuilding of commercial vehicle from flat rate of

`10,000

Increase in the excise duty on body buildingof commercial vehicles would exert extra

burden on end customers i.e. freight transportoperators.

Interest subvention schemes on short-term croploans continued at 7%. Further, additionalsubvention of 3% will be available for promptpayment

Continuation of interest subvention schemewould lead to higher farm income with smallfarmers and thereby push the demand formid-size and small tractors.

Investments towards infrastructure development(mainly roads and highways)

Increase of financing of infrastructureprojects through tax-free bonds from `30,000

crore to `60,000 crore Allocation of`25,360 crore on NHDP

proposal

Aggressive investments towards infrastructuredevelopment would drive the demand forM&HCV tippers.

Increase income tax exemption limit from`180,000 to `200,000

Minimal rise in disposable income due toincrease in the tax slab combined withincreased farm income will be the key driverfor two-wheeler demand.

*Indicates cars which have engine capacity more than 1,500cc in case of diesel and 1,200cc in case of petrol and length exceeding4 meters.

#Indicates cars having engine capacity more than 1,500cc in case of diesel cars and 1,200cc in case of petrol cars and exceeding4 meters.


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Impact on companies

Company Impact Comments

MSIL Compact and mini car segments are major revenue contributor for MSIL.

Hence rise in excise duty on large cars is not a major concern factor for the

company.

TML The commercial vehicle business of TML would be benefited from

aggressive investments proposed in infrastructure projects.

In passenger vehicle industry, the company will have to face challenge

to pass on the rise excise duty in the gloomy current scenario where the

industry is facing demand pressure as well as rise in competition levels.

The company will also have to pay higher custom duty on import of itsluxury cars from Jaguar and Land Rover.

M&M The commercial vehicle business of M&M would be benefited from theinvestments proposed in infrastructure projects.

In passenger vehicle segment, M&M product portfolio mainly consists

of vehicles with engine capacity greater than 1,500cc. Hence it will be

challenging to negate the pressure in demand owing to rise in prices

The tractor business of M&M is likely to benefit due to thecontinuation of interest subvention scheme.

ALL

Rise in allocation towards infrastructure to push demand for M&HCV

HMCL Price hike will be offset by rise in income-tax slabs

BAL Price hike will be offset by rise in income-tax slabs


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Industry Snapshot

Banking

Total bank credit for Scheduled Commercial Banks (SCBs) as on December 30, 2011 stood at

`4,365,640 crore, registering a y-o-y growth of 15.9%. The credit growth has been decelerating

continuously since December 2010 on account of economic slowdown coupled with tightening of

policy rates. The Incremental Credit-to-Deposit (ICD) ratio for all SCBs moderated from over

100% for twelve months ended January 2011, to 78.5% for twelve months ended January 2012. Inline with the slowdown in credit growth, the deposit growth has also started slowing down from

over 17% y-o-y level till September 2011 to around 15.7% level by January 2012. Money market

liquidity tightened significantly since November 2011 partly due to dollar sales by RBI. Despite the

tightening liquidity situation, the banks continue to maintain excess SLR in the range of around 5%

partly due to rising risk aversion among the banks as well as deployment of funds in Gsecs on

account of the rise in the Government borrowing programme.

With headline WPI standing at over 9.5% in H1FY12, the regulator continued to maintain ahawkish stand and cumulatively increased the repo rate by 175 bps in FY12. The banks however,

refrained from passing the entire impact of rise in cost of borrowings to prevent asset quality

pressures resulting in Net Interest Margin (NIM) of most of the banks seeing some pressure. On an

overall basis, provisioning expenses rose by around 30% on y-o-y basis in 9MFY12 on the back of

higher NPA provisioning by banks with the sharp increase in NPAs and RBI guideline mandating

higher specific provisioning for all NPAs. Consequently the overall Net Profit growth was muted at

around 6% year-on-year due to rise in provisioning cost as well as margin pressures. The overall

Gross NPAs of the banks covered in CAREs banking study (study covered 26 PSU and 13 Private

banks) stood at 2.88% of Advances) as on December 31, 2011. During 9MFY12, the absolute level

of Gross NPAs for these select 39 banks rose by over 40% y-o-y with Public Sector banks seeing a

jump of over 50% y-o-y. PSU banks NPA addition is due to migration to system based NPA

recognition as well deterioration in general economic environment. Capital adequacy ratio for the

banking system as a whole however continued to be comfortable with median capital adequacy ratio

standing above 12% as on December 31, 2011.

BANKING AND FINANCIAL SERVICES POSITIVE


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institutions including NABARD. Extension

of the scheme of capitalisation of weak RRBs

by another 2 years.

Rise in overall limit of issuance of tax free

bonds from `30000 last year to `60000 cr in

2012-13 by certain institutions such as

NHAI, IRFC, IIFCL, HUDCO, NHB and

SIDBI.

Financial Institutions to benefit from cost

effective funding avenues

To overcome the shortage of housing for

low income groups in major cities and towns,the government proposes to:

a) Allow ECB for low cost affordable

housing projects;

b) Set up Credit Guarantee Trust Fund

to ensure better flow of institutional

credit for housing loans;

c) Enhance provisions under Rural

Housing Fund from `3000 crore to`4000 crore;

d) Extend the scheme of interest

subvention of 1 per cent on housing

loan up to `15 lakh where the cost of

the house does not exceed `25 lakh

for another year; and

e) Enhance the limit of indirect finance

under priority sector from

`5 lakh to `10 lakh

Housing Finance Companies engaged in low and

middle income housing segment stand to benefit

on account of the rise in indirect finance housing

eligibility limit.

Allowing Qualified Foreign Investors (QFIs)to access Indian Corporate Bond market

Allowing Qualified Foreign Investors (QFIs) to

access Indian corporate bond market will help in

deepening debt markets in India and allow

companies especially non bank finance companies

to widen their resource base through capital

market borrowings.

Introduction of a new scheme called Rajiv

Gandhi Equity Savings Scheme. The scheme The government has introduced a tax exemption


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would allow for income tax deduction of 50

per cent to new retail investors, who investup to `50,000 directly in equities and whoseannual income is below 10 lakh. The scheme

will have a lock-in period of 3 years.

scheme (Rajiv Gandhi equity scheme) for equity

markets targeted at new investors and will

increase the retail participation in equity market.

This will improve the depth of the domestic

capital market.

Reduction in Securities Transaction Tax

(STT) by 20 per cent (from 0.125 percent to

0.1 per cent) on cash delivery transactions

Reduction in Securities Transaction Tax (STT) is

likely to have positive impact on the investors and

also benefit broking firms as there would be

increase volumes in equity market

Tax all services except those in the negative

list which also includes services of business

facilitators and correspondents to the banks

and insurance companies

This step is to increase financial inclusion and

take delivery of financial services to the door step

of the unbanked section of the population. This

would be one of the factors for the intermediaries

to act as business facilitators and correspondents.

Process of financial sector legislative reforms,

the Government proposes to move the

following Bills in the Budget Session of theParliament including The Micro Finance

Institutions (Development and Regulation)

Bill, 2012

The MFI bill is likely to remove the uncertaintyexisting in the microfinance sector on theregulatory front would make way for clear set of

guidelines for the MFIs to operate.

Impact on segment

Segment Impact Comments

Banking Sector PSU banks to benefit from capital infusion by GoI

Financial

Institutions To benefit from rise in tax free bond issuance as it would help in

raising funds at relatively finer rates

Housing Finance

Companies

To benefit from rise in housing loan eligibility limits for qualifying

as indirect priority sector lending by the banks


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Segment Impact Comments

Non Bank

Finance

Companies

To benefit from participation on QFIs in the bond market

Microfinance

To benefit from the exemption of business facilitators from

service tax

Introduction of Microfinance bill to remove uncertainty on the

regulatory front

Broking Firms

To benefit from reduction in STT


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Industry Snapshot

The Indian cement industry recorded a moderate growth of 5.1% in FY11 on account of

slowdown in construction activities due to prolonged monsoon, heavy winter, delay in execution

of infrastructural projects etc. During the first nine months of FY12, cement demand has

registered a growth of about 5.3% on a y-o-y basis. During the third quarter of FY12, the

quarterly cement demand picked up post monsoon and registered a growth of about 9.5% on a

y-o-y basis. The long-term cement demand in the country is expected to remain intact. Cement

demand will largely be driven by increased focus of the government on promotion of low-cost

affordable housing and infrastructure development.

Average cement prices have increased by about 10% from `253 per bag in FY11 to `278 per

bag in FY12. On the back of pick up in cement demand, especially during the third quarter of

FY12, quarterly average cement prices rose by about 13% to `284 per bag.

The cement industry has been grappling with cost pressure in FY12 due to rise in raw material

cost & freight charges, increase in prices of imported coal on account of rupee depreciation, etc.

However, the industry has managed to pass on the higher input cost through a series of price

hikes in the past few months.

Duty Structure

CustomsDuty (%)

Before After Impact Excise Duty

(` per tonne)Before After Impact

Coal 5% NIL

Retail- Price below`190 per 50 kg

bag

- Price above`190 per 50 kgbag

10% ad-valorem+`80

10% ad-valorem+

`160

12% ad-

valorem*+ `120

Bulk 10% ad-valorem

12% ad-valorem*

Clinker 10% ad-valorem+`200

12% ad-valorem

* An abatement of 30% has been notified on the Retail Sale Price.

CEMENT POSITIVE


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Proposal and Impact


Excise duty structure has been revised as per

details given in the above table.

This will lead to reduction in excise duty by about

`5-7 per bag.

Customs duty on coal has been exempted. Marginal reduction in the input cost is positive for

the cement industry.

The scheme of 1% interest subvention on

housing loan (for a loan amount upto `15

lakh for the cost of house not exceeding`25

lakh) is extended for the next fiscal.

The increased impetus of the government oninfrastructure development and affordable

housing will continue to drive the cement

demand.

ECB allowed for low-cost affordable housing

projects.

Allocation towards PMGSY has been

increased by 20% to `24,000 crore.

Allocation of the Ministry of Road Transport

and Highways for road development has

been increased by 14% to `25,360 crore.

Allocation to AIBP increased by 13% to

`14,242 crore.

Impact on companies


UltraTech Reduction in cost (with reduction in excise duty and customduty on coal) and increased allocation towards infrastructure

projects is positive for the cement players. Further, continued

focus of the government on affordable housing will also augur

well for the cement companies.

ACC

Ambuja

Shree Cement Since the company uses pet coke as a fuel, the reduction in

custom duty of coal will have no impact on the cost structure.


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Industry Snapshot

Chemical Industry is highly diverse and primarily consists of basic chemicals, petrochemicals,

pesticides and agrochemicals, specialty and fine chemicals, drugs and pharmaceuticals, paints

and varnishes, dyestuff and inks, etc. The size of the Indian Chemical industry is estimated at

USD 108 billion and accounts for approximately 7% of the Indian GDP. The sector contributes

heavily to the export import segment of the country accounting for around13-14% of total

exports and 8-9% of total imports. In terms of volume, India is the third-largest producer of

chemicals in Asia, after China and Japan and 12th largest in the world.

The per capita consumption of chemicals in India is about 1/10th of the world average

indicating more room for growth.

Challenges faced by the industry are high prices of basic feedstock, SSI reservation/fragmented

nature of the industry, low R&D levels, low level of brand development, issues related to

dumping, environmental regulations etc.

Duty Structure

Customs Duty

(%)


(%)

Before After Impact

Organic and

inorganic

coating

10 5 Overall 10 12

Boric Acid 5 7.5

Titanium dioxide 10 7.5

CHEMICALS NEUTRAL


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Proposal and Impact


Reduction of customs duty on

organic/inorganic coating material for

manufacturing electrical steel from 10% to

5%.

Expected to benefit companies engaged in

manufacturing of electroplating chemicals.

Customs duty on titanium dioxide is reduced

from 10% to 7.5%.

Expected to help manufacturers of dyes and

pigments. Titanium dioxide is a key input in the

paints industry and constitutes 12-15% of total

raw material cost.

Enhancement of customs duty on boric acidfrom 5% to 7.5%

Expected to negatively affect the insecticide andpesticide manufacturers.

Higher excise duty of 12% ad valorem Expected to have a negative impact acrosschemical manufacturers. However it is expectedto affect small unorganized players more.

Impact on companies


Asian Paints, Kansai Nerolac

Paints,Berger Paints and ICI Profitability margin is expected to improve due toreduction in customs duty of titanium dioxide (one of

the key inputs).

Grauer & Weil (India)

Decline in input prices is expected to be offset by risein excise duty.


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Industry Snapshot

Construction activity is an essential part of countrys growing need for infrastructure and

industrial development. Construction as a percentage of GDP has been in the narrow range of

7.9-8.1% in the past six years. Considering first three quarters of FY12, the construction growth

slowed down to 4.2% from 7.7% registered in the corresponding period of previous year. The

slowdown in construction is mainly on account of delay in the project awarding & execution

due to environmental clearance hurdles, political instability in some states etc.

Since last couple of years, margins of construction companies are under pressure due to muted

topline growth led by the delay in execution of orders, rising interest rates and fairly high prices

of key input materials like steel, cement, bitumen, copper.

At the end of third quarter of FY12, the ratio of order backlog to net sales (four trailing

quarters) of the major construction companies was in the range of 2.6-5.5 times. However,

execution of the order backlog remains a key challenge due to various constraints like land

acquisition, environmental clearances, political issues etc.

Duty Structure

Excise Duty (%) Before After Impact

Cement

Retail

- Price below`190 per 50 kg bag

- Price above `190 per 50 kg bag

- Price above `190 per 50 kg bag

10% ad-valorem +`

80 per tonne10% ad-valorem +`160 per tonne

12% ad-valorem* +

`120 per tonne

Bulk Cement 10% ad-valorem 12% ad-valorem*

Steel 10% 12%

*An abatement of 30% has been notified on the Retail Sale Price of cement.

CONSTRUCTION POSITIVE


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Proposal and Impact


The government has proposed to issue tax free bonds to the tune

of`60,000 crore through various infrastructure institutions.

The sustained focus of the

government on

infrastructure development

especially power, roads,

irrigation etc through

increased allocation to

schemes like PMGSY,

RIDF, AIBP would be

beneficial for the

construction sector. Also,

continued focus of the

government on the low-

cost and affordable housing

will augur well for the

sector. The easy availability

of funds and relaxation in

ECB norms will be positivefor the construction

industry.

Allocation of the Ministry of Road Transport and Highways for

rood development has been increased by 14% to `25,360 crore.

Allocation towards the PMGSY has been increased by 20% to

`24,000 crore.

Allocation to AIBP increased by 13% to `14,242 crore. In order

mobilize large resources to fund irrigation projects, government

owned Irrigation and Water Resource Finance Company is being

operationalised.

Allocation towards RIDF has been increased to `20,000 crore.

The scheme of 1% interest subvention on housing loan is extended

till next fiscal for a loan amount upto `15 lakh, with the cost of

house not exceeding`25 lakh.

ECB allowed for low cost affordable housing projects.

The rate of withholding tax on interest payment on ECB forPower, Roads, Ports & Shipyards, affordable housing, Dams etc. is

proposed to be reduced from 20% to 5% for next 3 years

ECB is permitted to part finance rupee debt of existing power

projects.

Impact on companies


IVRCL Infrastructures & Projects Increased allocation towards variousinfrastructure projects is expected to result inincreased order inflow to the construction

companies.

Hindustan Construction Company Gammon India Ltd Patel Engineering Ltd Nagarjuna Construction Company


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Industry Snapshot

Educational services consist of Academic, Non-Academic, Vocational, Technical and Other

certified and training courses. India has the third-largest education system in the world after

America and China with around 13.5 lakh schools and 31,000 higher education institutes (HEIs).

It is home to the largest population in the age group 0-24 years.

The growth in the personal disposable income of the Indians, growing contribution of the

services sector to Indias GDP thereby requiring greater number of qualified youths and theincreasing thrust of the GoI to improve the countrys educational system and eventually the

literacy rates has resulted in manifold growth of the Indian Educational sector since the last

decade. Correspondingly, the countrys literacy rate has improved from 64.8% during 2001 to

74% as per the Census 2011. With the growing penetration of educational concepts such as Pre-

school, Information & Communication Technology (ICT) in schools etc the market size of the

Indian Education industry aggregated US$66.6 bn during FY11. Importantly, over the years, the

role of private sector in education has increased with the setting-up of institutes especially in the

K-12 & Higher education segment. Even, the GoI has emphasised on Public Private Partnership

(PPP) in education so as to expand the reach and provide quality education to students in small

towns & villages.

The growth in the Indian Education System is expected to be fuelled by growth in disposable

income, acceptance of vocational courses, GoIs orientation towards Public Private Partnership,

entry of corporate and foreign educational institutions and growing focus on distance education

mode.

Duty Structure

Service Tax (%) Before After Impact

Service Tax on other educational services such as

coaching class etc (excluding pre-school and school

education, recognised education at higher levels and

approved vocational education)

10 12

EDUCATION POSITIVE


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Proposal and Impact


Budgetary allocation for Right to Education

scheme under the Sarva Shiksha Abhiyan

(SSA) at `25,555 crore; y-o-y increase of

21.7%

In an effort to improve the literacy rates of the

country, the GoI has been emphasising on

providing subsidised education to the populace

specially in the rural India. The increase in

budgetary allocation under the various

educational schemes of GoI augurs well for the

private players in the industry in terms of greater

flow of orders to be received by the private

players from the government bodies.

Budgetary allocation for Rashtriya

Madhyamik Shiksha Abhiyan (RMSA)

scheme at `3,124 crore; y-o-y increase of

29%

6,000 schools proposed to be set-up at block

level as model schools during the XIIth plan

period. Of the same, 2,500 schools are

proposed to be set-up through the PPP

mode

The setting-up of 2,500 schools through the PPP

mode would result in greater involvement of the

private industry players thereby increasing their

penetration in the brick-n-mortar form of

education service.

Budgetary allocation of `1,000 crore to

National Skill Development Fund (NSDF).

This would result in increased demand from the

GoI for skill development-related programmes

being offered by the private players in order to

increase the number of skilled youths in the

nation.

Service tax on Pre-school and school

education, recognised education at higher

levels and approved vocational education

exempted

The exemption from service tax; being an indirect

form of taxation would be passed on to the

students / consumers in the form of lower cost of

educational services. However, the exemption

remains restricted to certain categories of

educational services only.

Budgetary allocation for Mid Day Meal

programme in schools at `11,937 crore, y-o-y

increase of 15%

No impact on the private players in the industry


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Impact on companies


Everonn Education Ltd. The increased budgetary allocation by the GoIunder various educational schemes such as SSA,

RMSA and skill development / vocational

education augurs well for private players in the

education industry with the allocation expected

to result in higher inflow of orders to these

players especially in the Information and

Communication Technology (ICT) segment of

education. Further, the announcement of set-up

of schools through the PPP mode during the

XIIth plan period is expected to enable these

players establish a greater footprint in the brick-

n-mortar form of education service.

Compucom Software Ltd.

Educomp Solutions Ltd.

Core Education &

Technologies Ltd.


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Industry Snapshot

The Indian fertilizer industry is dominated by urea comprising around 50% of the volume of

fertilizer consumption followed by di-ammonium phosphate (DAP; 20%), complex fertilizers

(17%), single super phosphate (SSP; 6%) and muriate of potash (MOP; 7%).

The skewed consumption is a result of uneven subsidy policy reforms in the fertiliser sector.

The Government brought most fertilisers under nutrient-based subsidy (NBS) scheme from

April 1, 2010; however, urea remains under the old subsidy regime. The New Pricing PolicyStage III for urea units that ended on March 31, 2010 was extended until the formulation of the

new policy. As a result urea subsidy follows fixed retail price and floating subsidy and all other

fertilisers under NBS follow fixed subsidy with floating prices. Hence, the government bears

most of the input price fluctuation through subsidy for urea, whereas some amount of price

fluctuation is passed on to the farmers through retail prices in other fertilisers

The fertilizer sector is expected to remain a priority for the Government due to its larger role in

the national food security. However, the new allocation of natural gas may not increase in thenear term due to reduction in output from a major source in KG basin and the existing

allocation may get hampered if the output is reduced further. This is likely to necessitate higher

import of gas and investment in THE overseas companies with firm tie-up for gas.

The steps the Government takes to bring urea under NBS scheme and move towards the direct

transfer of subsidy to the farmers would remain crucial.

Duty Structure

Customs Duty

(%)


(%)

Before After Impact

Urea 10% 10% Urea Nil Nil

DAP 5% 5% DAP Nil Nil

Complexes 5% 5% Complexes Nil Nil

Rock Phosphate 5% 5% Rock Phosphate Nil Nil

FERTILIZER POSITIVE


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Proposal and Impact


Eligibility of capital investment in the

fertilizer sector under viability gap funding

under the scheme of support to public

private partnership

The proposal would boost up investment in the

sector and would see more private participation

Reduction of withholding tax on interest

payments on external commercial

borrowings from 20% to 5%

Would bring down the effective rate of interest

on the ECBs and would make projects more

viable

Increase in investment linked deduction ofcapital expenditure from 100% to 150%

The proposal would make capital investmentmore attractive with better returns to equity

Import of equipment for fertilizer plants, for

initial setting up or substantial expansion, to be

fully exempt from customs (5% earlier) duty

for three years

The tax exemption would reduce the landed cost

of equipments and encourage investments

Proposal to implement direct transfer of

subsidy to the farmers in phases

If implemented, would reduce the working-capital

requirement of fertilizer companies, save their

interest costs and improve their capital structure.

It would also benefit farmers and would reduce

expenditure on subsidies by encouraging judicious

use of fertilizers

Increase agricultural credit by`1 lakh crore

to `5.75 lakh crore in FY13

Interest subvention for short term crop loan

at 7% and an additional subvention of 3%

for prompt paying farmers

Proposal to allocate `10,000 crore toNABARD for refinancing the regional rural

banks to in-turn extend short term crop

loans to the small and marginal farmers

Fertilizer demand would to get a fillip on account

of cheaper and easy credit availability to the

farmers


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Impact on companies


IFFCO The budget proposal would increase the demand forfertilizers on the back of cheaper farm credit. While

the direct transfer of subsidy, if implemented, would

have favourable impact on interest cost and

improve their capital structure.

The budget proposal makes a conducive

environment for capital expenditure, however, the

extent of gas availability would remain crucial for

new capital investment decisions.

The budget remained silent regarding bringing the

subsidy on urea under NBS scheme leaving a cloud

of uncertainty.

GSFC Ltd.

GNFC Ltd.

Tata Chemicals Ltd.

Nagarjuna Fertiliser and

Chemicals Ltd.


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Industry Snapshot

The Indian consumer goods industry remains highly fragmented and is classified into two major

segments namely, consumer durables and Fast Moving Consumer Goods (FMCG), which

comprises a wide array of products. The Indian FMCG sector is the fourth-largest sector in the

economy accounting for 5% of the total factory employment in the country.

The industry is mainly driven by changing demographic pattern, increasing disposable income,

entry of new players, greater product awareness and affordable pricing/financing options whichis leading to robust growth of the consumer durables industry.

Penetration level of consumer goods in rural areas comprising 70% of Indias population is still

low indicating the untapped market potential. Wider marketing and distribution network remains

key to increase penetration and market share.

Challenges faced by the industry are adverse monsoon (at times), spurious products, illegal

imports, cost escalation, intense competition, high advertisement cost and complex distribution

system besides the recent economic slowdown.

Duty Structure

Customs Duty

(%)


(%)

Before After Impact

LCD/LED panel 5 0 General Mfg 10 12

Memory card

components formobile handset

5 0 Processed Soya 10 6

Proposal and Impact


Increase in standard excise duty from 10% to

12%

Excise duty on 130 consumer items have been

increased from 1% to 2%

With higher competition in most segments, it will

be difficult for companies to pass on the higher

duty to consumers. Hence, margins will be

impacted.

FMCG AND CONSUMER DURABLES NEUTRAL


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Increase in Tax Slabs Higher disposable income in the hands of

consumers will be positive to FMCG andconsumer durable industry

Impact on companies


Nestl Custom duties on certain products like probiotics and coffee vending

machines have been reduced from 10% to 5% which is offset by rise

in excise duty.

HUL Decrease in excise on certain food products like processed soya from10% to 6% being offset by increase in general excise duty from 10%

to 12%.

Blue Star Rise in excise duty cannot be easily passed on to consumers given

high competition

Eureka Forbes

Rise in excise duty cannot be easily passed on to consumers given

high competition


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Industry Snapshot

India is the world's largest processing centre for G&J and the industry contributed

approximately 17.5% to the total export earnings of the country during FY11.

In FY11, the G&J domestic market size was valued at approximately US$27.5 billion and

exports amounted to US$43.14 bn. CARE Research expects sale of domestic G&J sector, to

grow by approximately 15% CAGR till FY2016 and G&J export market to grow at 12% CAGR

during the same 5 year period.

The key drivers for growth in the domestic market will be higher disposable income, rising

young population with the urge to spend, higher number of working women and conscious

marketing efforts of the companies. Consumption growth will come from metropolises and

Tier-I and II cities.

Duty Structure

Customs Duty

(%)


(%)

Before After Impact

Gold bars &gold coins(`per 10 gm),Platinum

2 4 Gold bars &

gold coins(`per 10 gm)

2 3

Silver(`per kg)

6 6 Silver and articlesof silver

1 0

Non StandardGold

5 10

Gold and articlesof gold

1.5 3

C&P Colouredgemstones

0 2

GEMS AND JEWELLERY NEGATIVE


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Proposal and Impact


Increase in custom duty on gold bars, coins

and gemstones alongwith refined gold

The GJ products would become more expensive

and would impact purchasing power of the

consumers as prices are already high of these

products.Custom duty on polished colored gems has

been introduced at 2% and on platinum it

has been increased to 4% from 2% earlier

Impact on companies


Gitanjali

Gems Though the companies will pass on the increased duty, purchasing power

of the consumers would be impacted due to already high prices of these

products and high inflation. Sales volumes could see slight impact.Titan

Industries


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Industry Snapshot

The Indian healthcare industry is estimated to be valued at `2.8 tn in size in FY11, growing at a

5-year CAGR of 13.1% p.a. The hospital industry accounts for roughly 70% of total healthcare

market. The Indian hospital industry can be broadly categorized as 1) highly fragmented in nature

due to large presence of unorganized players, 2) capital-intensive with long gestation period, 3)

positive supply-demand fundamentals, 4) favourable government policies and 5) attractive

business model for long-term investors with project IRR of 15-17%.

Indian government targets to increase the share of public expenditure on health to at least 2.0%-

2.5% of GDP by the end of 12th five year plan (FY13-17) from the current level of around 1.3%

of GDP, which is well below the emerging market average of 3.0%. The government has used its

own resources to focus on delivery of effective and affordable healthcare services to the

vulnerable sections of population by setting up primary clinics in rural areas, while encouraging

private sector to meet the growing demand of quality health services in the form of favourable

investment policies.

Organized corporate hospitals form


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Increase in investment-linked deduction of

capex from 100% to 150% u/s 35AD

At present, the government allows 100%

deduction of capex (excluding cost of land,goodwill and financial instruments) for setting

up a new hospital with at least 100 beds

anywhere in India under Sec 35AD. The

proposed increase in investment-linked

deduction is expected to boost more private

investment into the sector.

Impact on companies


Fortis

Healthcare The increase in investment-linked deduction of capex from 100% to

150% will positively benefit the company on the ongoing/new capex plan

Apollo

hospital The increase in investment-linked deduction of capex from 100% to

150% will positively benefit the company on the ongoing/new capex plan


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Industry Snapshot

Indian Logistics industry is highly fragmented and can be classified into seven broad categories:

rail freight, Container Freight Stations/ Inland Container Depot, Multi-modal Transport

Operator, coastal shipping, trucking, warehousing and express logistics. However over the past

few years the concept of third party logistics (3PL) have evolved which involves bundling of

various logistics services such as warehousing, inventory management, transportation, freight -

forwarding and packaging.

The domestic logistics industry is growing at 8-10% per annum and is currently estimated at

USD 225 billion. The warehousing segment which forms an important constituent of logistics

value chain is dominated by small players with limited capacity. As of March 2011, India has a

warehouse space of around 1800-2000 million sq ft. However, most of the warehouses in India

are small in size- between 5000 to 25,000 sq ft as compared to 2,50,000 to 1 million sq ft in the

US or Western Europe.

The overall cost of the logistics in India is estimated to be 13% of GDP. This is on the higherside as compared to 8-9% of the GDP in US. The reason for the same being structural

inefficiencies resulting from poor infrastructure, inconsistent tax system, rail haulage rates,

wastages in truck transport due to congestion, octroi duty on truck transportation and no tax

incentives. The major growth drivers for the sector would be increasing investment in

warehousing, CFS/ICD and Multimodal Logistics Park, reduction of documentation and

introduction of GST (Goods and Service Tax), uniform toll policy, granting of infrastructure

status to the sector as a whole etc.

Duty Structure


Service Tax 10% 12%

LOGISTICS & WAREHOUSING NEUTRAL


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Proposal and Impact


GST introduction timeline not announced The expected benefits to the industry remains

delayed.

Investment linked tax deduction of capital

expenditure at an enhanced rate of 150% as

against the current rate of 100% for cold

chain facility and warehouses (including

CFS/ICD)

Expected to draw fresh investments from

unconventional sources thus enhancing the

storage capacity.

Big boost to grain storage capacities

Central assistance of `18,500 crore (over aperiod of 5 years) to be provided to the Delhi

Mumbai Industrial Corridor.

Expected to expedite the work on the same,improving the transportation efficiency.

Several measures to increase investments in

roads

Reduction in transportation bottlenecks

Impact on companies


Continental Warehousing

Corporation (Nhava Sheva) Enhanced benefits for investment linked

deductions

National Collateral Management

Services

Boost to grain storage capacities with

enhancement of investment linked deduction on

capital expenditure and funding available to

warehouse receipts.

Agility Logistics

Rise in service tax rate is expected to affect the

profitability


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Industry Snapshot

Media and Entertainment industry is highly fragmented and is classified into various segments

namely, Television, Print, Film, Radio, Music, Out of Home, Animation and VFX, Gaming and

Digital Advertising. As per FICCI KPMG Report, Media and Entertainment industry grew at

11.7% yoy in 2011 to `728 bn backed by digitalisation, increasing penetration in Tier 2 and Tier

3 cities, regionalisation and new media business. Television (45%), Print (29%) and Film (13%)

continue to be the major contributing sectors to the industry. The advertising segment, which is

a key contributor to the M&E industrys revenue (41%), grew at 13% yoy in 2011 to `300 bn

wherein Print Segment accounts for 46% of the advertising pie.

Industry is estimated to grow at CAGR of 14.9% (2011-2016) driven by strong growth in

segments like gaming, digital advertising, Radio and Animation & VFX. However similar to the

past trend, Television (CAGR growth (2011-16)): 17% and Print (CAGR growth (2011-16)): 9%

followed by Film (CAGR growth (2011-16)): 10% shall continue to dominate the sector. Going

forward, the potential for advertising spends remains strong and is expected to grow at a CAGR

of 14.3% (2011-2016) to reach`

586 billion in 2016.

Some of the key growth drivers for the sector are increasing Digitalisation due to changing

regulatory policies, Regionalisation, New Media and Social Media. Challenges for the sector (like

piracy and inadequate industry measurement systems) leading to revenue leakages are being

addressed albeit gradually.

Duty Structure


Service Tax on copyrights relating torecording of Cinematographic films

10 0

Proposal and Impact


Service Tax exemption on copyrights relating

to recording of Cinematographic films

Lower cost for various players in the value chain

of Film Industry

MEDIA AND ENTERTAINMENT POSITIVE


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Customs Duty (%) Before After Impact Excise Duty (%) Before After ImpactZinc Concentrates 2.5 2.5 Refined Lead 10 12

Refined Zinc 5 5 Non-Coking Coal 0 0 Lead Concentrates 2.5 2.5 Petroleum Coke 10 12

Refined Lead 5 5 CalcinedPetroleum Coke

10 12

Non-Coking coal 5 0

Petroleum Coke 2.5 2.5

Calcined PetroleumCoke 0 0

Proposal and Impact


Increase in Excise Duty from 10% to 12%

on all non-ferrous metal products.

Increase in excise duty is likely to be completely

passed on to the end-users, owing to the positive

demand-supply outlook.

Relaxation in Customs Duty for thermal coal

from the existing 5% to Nil and nickel ore

and concentrates from 2.5% and 7.5% to Nil

Relaxation of Customs Duty on coal from the

existing 5% to Nil is likely to reduce cost of

captive power generation plants. Further

relaxation in customs duty for nickel ore and

concentrate will prove beneficial in importing

cheaper raw material requirements.

Impact on companies


Sterlite Industries

India Ltd. Complete pass through of rise in Excise duty and partial

benefits in cost reduction to the extent of imported coal if any.

Hindalco Ltd.

Complete pass through of rise in Excise duty and partialbenefits in cost reduction to the extent of imported coal if any.

NALCO


Hindustan Zinc Ltd.



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Industry Snapshot

Oil & Gas sector is dominated by few players mainly Public Sector Undertakings. The sector

primarily consists of three segments namely Exploration & Production aka upstream, Refining

and Marketing. The sector caters to the energy needs of the economy and hence is directly linked

to the economic activity of any country or region. It is a highly regulated sector and operated

primarily by government-promoted companies.

Prices of sensitive petroleum products are regulated by government hence oil marketing

companies incur huge under-recoveries. The 9-month under-recovery reported at the end of

December 2011 was `97,313 crore. The continued incurrence of under-recoveries by Oil

Marketing Companies OMCs is adversely affecting their financial and liquidity position.

Borrowing of OMCs (in thousand crores)

Source: RAJYA SABHA STARRED QUESTION NO. 126

Our economy is highly dependent on imported crude oil for various petroleum products as the

domestic crude oil production merely accounts for 20 per cent of the consumption. This makes

us further vulnerable to not only international crude oil prices but also to exchange rates.

Falling output of indigenous natural gas has made us more dependent on the international

markets for LNG imports. The dependency on LNG is paralyzed by infrastructure bottlenecks

such as regasification capacity.

Diesel contributes to around 40 per cent of all petroleum products in India followed by LPG and

Petrol. India possesses excess refining capacity and therefore exports petroleum products except

for Liquefied Petroleum Gas wherein we are in deficit and import LPG.

OIL AND GAS NEGATIVE


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Duty Structure

Customs Duty Before After Impact

Liquefied Natural Gas LNG 5% Nil

Cess on Crude Oil Imports 2,500/MT 4,500/MT

Proposal and Impact


Oil & Gas pipeline

infrastructure eligible forviability gap funding

The proposal would act like a catalyst thereby increasing

investments into the pipeline infrastructure.

Removal of 5 per cent custom

duty on LNG imports

Currently, regasification capacity is in deficit i.e. there is ample

demand for imported LNG. Hence removal of custom duty

would not have any impact on the current situation.

Increase in cess on imported

crude oil from `2,500/MT to

`4,500/MT

India is heavily dependent on imported crude oil. The proposal

would adversely impact on both refiners as well as marketers.

The exporters would not be able to pass on the cess to importers

as prices of petroleum products are determined in Internationalmarkets. Further, the budget was not able to throw light on

much awaited petroleum product pricing mechanism. The

present opaque pricing mechanism of petroleum products would

adversely impact the industry considering the mounting subsidies

on the back of increasing crude oil prices. The new cess rate on

imported crude oil would only amplify the worsening situation.

Impact on companies

Company Impact CommentsPetronetLNG

Removal of 5% customs duty on LNG will have neutral effect on thecompany as it is already running full capacity.

Reliance Largest refinery and biggest importer of crude oil would be adverselyimpacted by the increase in cess on imported crude oil.

GAIL GAIL, the major gas transporter would slightly benefit from the proposedinclusion of pipeline infrastructure in viability gap funding. There wasno solution to the core problem of acquisition of land for laying pipelines.


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Industry Snapshot

India is the 15th largest paper manufacturer in the world, accounting for around 2.5% of the

worlds output. Demand for paper sector is closely-linked to economic activity as demand has

grown at an average of 0.9x multiple of GDP in the past 5 years. The industry can be broadly

characterized as 1) capital, energy and water intensive, 2) highly fragmented structure and 3) poor

economies of scale due to use of obsolete technology. Raw-material, energy and stores and

spares (including chemicals) forms about 75-80% of the total operating costs for the paper

industry.

India is selfsufficient in most paper segments, except for newsprint and higher grades of P&W

papers. The country imports roughly 35% of coated woodfree paper demand and 50% of

newsprint demand. On the raw-material front, the industry imports roughly 33% of its pulp

requirement (both wood and recycled) to meet the domestic demand.

The industry has experienced a very sharp fall in margin in FY12 due to imbalance of demand-

supply fundamentals and significant increase in raw-material and fuel costs. The domestic paperproducers are finding difficult to pass on the costs due to significant increase in domestic

capacity and increase in imports. As per the recent statistics, paper imports as a percentage of

consumption has increased from 22% in March 2011 to 31% in July 2011.

Duty Structure Finished goods

Customs Duty(%)

Before After Impact Excise Duty(%)

Before After Impact

Paper &Paperboard

10 10 Paper &Paperboard

5 6

Newsprint Exempt Exempt Newsprint 5 6

PAPER AND PAPER PRODUCTS NEGATIVE


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Duty Structure Raw-material

Customs Duty (%) Before After Impact

Wood Pulp 5 5

Wastepaper 2.5 0

Coal 5 0

Proposal and Impact


Increase in excise duty from 5% to 6% Paper players may face difficulty to pass on theentire increase in excise duty to end customers

due to excess supply over demand

Increase in excise duty on chemicals & other

inputs from 10% to 12% and decrease in

custom duty on wastepaper/coal from

2.5%/5% to nil

Profitability of the paper industry will be

adversely impacted as the impact of increase in

excise duty on chemicals and other inputs would

more than offset the benefit from exemption of

custom duty on waste paper and coal

Increase in budgetary allocation for education

by 21% to `74,000 crores in FY13

Will positively impact the demand for printing

and writing papers

Impact on companies


Emami

Paper The impact of hike in excise duty from 5% to 6% on finished products

and increase in excise duty on chemicals & other inputs from 10% to

12% would more than offset the benefit of exemption of custom duty

on waste paper and coal

BILT/JK

Paper Margins would be adversely impacted due to retention of import duty

on finished products and wood pulp, hike in excise duty on finished

products and other inputs


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Industry Snapshot

The Indian Pharmaceutical Industry (IPI) has a market size of`117,860 cr as on March 2011

and is expected to grow at a CAGR of 13.4% between FY10 and FY15E.

The branded generics dominate about 90% of the total sales which includes the OTC segment

and the remaining 10% constitutes of commodity generics. Going forward, CARE Research

believes there will be increased demand of drugs for lifestyle related diseases such as oncology,

obesity, respiratory, cardiovascular, CNS diseases and immune system disorders given rapidurbanization and increase life-expectancy.

Indian pharma industry exports to more than 200 countries including highly regulated markets

like the US and Europe. Export market which constitutes 41% of the total IPI sales in FY2011

has shown a robust growth rate of approximately 19% y-o-y over the 5-year period ending

FY2011. Contract Research & Manufacturing Services is also considered an important growth

driver for pharma exports

CARE Research expects this positive trend in the Indian pharmaceutical industry to continue in

the coming years on the back of its manufacturing prowess coupled with a large domestic

market having strong macroeconomic growth, expansion of healthcare infrastructure (private

and public), rising incidence of chronic diseases and healthcare penetration to the extended

urban and rural regions.

Duty Structure

Customs Duty (%) Before After Impact Excise Duty(%)

Before After Impact

Bulk Drugs & Vaccines 5 5

Bulk Drugs & Vaccines 10 12

Formulations 10 10

Formulations 5 6

Medical Devices 5 5

Medical Devices 0 0

PHARMACEUTICALS NEUTRAL


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Proposal and Impact


Extended the weighted deduction on R&D

expenditure to 200% for in-house research

for the next five years till FY2017

Positive for the companies as this would widen

the scope of R&D in the industry

MAT announced for partnership units Negative for companies that have partnership

unit, as it would result in higher tax outflow.

Impact on companies


Sunpharma

Industries

The share of profit from the partnership unit holding 97.5%(approximate 30% of Sunpharmas revenue) would witnessadditional tax burden.

Dr. Reddys Extension of weighted R&D deduction till FY17.

Cadila Healthcare The share of profit from the partnership unit holding 96%(approximately 20% of Cadilas revenue) would witness

additional tax burden.Ranbaxy Lab

Extension of weighted R&D deduction till FY17.

Divis Lab Excise duty increase on bulk drugs and formulation would bepassed on to innovator companies


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Industry Snapshot

Historically, Indian power sector commissioned only half the targeted capacity addition for most

of the 5-year plans. However, with private sector entry, the country added ~52.6GW in 11th

Plan (v/s initial target of 78 GW) till February, 2012. At this juncture, the Indian Power sector is

grappling with twofold problems-1) financial distress of distribution companies leading to

inability to pay and 2) fuel shortages leading to capacity under-utilization.

The power sector is facing acute coal shortage as domestic coal production grew only at 4.6%CAGR during FY09-11, vis-a-vis a demand growth of 6.6%. The 12th Plan capacity addition is

expected to be 76GW, with ~60GW as coal based. However, the existing and upcoming power

plants are likely to face acute coal shortage due to Coal Indias inability to ramp up coal

production

CARE Report on Union Budget 2012-13

Documents

Transcript of CARE Report on Union Budget 2012-13