Union Budget Analysis 2014-15

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Auto Components ...........................12-13

Automobiles ....................................14-15

Banking & Financial Serv .................16.17

Cement ...........................................18-19

Coal ......................................................20

Construction ...................................21-23

Consumer Durables ........................24-25

Education .............................................26

Engineering & Cap. Goods ..............27-28

Fertilizers .........................................29-30

FMCG ..............................................31-32

Gems & Jewellery ...........................33-34

Hospitals and Healthcare ................35-36

Hotels ...................................................37

IT and ITES .......................................38-39

Media ...................................................40

Mining and Minerals .......................41-42

Non-ferrous Metals .........................43-44

Oil and Gas ......................................45-46

Pipes ...............................................47-48

Ports .....................................................49

Power (incl renewables)..................50-51

Real Estate ......................................52-53

Roads and highways ........................54-55

Shipping ...............................................56

Steel ................................................57-58

Sugar ....................................................59

Textiles ............................................60-61

Warehouse/ Logistics ...........................62

TABLE OF CONTENTS Economic Survery 2013-14 .......................................................... 2-3

Railway Budget 2014-15 .............................................................. 4-5

Union Budget 2014-15 ............................................................... 6-11

Sectors

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The Ministry of Finance today released the Economic Survey for the year 2013-14.

The Survey based on developments of FY14, draws out a cautious picture of the year gone by, emphasizing the continued need for reforms in the coming months with an outlook for the next fiscal pointing towards gradual improvements.

Current Marco-economic Scenario

The Survey notes that India’s current economic slowdown is deeply rooted in domestic weakness. Monetary tightening had been inevitable in the face of increased external headwinds and spiking inflation on account of inadequate supply-side constraints. The macro-economic scenario in FY14 has hence been characterized by -

• Moderation in growth

• Growth in FY14 settled at 4.7% , growth slowdown was mainly driven by the industry sector

• Elevated price levels

• WPI has registered some moderation at 6%, CPI remains high at 9.5%; food inflation resurfacing

• Improved Balance of Payments

• Current account deficit (CAD) declined sharply from a record high of US $ 88.2 billion (4.7% of gross domestic product GDP) in 2012-13 to US $ 32.4 billion (1.7% of GDP) in 2013-14.

• Foreign exchange reserves increase to $ 304.2 billion at end March 2014

• Fiscal deficit contained at 4.5% (below target) despite macroeconomic challenges of growth slowdown, elevated crude oil prices and low levels of investments

Table 1: Domestic Macro-economic Indicators (%)

FY10 FY11 FY12 FY13 FY14

GDP growth 8.6 8.9 6.7 4.5 4.7

Inflation 3.8 9.6 8.9 7.4 6.0

Savings 33.7 33.7 31.3 30.1 -

Investment 36.5 36.5 35.5 34.8 -

Source: Economic Survey 2013-14

Table 1 above gives a snapshot of the domestic macro-economic indicators. Table 2 below highlights the performance in the external sector.

Table 2: External Sector

FY11 FY12 FY13 FY14

Trade

Exports growth (%) 40.5 21.8 -1.8 4.1

Imports growth (%) 28.2 32.3 0.3 -8.3

CAD (% of GDP) 2.8 4.2 4.7 1.7

Net Foreign investment ($ bn)

FDI 11.8 22.1 19.8 21.6

Portfolio Invt. (FII) 30.3 17.1 26.9 4.8

Forex Reserves 304.8 294.4 292.0 304.2Source: Economic Survey 2013 - 14

Government Reaction

The government aims at reforms for growth on three fronts namely,

• Low & stable inflation regime

• Tax and expenditure reforms

• Regulatory framework

Provisions commensurate with these macro-targets are likely to reflect in Budget 2015, to be announced tomorrow. Moderation in inflation would ease the monetary policy stance and revive the confidence of investors, and with the global economy expected to recover moderately, particularly on account of performance in some advanced economies, the economy can look forward to better growth prospects in 2014-15 and beyond.

Proposed Strategy

• Priority of fighting inflation –

o work towards a low and stable inflation rate through fiscal consolidation

o Establishing monetary policy framework and creating a conducive environment for a competitive national market for food

• Strengthening of fiscal balances –

o New Fiscal Responsibility and Budget Management

Economic Survey: 2013-14

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(FRBM) Act, better accounting practices and improved budgetary management

o Simple, predictable and stable tax regime - a single-rate goods and services tax (GST), a simple direct tax code (DTC), and a transformation of tax administration

o Prioritization of expenditure reforms involving three elements: shifting subsidy programmes away from price distortions to income support, a change in the focus of government spending towards provision of public goods, and a systems of accountability through a focus on outcomes

• Business Confidence –

o Increasing concern about the difficulties faced by firms

o Need to simplify processes including those relating to tax policy and administration.

• Well developed corporate market –Various policy reform measures were implemented in consultation with all market regulators and the Ministry of Corporate affairs (MCA) to improve the regulatory regime and stimulate the growth of the corporate bond market:

o Strengthening of the legal framework for regulation of corporate debt by amendments in SARFESI Act and Income Tax Act.

o Relaxation of investment guidelines for pension funds, provident funds, insurance funds, etc.

o Introduction of new products or removal of legal or regulatory constraints for nascent products such as covered bonds, municipal bonds, credit default swaps, credit enhancements, and securitization receipts.

o Amendment in definition of deposit in Companies (Acceptance of Deposits) Rules 1975.

o Development of securitized debt market by ensuring clarity in taxation policy for securitized debt.

o Rationalization of withholding tax (WHT) on FIIs for G-Secs and corporate bonds.

o Relaxation of investment norms of insurance / pension funds

o Insurance companies allowed participating in the repo market to increase liquidity. The RBI also reduced the minimum haircut requirement in corporate debt repo. Repo in corporate debt also permitted on commercial papers, certificates of deposit, and non-convertible debentures of less than one year of original maturity.

o Insurance companies and mutual funds allowed participating as market makers in credit default swap (CDS) market

o Setting up of central counter party (CCP) and creation of trade guarantee fund for trading in corporate bonds in stock exchanges.

o New trading platform and risk management system for corporate bonds including a centralized database on outstanding amount, settlement value, and traded volume to eliminate fragmentation of information

Outlook for FY15

• GDP growth likely to be in the range of 5.4% - 5.9%

o downside risks to the economy arising from a poor monsoon, the external environment and the poor investment climate

• CAD to be limited to around $ 45 billion, 2.1% of GDP

• Easing of supply-side constraints should lead to lower inflation, such that RBI has room to lower interest rates to boost investments and growth.

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Financial Performance: 2013-14

• Railways carried 1050.18 MT during the year. The goods earnings fell short of its estimates by Rs.94 crore. Passengers were also less by 46 million over revised target and its earnings were short by Rs.968 crore over the revised target.

• Gross traffic receipts grew by 12.8% to reach Rs. 1,39,558 crore while the ordinary working expenses stood at Rs. 97,571 crore which was in excess by Rs.511 crore.

• Surplus for the year was Rs.3,783 crore after fulfilling the dividend commitment of Rs. 8,010 crore.

• Internal revenue generation for FY14 was Rs. 11,170 crore against the revised target of Rs. 14,496 crore.

• Operating ratio deteriorated by 2.7% over the revised target to touch 93.5%.

• The plan expenditure fell short of targets of Rs.59,359 core on account of non- materialization of PPP projects.

Budget Estimates: 2014-15

• Freight traffic growth pegged at 4.9% amounting to 1,101.25 MT while earnings estimated at Rs.1,05,770 crore

• Passenger growth pegged at 2% with earning of Rs. 44,645 crore.

• Ordinary Working Expenses proposed at Rs.1,12,649 crore.

• Pension outgo trend retained at Rs.28,850 crore

• Plan outlay under budgetary sources – Rs. 47,650 crore

• Market borrowings scaled down to Rs. 11,790 crore from Rs.19,805 crore.

• Surplus for FY15 is estimated at Rs.602crore

• Operating ratio to come down from 93.5% to 92.5% in FY15.

Key measures

In an effort to improve railway services the following announcements have been made-

• Will offer Wi-Fi-services in all ‘A’ category trains and A1 stations.

• Digitization of reservation charts at stations

• Working on making railway offices paperless in five years.

• E-ticketing through mobile phone as well as expanding the scope of online booking

• Provision of escalators, lifts via PPP route at all major stations

• CCTVs will be installed at major stations in order to keep a check on cleanliness

• Recruit 4,000 Women as RPF constables for strengthening safety and security.

• Revamping of the entire reservation system

• Outsource cleaning services in railways

• Launch of new train routes

• Construction of 1785 road under bridges and road over bridges

• High speed bullet trains to be launched.

Measures to improve efficiency

• Proposed to restructure Railway Board

• Aims to utilize the station rooftops to harness soar energy

• E-procurement compulsory for procurement over Rs.25 lakh

• Status of ongoing projects to be made available online.

• Proposed to set up project formulation and management group

• Independent Rail Tariff Authority Set-Up to Advice on Fares and Freight

Budget Implications

• Firstly, the increase in freight rates of 6.5% across the board will affect prices of goods that use railways as a mode of transport. For the industry as whole the average increases of over 6.5% in freight rates will push up the cost of production which in turn will exert pressure on prices of final products. There could be migration to road transport though the higher cost of diesel on account of the price being calibrated to the market could be a countervailing factor.

Highlights of Railway Budget: FY15

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• The increase in freight rates (6.5%) and the increase in passenger fares (14.2%)together would result in additional revenue mop up of Rs 8,000 crore. This is likely to partly offset the increasing cost during the year.

• Passenger friendly measures such as e-ticketing system, e-ticketing through mobile phones, free Wi-Fi facilities in some trains, escalators and lifts at major stations, CCTVS to monitor stations, large scale computerization,platform and unreserved tickets through internet,etc.have been proposed. These initiatives will largely have a positive impact on various sectors particularly information technology (IT), telecommunication and engineering.

• Besides, expansion of railways with faster clearances of proposed projects in the pipeline will positively boost the demand for industries such as steel, aluminum cables, cement, solar equipment, electrical equipment, etc.

• The modernization of the railways through induction of technology will also help eliminate corruption and bring in more efficiency into the system.

• Share of freight traffic earnings shall increase furtheras no shift towards substitutes such as road transport is expected with hike in diesel prices already in place.

• The Budget provides significant opportunities for Public investments via PPP mode. It also seeks to bring in resources through FDI mode. Over Rs 6000 cr is to be mobilized through this route. To make it more attractive tax holidays have been proposed.

• Borrowings through IRFC would be Rs 11,790 cr, which presumably would be tax free bonds. This will be useful for households and complement any effort in the Union Budget to enhance the savings rate.

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Budget Highlights:

Table 1: Summary Table

Rs Crore FY11 FY12 FY13 FY14 RE FY15 BE

Revenue Receipts 7,88,471 7,51,437 8,77,613 10,29,252 11,89,763

Tax revenue(net to centre) 5,69,869 6,29,765 7,40,256 8,36,026 9,77,258

Non – tax revenue 2,18,602 1,21,672 1,37,357 1,93,226 2,12,505

Capital Receipts 4,08,857 5,68,918 5,83,387 5,61,182 6,05,129

Recovery of loans 12,420 18,850 16,268 10,802 10,527

Disinvestment of Equity in PSEs 22,846 18,088 25,890 25,841 63,425

Internal debt (market borrowings) 3,25,414 4,36,211 4,67,356 4,53,902 4,61,205

External borrowings (Net) 23,556 12,448 7,201 5,441 5,734

Total Receipts 11,90,899 13,20,355 14,10,367 15,90,434 17,94,892

Revenue Expenditure 10,40,723 11,45,785 12,43,509 13,99,540 15,68,111

Interest payments 2,34,022 2,73,150 3,13,170 3,80,066 4,27,011

Subsidies 1,73,420 2,17,941 2,57,079 2,55,516 2,60,658

Pensions 57,405 61,166 69,479 74,076 81,983

Capital expenditure 1,56,605 1,58,580 1,66,858 1,90,894 2,26,781

Total Expenditure 11,97,328 13,04,365 14,10,367 15,90,434 17,94,892

Revenue Deficit 2,52,252 3,94,348 3,65,896 3,70,288 3,78,348

Fiscal Deficit 3,73,591 5,15,990 4,90,597 5,24,539 5,31,177

Primary Deficit 1,39,569 2,42,840 1,77,428 1,44,473 1,04,166

Table 2: Borrowing Position Rs Crore FY11 FY12 FY13 FY14 RE FY15 BE

Internal borrowings

Net Borrowings 3,25,414 4,36,211 4,67,356 4,53,902 4,61,205

Gross Borrowings 4,37,000 5,09,796 5,58,000 5,63,911 6,00,000

Repayments 1,11,586 73,585 90,644 1,10,009 1,38,795

External Borrowings

Net Borrowings 23,556 12,448 7,201 5,441 5,734

Gross Borrowings 35,330 26,034 23,309 23,565 28,175

Repayments 11,774 13,586 16,108 18,124 22,441

Table 3: Major Subsidies

Rs Crore FY11 FY12 FY13 FY14 (RE) FY15 (BE)

Major Subsidies 1,64,516 2,11,319 2,47,493 2,45,452 2,51,397

Food Subsidy 63,844 72,822 85,000 92,000 115,000

Fertilizer Subsidy 62,301 70,013 65,613 67,972 72,970

Petroleum Subsidy 38,371 68,484 96,880 85,480 63,427

Union Budget 2014-15

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1. Outline and Initiatives Fiscal Outline

• The Revenue receipts are budgeted to increase by 15.6% to Rs 11,89,763 crore in FY15 (BE).

o Tax revenue is expected to rise to Rs 9,77,258 crore, marking a growth of 16.9%.

o Non-tax revenue is estimated to stand at Rs 2,12,505 crore, a growth of 10% over that in FY14 (RE).

• Total expenditure of the Government in FY15 is estimated to reach Rs 17,94,892 crore, 10.9% higher than that in FY14 (RE).

o Plan expenditure which accounts for 32% of the total expenditure is estimated at Rs 5,75,000 crore, a growth of 20.9% over the last fiscal.

o Non-Plan expenditure which accounts for 68% of the total expenditure is budgeted to increase by 9% to Rs 12,19,892 crore in FY15 (BE).

• The Revenue deficit is budgeted to decline to 2.9% of GDP in FY15 (BE) from 3.3% in FY14 (RE). The revenue deficit in absolute figure is estimated to be Rs 3,78,348 for FY15 (BE).

• The Fiscal deficit target is maintained (as in interim budget) at 4.1% of GDP in FY15 (BE), lower than the 4.6% of FY14 (RE).

• Government’s net borrowing has been revised upwards to Rs 4,61,205 crore in FY15 (BE) from Rs 4,53,902 crore in FY14 (RE).

• The disinvestment target in the current fiscal is estimated to rise to Rs 63,425 crore from Rs 25,841 crore in FY14 (RE).

• The subsidy bill is expected to rise marginally (2%) from Rs. 2,45,451 crore to Rs 2,51,397 crore.

o The fertilizer subsidy is to increase to Rs. 72,970 crore in FY15 (BE) from Rs 67,972 crore in FY14 (RE).

o The food subsidy has increased significantly from Rs 92,000 crore in FY14 (RE) to Rs 1,15,000 in FY15 (BE).

o Petroleum subsidy has moderated to Rs 63,427 crore in the ongoing fiscal from Rs. 85,480 crore in FY14.

Tax Proposals

• Personal Income-tax exemption limit raised by Rs.50,000- that is, from Rs.2 lakh to Rs.2.5 lakh in the case of individual taxpayers, below the age of 60 years.

Exemption limit has been raised from Rs.2.5 lakh to Rs.3 lakh in the case of senior citizens.

• No change in the rate of surcharge either for the corporates or the individuals, HUFs, firms etc.

• The education cess to continue at 3%.

• Investment limit under section 80C of the Income-tax Act raised from Rs.1 lakh to Rs.1.5 lakh.

• On the indirect tax front, reductions have been made in customs and excise duty aimed at giving the manufacturing sector a boost.

Infrastructure Initiatives

• A sum of Rs.7,060 crore is provided in the current fiscal for the project of developing “one hundred Smart Cities.

• An institution to provide support to mainstreaming PPPPs called 4PIndia to be set up with a corpus of Rs.500 crore.

• Banks to be allowed to raise long term funds for lending to infrastructure sector with minimum regulatory pre-emption such as CRR, SLR and priority sector lending.

• As an innovation, a modified REITs (Real Estate Investment Trust) type structure for infrastructure projects is also being announced as Infrastructure Investment Trusts (InvITs) which would have a similar tax efficient pass through status, for PPP and other infrastructure projects.

• Inland Navigation: Project on Ganges called “Jal Marg Vikas’ to be developed between Allahabad and Haldia.

• New Airports: Scheme for development of new airports in Tier I and Tier II Cities to be launched.

• Road Sector:

o An investment of an amount of Rs.37,880 crore in NHAI and State Roads is proposed which includes Rs.3,000 crore for the North East.

o Target of NH construction of 8,500 km to be achieved in current financial year

o Work on select expressways in parallel to the development of the Industrial Corridors will be initiated. For project preparation NHAI is to be set aside a sum of Rs.500 crore.

o PMGSY has been provided sum of Rs.14,389 crore in FY15 budget.

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• Railways:

o A sum of Rs. 100 crore to be allocated for metro projects in Lucknow and Ahmedabad.

• Shipping:

o Rs.11,635 crore will be allocated for the development of Outer Harbour Project in Tuticorin for phase I.

o SEZs will be developed in Kandla and JNPT.

o Comprehensive policy to be announced to promote Indian ship building industry.

• Energy:

o 10 year tax holiday extended to the undertakings which begin generation, distribution and transmission of power by 31.03.2017

o An exercise to rationalize coal linkages to optimize transport of coal and reduce cost of power isbeing considered..

o Rs.400 crores provided for a scheme for solar power driven agricultural pump sets and water pumping stations.

o Rs.100 crore is allocated for a new scheme “Ultra-Modern Super Critical Coal Based Thermal Power Technology.”

o Comprehensive measures for enhancing domestic coal production are being put in place.

o The budget also proposes Rs.200 crore for power reforms along with Rs. 500 cr for rural power plan for New Delhi.

Social Initiatives

• New programme “Neeranchal” to give impetus to watershed development in the country with an initial outlay of Rs.2,142 crore.

• Allocation for National Housing Bank increased to Rs.8,000 crore to support Rural housing.

• An amount of Rs.50,548 crore is proposed under the Schedule Cast Plan and Rs. 32,387 crore under Tribal Sub Plan (TSP)- Schedule Tribe.

• For the welfare of the tribals “Van Bandhu Kalyan Yojna” launched with an initial allocation of Rs.100 crore.

• Outlay of Rs.50 crore for pilot testing a scheme on “Safety for Women on Public Road Transport”.

• Sum of Rs.150 crore on a scheme to increase the safety of women in large cities

• A sum of Rs.100 crore is provided for “Beti Bachao, Beti Padhao Yojana”, a focused scheme to generate awareness and help in improving the efficiency of delivery of welfare services meant for women.

Agriculture Initiatives

• A sustainable growth of 4% in Agriculture will be achieved in FY15

• An amount of Rs 100 crores set aside for Agri-tech Infrastructure Fund

• To mitigate the risk of Price volatility in the agriculture produce, a sum of Rs 500 crore is provided for establishing a Price Stabilization Fund

• Central Government to work closely with the State Governments to re-orient their respective APMC Acts

• A target of Rs 8 lakh crore has been set for agriculture credit during FY15

• Corpus of Rural Infrastructure Development Fund (RIDF) raised by an additional Rs 5000 crore

• Allocation of Rs 5,000 crore provided for the Warehouse Infrastructure Fund

• Long Term Rural Credit Fund” to set up for the purpose of providing refinance support to Cooperative Banks and Regional Rural Banks with an initial corpus of Rs 5,000 crore.

• Rs. 1,000 crore provided for “Pradhan Mantri Krishi Sinchayee Yojna” for assured irrigation.

• Restructuring FCI, reducing transportation and distribution losses and efficacy of PDS to be taken up on priority.

• New Urea Policy to be formulated

Industry Initiatives

• Rs. 100 crore provided for setting up a National Industrial Corridor Authority.

• Proposed to establish an Export promotion Mission to bring all stakeholders under one umbrella.

• Apprenticeship Act to be suitably amended to make it more responsive to industry and youth

• Sum of Rs 500 crore for developing a Textile mega-cluster at Varanasi and six more at Bareilly, Lucknow,

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Surat, Kutch, Bhagalpur and Mysore

• Rs 10,000 crore provided through equity venture capital funds, quasi equity, soft loans and other risk capital specially to encourage new startups by youth to be set up in MSME sector

• Introduction of GST to be given thrust

Banking Initiatives

• Requirement to infuse Rs 2,40,000 crore as equity by 2018 in our banks to be in line with Basel-III norm

• Banks to be encouraged to extend long term loans to infrastructure sector with flexible structuring, to be permitted to raise long term funds for lending to infrastructure sector with minimum regulatory pre-emption such as CRR, SLR and Priority Sector Lending (PSL)

Financial Sector

• Introduction of uniform KYC norms and inter-usability of the KYC records across the entire financial sector.

• Introduce one single operating demat account.

• Uniform tax treatment for pension fund and mutual fund linked retirement plan.

2. Impact Analysis on various components of GDP(i) AgricultureThe government aims at a 4% growth in agriculture in this fiscal and to achieve this growth it plans to undertake various measures. The government has stated its aim for a second green revolution and has laid out measures to improve technology & investment to make the sector competitive. It has made allocation for the short & long term investment in the sector and for an agri – infrastructure fund. Higher provision of credit at Rs 8 lakh crore to agriculture marking a 20% increase over the agricultural credit last year while also being higher than the increase in overall credit disbursed by banks. This will help to improve the production and logistics for various crops. Also, the continuation of interest rate subvention is timely, as it will help provide the much needed funds to farmers and help ease their financial burden to an extent at a time when they are pressured by sub-normal monsoons. Other initiatives such as making allocations for warehousing and intent on reorienting the long overdue APMC Act would benefit both the producers and the

consumers. NREGA ProgrammeNREGA in the past has not been too successful in producing meaningful public assets. The government aims at redesigning the programme by providing employment for more productive, asset creation which has linkages to agriculture & allied activities. The allocation towards this programme has been retained at around Rs 33,000 crore.

(ii) InfrastructureTransportThe government has emphasized the need to accelerate infrastructure development. Government strategy to boost investments in infrastructure segment via PPP mode indicates an increased thrust on the sector. Budgetary allocations to the Ministry of Road Transport and highway for building National Highways and Ministry of Railways for high speed trains such as metros are expected to encourage the transportation and overall logistics segment in India. Increase in allocations to schemes such as PMGSY is expected to improve access for rural population. In addition, the proposed projects to be undertaken to develop roads, airports and railways will also aid in generating employment opportunities. Thus, improvement in overall connectivity across the states in turn shall aid particularly the manufacturing segment activities and drive the overall economic growth.

EnergyThe energy sector has been affected particularly due to shortage in coal thereby severely impacting thermal power generation. The government’s proposal to rationalize coal linkages will have a positive impact on the thermal power plants. Various incentives have been provided such as 10 year tax holiday extended to the undertakings which begin generation, distribution and transmission of power by 31.03.2017. This will further encourage new players to enter the power sector. In addition, the budget also proposes Rs.200 crore for power reforms along with Rs. 500 cr for rural power plan in order to make New Delhi a world class city. It also focuses on undertaking modern power projects. These measures are expected to have a positive impact on the power sector.

In order to boost infrastructure financing, the budget provides various financing measures. Firstly, it lays emphasis on the PPP mode to funds sources for infrastructure projects. Besides, the government has also proposed to allow banks

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to raise long term funds for lending to infrastructure sector with minimum regulatory pre-emption such as CRR, SLR and priority sector lending. Given the increased planned outlay for infrastructure sector, the budget is expected to positive for the infrastructure segment.

(iii) Deficit The government retained the fiscal deficit target of 4.1% from the interim budget. The attainment of the targeted 4.1% of GFD (as a percentage of GDP in FY15), would be contingent on the overall growth of the economy and the consequent increases in revenue. With no major changes on the taxation and revenue front, growth in the same would have to be robust enough to help meet this target.

(iv) DisinvestmentThe government has set a disinvestment target of Rs 63,425 crore for the current fiscal, mainly driven by the current market conditions. There is a disconnection in the current economic conditions and the equity market movements. The movement in the market has been driven mainly by sentiment. With the stock market on an upturn, this could be the right time to offload equity into the market. However, the final decision taken on disinvestment would be company specific. Also it remain to be seen whether disinvestment of this magnitude would be one that involves the entire market or whether it would be done through cross holding of PSUs as has been the case in the past.

(v) Interest rate and liquidityThe long term gross market borrowing plan of the government for FY15 is in line with the envisaged plan in the interim budget at Rs 6,00,000 crore growing by 6.4% compared to last year. However since this amount is not very different from the earlier estimate in the interim budget, there is no pressure expected on the liquidity in the system. Gross borrowings in the form of external assistance are estimated to grow by 19.6% to Rs 28,175 crore from Rs 23,565 crore in FY14.

The net borrowing from the internal debt market is likely to increase slightly to Rs 4,61,205 crore in FY15 from 4,53,902 crore last year. The net borrowing under external assistance will grow by 5.4% to Rs 5,734 crore in FY15.

The implicit interest rate for FY15 appears to have fallen to 6.9% in FY15 from 7.13% in FY14 suggesting that the Government anticipates a decline in interest rate in the

ongoing fiscal. However, this is highly unlikely given the failed monsoon so far, uncertainty in oil prices. Moreover, it appears as though interest rates will continue to be inflation driven and hence are out of the budgetary context.

(vi) DebtPublic debt of the GoI is stated to rise by 11.9% in FY15 to Rs. 49,60,065 crore. Internal debt which accounts for 96% of the public debt is estimated to grow by 12.3% to Rs 47,71,602 crore and external debt will increase by a small 3.1% to Rs 1,88,463 crore. The other liabilities of the Government are estimated to rise by 11% to stand at Rs 62,22,658 crore in Fiscal ’15 from Rs 55,87,149 crore last year.

Table 3: Debt Profile (Rs Cr)

Rs crore FY13 (A) FY14 (RE) FY15 (BE)

Public Debt 39,41,855 44,33,026 49,60,065

Internal Debt 37,64,566 42,50,297 47,71,602

External Debt 1,77,289 1,82,729 1,88,463

Other liabilities 11,28,747 11,54,423 12,62,592

Total debt 50,70,601 55,87,449 62,22,658

(vi) Financial Services: ImpactCapital MarketsThe extension of the 5% withholding tax on all corporate debt issued by Indian corporates abroad would bring about the much needed uniformity in tax treatment of investors. This move could help attract foreign investors towards Indian corporate bonds thereby deepening the bond market. It would also aid corporates in tapping the bond markets to raise funds.

The Government reiterated the importance of deepening the bond market and the currency derivative markets in the country and regulators were urged to lower restrictions on the same.

Single KYC norms and demat account to apply across the entire financial system. This would help households dealing in these markets.

(vii) Inflation: Macro impactWhile the budget announcements are not likely to have any immediate impact on inflation, there are certain steps in the right direction when viewed from the long term perspective. The following conjectures can be drawn based on the announcements and estimates in the budget.

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• The reduction in the duties of manufactured items could ease inflationary pressures in these items.

• The reduction in petroleum subsidy would result in an increase in the prices of petroleum products to be borne by consumers. Petroleum prices could be further pressed by the unrest in Iraq.

• The Government is to increase the warehousing capacity for increasing the shelf life of agriculture produce. Additional scientific warehousing infrastructure in the country will also be set up. This will preserve the earning capacity of farmers and ease the price volatility of agriculture produce.

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Auto Components Industry Snapshot:

During the last decade strong growth scenario in automobile sales has fuelled growth in the auto component industry. Apart from rising demand from local OEMs, the industry also got boost by the entry of global automobile OEMs to seize low-cost advantage of manufacturing in India.

Growing income levels during last one decade translated into strong automobile sales which in turn resulted in high demand for OEM segment. However, last couple of years were challenging for OEM segment due to strained demand for new vehicles from domestic as well as exports market.

The replacement segment had hardly any impact of the economic slowdown on account of the huge existing vehicle population. Moreover, the relatively faster increase in the density of roads has led to greater passenger & cargo movement by roads vis-à-vis rail which too has added to replacement demand.

CARE Ratings believes auto component manufacturers have to derive new strategies like expanding product offering to cater larger end user industry base, focusing on exports markets, improving technology, etc. to negate the impact of demand slowdown. Moreover, the industry would also be benefited on the back of increasing localisation drive by global OEMs in order to cut down cost combined with rising exports. However, complete revival of auto component industry largely depends on recovery of OEM segment which forms around 62 per cent of the industry turnover.

Duty Structure

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

Engine & engine parts, except the below-mentioned

7.5 7.5 = Engine & engine parts 12 12 =

Silencer, exhaust pipes & radiators

10 10 = Drive transmission, steering, suspension & braking parts

12 12 =

Drive transmission, steering, suspension & braking parts, except the below-mentioned

10 10 = Spark plug, distributors, ignition coils & starter motors

12 12 =

Couplings & seals 7.5 7.5 =Spark plug, distributors, ignition coils & starter motors

7.5 7.5 =

Proposal and Impact

Budget proposals Impact on the IndustryPre-budget announcement of extension of excise duty rebate till December 31, 2014, was reiterated by the Finance Minister.

Lower excise duty would translate into lower vehicle prices; consequently, induce growth in demand which would in turn lead to higher demand for auto components.

13

Impact on Companies

Company Impact Comments

Bharat Forge Ltd. +

Pre-budget extension of excise duty cut for automobile industry would boost vehicle demand which would translate into higher demand for auto ancillaries.

Bosch Ltd. +Exide Industries Ltd. +Motherson Sumi Ltd +Sona Koyo Steering Systems Ltd. +WABCO India Ltd. +

14

AutomobilesIndustry Snapshot:

The automobile industry is sensitive to economic cycles. Factors like interest rates, fuel prices, disposable income, inflation, consumer confidence etc. have strong influence on the industry demand. However, the extent of cyclicality differs across passenger vehicles (PV), commercial vehicles (CV) and two-wheeler (TW) industry. For instance, medium and heavy commercial vehicle (M&HCV) along with PV industry is highly sensitive to factors like interest rates, fuel prices and consumer spending whereas TW and light commercial vehicles (LCV) are comparatively less sensitive to the aforesaid factors.

The PV industry bore the brunt of economic slowdown during FY14 on account of high interest rates coupled with high inflation and spiralling fuel prices. The CV industry was worst hit in FY14 witnessing sharp drop in growth levels as low freight demand disallowed fleet expansion by transport operators. The TW industry witnessed a moderate growth due to low dependence on financing and support from rural demand as the rural economy thrived on account of good monsoon last fiscal.

In a year when vehicle sales were trembling across segment in automotive sector, scooters segment continued to flourish owing to the improved mileage and unisex appeal of newer breed of scooters. UVs and LCVs which were the other star performers during past couple of years failed to continue growth momentum against economic headwinds.

While the fundamentals for the sector remain intact, growth is currently constrained by the general economic slowdown. Interest rates, fuel pricing, infrastructure and agriculture spending would be decisive factors for automobile sector to emerge out of the current slump in the short term.

Duty Structure


Passenger Cars Small Cars* 8 8* =Old 105 105 = Mid-size Cars@ 20 20* =New 100 100 = Large Cars# 24 24* =Two Wheelers SUV 24 24* =Old 105 105 = Buses 8 8* =New 60 (75^) 60 (75^) = Trucks 8 8* =Two Wheeler Two Wheeler 8 8* =Old 10 10 = Three Wheeler 8 8* =New 10 10 = Hybrid Vehicles 5 5* =

N o t e : *Indicates cars which have engine capacity less than 1,500cc in case of diesel and 1,200cc in case of petrol and length less than 4 meters.

@ Indicates cars which have engine capacity less than 1,500cc in case of diesel and 1,200cc in case of petrol and length more than 4 meters.

#indicates cars having engine capacity more than 1,500cc in case of diesel cars and 1,200cc in case of petrol and length exceeding 4 meters.

Definition of SUV as per central excise department is a vehicle with engine capacity greater than 1,500cc, length exceeding 4000mm and ground clearance 170 mm and above

^ Indicates motorcycle with engine capacity > 800 cc

* Excise duty rebate provided during Interim budget 2014-15 is extended in the Union Budget 2014-15 until 31st December, 2014.

15

Proposal and Impact

Budget proposals Impact on the Industry

Pre-budget announcement of extension of excise duty rebate till December 31, 2014, was reiterated by the Finance Minister.

Automobile demand has been constrained on account of higher ownership cost of vehicles on account of high fuel and financing costs coupled with lower propensity to spend owing to lower job prospects, low growth in income levels and high inflation level. However, lower excise duty would translate into lower vehicle prices, consequently, induce growth in demand.

Hike in agriculture credit from Rs.700,000 crore to Rs.800,000 crore Improved rural liquidity, thereby push demand for Tractors and TWs.

Extension of interest rate subvention scheme for crop loans Improved rural liquidity, thereby push demand for Tractors and TWs.

Impact on Companies


Maruti Suzuki India Ltd + Pre-budget extension of excise duty cut coupled with improved rural liquidity goes in favor of Maruti as rural sales form a sizable portion of total sales of the company.

Ashok Lyeland Ltd. + Pre-budget extension of excise duty cut coupled with higher allocations towards both rural and urban infrastructure would push demand for M&HCV.

Hero Motocorp Ltd + Pre-budget extension of excise duty cut coupled with improved rural liquidity goes in favor of Hero as rural sales form a sizable portion of total sales of the company.

Bajaj Auto Ltd. + Pre-budget extension of excise duty cut would help company keep vehicle prices low which would in turn result in higher demand.

16

Banking & Financial ServicesIndustry Snapshot:

Banks The banking sector has a very high correlation with the overall economic growth in the country. During

FY14, the overall economy continued to witness moderation in growth with GDP growth at 4.7%. The manufacturing sector saw negative growth at -0.7% during the year while sectors like construction and services sector witnessed low growth. As a result, the credit growth during FY14 was also muted at around 14% supported by growth in sectors like services, agriculture and personal loans. The muted economic scenario impacted the overall performance of banks as indicated in deterioration in asset quality leading to higher provisioning costs and moderation in income impacting profitability besides moderated credit growth. The Gross NPA ratio for the banks increased from 3.31% as on March 31, 2013 to 3.91% as on March 31, 2014. Although both the profitability and asset quality of the banks was impacted, currently the Indian banks remained adequately capitalised with median Capital Adequacy Ratio (CAR) of around 11.5% (under Basel III). During FY14, interest rates continued to be at an elevated level, given the Reserve Bank of India’s (RBI) focus on controlling inflation.

During FY15, RBI is likely to keep its focus on inflation in view of uncertain monsoon, due to which the interest rates are likely to remain more or less stable during the year. CARE’s GDP growth forecast for FY15 is expected to improve gradually to 5.2% to 5.5% considering the new government’s plan to focus more on investment in the infrastructure sector, time bound action and improved co-ordination between the Central and State Governments to ensure smooth implementation of new Government policies. The improvement in overall economic growth and governmental clearances in projects would help recovery in sectors like infrastructure and manufacturing which may result in stabilisation of the asset quality of banks and propel credit growth in the range of 16% to 18% during FY15.

In addition to fund the uptick in credit growth, the banks would be required to raise substantial equity capital in the next 4-5 years to comply with the Basel III guidelines. With public sector banks having over 70% market share, the government would be required to infuse equity capital in the banks. As per CARE’s estimates, the total equity capital requirement for Indian banks till March 2019 (when Basel III would be fully implemented) is likely to be in the range of Rs.1.5-1.8 trillion assuming that the economic growth picks up (estimated average GDP at 6%) and the average credit growth is in the range of 15% to 16% over the next five years.

Housing Finance Companies Strong demand due to low penetration of housing finance especially from Tier II and III cities, increasing urbanization, tax

incentives and stable asset quality have helped the Housing Finance Companies (HFCs) witnessed a growth of around 16% - 17% in their loan portfolio during FY14. The Gross NPA ratio for HFCs was in the range of 0.75% to 0.80% as on March 31, 2014 as compared to 0.65% to 0.70% as on March 31, 2013. Most of the HFCs remained adequately capitalized. The credit growth for HFCs is projected in the range of 18% to 20% (CAGR) during FY14-FY16 mainly led by demand in Tier-II and Tier-III cities.

In the budget for FY14, the Congress led government had introduced Section 80EE in the Income Tax Act which provided additional deduction to first time home buyers in respect of interest on loan taken for residential house property for loans sanctioned during the period April 1, 2013 to March 31, 2014. The value of the house should not be more than Rs.40 lakh and the amount of loan availed should not be more than Rs.25 lakh. The scheme had helped home buyers in Tier II and Tier III cities wherein the housing ticket size are under Rs.25 lakh. However, there was no amendment/extension in the interim budget for FY15. HFCs are expecting an extension of the scheme in the budget for FY15 to help increase their business.

17

Proposal and Impact


Capitalisation of banks by way of increasing public shareholding in banks. Government to maintain majority shareholding in public sector banks.

Government maintaining the majority shareholding in the public sector banks is a credit positive while greater autonomy and making banks accountable should improve the performance of banks in the medium term.The interim budget had an allocation of Rs.11,200 crore for capitalisation of public sector banks, however, large part of capitalization of the banks now would be through capital markets.

Establishment of six new Debt Recovery Tribunals Likely to help early resolution of troubled assets.Banks will be permitted to raise long term funds for lending to infrastructure sector with minimum regulatory preemption such as CRR, SLR and Priority Sector Lending (PSL).

Raising long term funds will help banks to manage their asset –liability mix better to allow them to lend to the infrastructure sector.

Additional incentive of 3% for timely payment of concessional agriculture loan given at 7% under the Interest Subvention Scheme for short term crop loans.

Additional incentive will help improve credit culture among the farmers and have positive impact on the asset quality of banks.

Sum of Rs.7,060 crore to develop ‘Smart Cities’, as satellite towns of larger cities and by modernizing the existing mid-sized cities.

This growth in urbanization will provide growth opportunities for banks and HFCs.

The increased allocation to Rs.8,000 crore for National Housing Bank (NHB) for Rural Housing Fund

The Government’s continued thrust on providing low cost affordable housing is a positive for HFCs.

Sum of Rs.4,000 crore from the priority sector lending shortfall to support affordable housing to economically weaker segments (EWS) and low income group segment (LIG)

The Government’s continued thrust on providing low cost affordable housing is a positive for HFCs and banks.

Increase the deduction limit on account of interest on loan in respect of self-occupied house property from Rs.1.5 lakh to Rs.2 lakh

Help banks and HFCs business growth.

Proposed ‘Long Term Rural Credit Fund’ in NABARD for the purpose of providing refinance support to Cooperative Banks and Regional Rural Banks with an initial corpus of Rs.5,000 crore.

Improve the long term investment in credit in the agriculture sector and provide funding to Regional Rural Banks (RRB) and Co-operative Banks.

Allocation of Rs.50,000 crore to Short Term Cooperative Rural Credit (STCRC) – Refinance Fund.

Provide lower cost fund to NABARD and in turn help increased and timely credit to farmers.

The composite cap in the Insurance sector proposed to be increased from 26% to 49%, with full Indian management and control, through the FIPB route.

Positive impact on the insurance sector as it will bring in more foreign investment in the sector which will help the growth in the sector.

Increase in capital gains arising on transfer of units of non-equity mutual funds, held for more than a year from 10% to 20%. The holding period for such units is increased from 12 months to 36 months

Likely to shift investments from debt funds to bank deposits and other instruments.

18

CementIndustry Snapshot:

The Indian cement industry witnessed a dismal demand growth in the past few years. In FY14, the consumption of cement showed a tepid growth of 3.5 per cent on a YoY basis, the lowest growth over the last one decade.

The slowdown in the real estate sector and delay in takeoff of various infrastructural projects in the period FY11-14 took a toll on the cement demand. Spiralling cost of capital, delays in execution of infrastructure as well as industrial projects on account of land acquisition & environmental clearance hurdles and the overall economic slowdown adversely affected the offtake of cement.

Though the demand for cement in the long term remains intact, the demand for cement is expected to show a gradual recovery in the short to medium term. The newly elected government is expected to focus on strengthening the infrastructure in the country. Also, focus on low-cost affordable housing and revival in overall economic growth is expected to provide some respite to the cement demand.

The cement industry has been grappling with cost pressure in the past few months due to raise in the railway freight cost and diesel prices. However, the industry has managed to pass on the higher input cost through a series of price hikes in the same period.

Duty Structure


Cement Cement

OPC/PPC/PSC#- Basic- CVD- Special CVD

Nil12

4

Nil12

4

= - Retail 12*+Rs.120/t

12*+Rs.120/t

=

Clinker- Basic- CVD- Special CVD

1012

4

1012 4

= - Bulk 12# 12 =

- Clinker 12 12 =*An abatement of 30% on Retail Sale price and is on adveloram, # on adveloram, # OPC- Ordinary Portland cement, PPC- Portland pozzalana cement and PSC- Portland slag cement.

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Proposal and Impact

Budget proposals Impact on the Industry• Key schemes announced1) Concession on requirement (Built up area and capital) for FDI for development of

smart cities.2) Enhancement of allocations for the year 2014-15 to Rs.8,000 crore for Rural

Housing via National Housing Bank (NHB).3) Allocate of Rs.4,000 crore for NHB with a view to increase the flow of cheaper

credit for affordable housing to the urban poor/EWS/LIG segment.4) Inclusion of slum development in the list of Corporate Social Responsibility (CSR)5) Porposal to award 16 new port projects worth Rs.11,635 crore in this year6) Investment in National Highways Authority of India and State Roads of an amount

of Rs.37,880 crore, including Rs.3,000 crore for the North East. 7) Setting aside Rs.14,389 crore for PMSGY

The said schemes/ measures to boost infrastructure and housing segments. This is expected to spur cement demand.

• Increase of custom duty on coalThis would result in marginal increase in cost of production of cement by about Rs.0.15 per bag.

Impact on Companies


Ultratech Cement + Various schemes announced to have a positive impact on the demand. However, increase in custom duty on steam coal to result in marginal increase in cost of production.

ACC +Ambuja +Indian Cement +

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CoalIndustry Snapshot:

Indian coal industry’s domestic production/off-take stood at 567/582MT in FY14 (refers to the period April 01 to March 31). Against this the demand for coal stood at 722MT in FY14 resulting in deficit of 19.3%, which was met through import. CARE expects Indian coal production to reach 690MT for the base case scenario implying a 5.5% CAGR from FY14-FY17. The growth in coal production would be contributed by Coal India Limited (CIL) (expected to reach 564MT implying 5.7% CAGR during FY14-FY17E) and 7% production CAGR from the captive mines (68.7MT in FY17E). The demand of coal is expected to grow at 5.4% for the same period translating into higher reliance on imported coal which is expected to reach to 148.8MT by FY17E.

Over the past one year, various policy measures like coal price pooling, coal banking, etc, have been proposed in order to tide over the coal deficit in the country. While there have been several policy announcements the implementation remains tardy due to lack on consensus among various stakeholders.

Duty Structure

Customs Duty (%) Before After Impact

Non-Coking Coal 2% 2.5% =Coking Coal Nil 2.5% =Non-coking & coking Coal (Counter Veiling Duty)

2% 2% = Met coke Nil 2.5% =Clean Energy Cess Rs50/tonne Rs100/tonne =

Impact on Companies


Coal India Limited = Since, energy cess is pass-through, Coal India Limited would not be impacted.

21

ConstructionIndustry Snapshot:

Construction is integral to support India’ growing need for infrastructure and industrial development. In the last 10 years, construction as a percentage of gross domestic product (GDP) has been in the range of 7.43% to 8.10%. The industry witnessed a slowdown in the last couple of years mainly on account of slowdown in the economy, delay in project awarding and execution due to environmental clearance hurdles, aggressive bidding by players, land acquisition issues and political instability in some states.

As on March 31, 2014, the multiple of order backlog to the net sales of the major construction companies stood at around 2.9 times.

Raw material cost accounts for about 40% of the total cost of a construction company of which cement and steel are the major inputs. Rising input costs alongwith other factors like high interest on increased debt burden resulted into a declining trend in profitability margins in the last couple of years. With the revenue of the industry growing at a snail’s pace; coupled with the rising cost pressure, the PBDIT margin of the industry is expected to remain under pressure in the short term.

Duty Structure

Excise Duty (%) Before After Impact

Cement Retail 12% ad-valorem* + Rs. 120 per tonne 12% ad-valorem* + Rs. 120 per tonne =Cement Bulk 12% ad-valorem* 12% ad-valorem* =Steel 12% 12% =

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

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Proposal and Impact

Budget proposals Impact on the IndustryRoads:A huge investment of Rs.37,880 crore (including Rs.3,000 crore for North East) is proposed in NHAI and state roads along with measures to reduce maze of clearances as the government intends to construct national highways of 8,500 km during FY15. Government intends to set up National Industrial Corridor Authority; with a view to give impetus to transport connectivity which will lead to India’s growth in manufacturing and urbanization. Improving supply chain for faster transport of goods to various cities would be done by working on select expressways along with development of industrial corridor. NHAI shall be required to set aside Rs.500 crore for project preparation of the same.

The continual increased focus of the government on infrastructure development especially roads, smart cities, ports, watershed development, airway, and waterway would be beneficial for the construction sector in terms of providing increased orders.

AirportsTo improve air connectivity and make air travel an accessible option for large number of Indians, a scheme for development of new airports in tier-I and tier-II is expected to be launched through Airport Authority of India or PPPs.RailwaysThe Railway Budget for FY15 proposed construction of 1785 road under bridges and road over bridges and provision of escalators, lifts via PPP route at all major stations. It also focused on expansion of rail infrastructure with faster implementation of projects planned.The Union Budged 2014 proposes construction of urban metros including light rail systems through PPP mode to be supported by the central government through Viability Gap Funding (VGF). During FY15 government intends to set aside Rs. 100 crore for metro projects in Lucknow and Gujrat.Further, a sum of Rs. 1,000 crore is provided towards rail connectivity in border areas and an additional Rs. 1,000 crore is provided for rail connectivity in North Eastern states.

Ports To boost trade, 16 new port projects are expected to be awarded with a focus on port connectivity. Rs.11,635 crore is expected to be allocated for the development of Outer Harbour Project in Tuticorin for phase-I. SEZs are also expected to be developed in Kandla, Gujarat and JNPT, Maharashtra. Inland waterwaysDevelopment of inland waterways through construction of Jal Marg Vikas (National Waterways – I) between Allahabad and Haldia covering a distance of 1,620 Kms. It would enable commercial navigation of vessels with atleast 1,500 tonne capacity at an estimated cost of Rs. 4,200 crore.Smart cities: The PM’s vision of developing ‘100 smart cities’ as satellite towns of larger cities and modernizing the existing mid-sized cities would be done through allocation of Rs.7,060 crore Requirement of built-up area and capital conditions for FDI is reduced from 50,000 sq mtrs to 20,000 sq mtrs and from USD 10 million to USD 5 million with a 3 year post completion lock-in period. To increase impetus to watershed development in the country, a new programme called ‘Neeranchal’ has been introduced with an initial outlay of Rs.2,142 crore in FY15.

23

FinancingBanks would be encouraged to extend long term loans to infrastructure sector with flexible structure to absorb potential adverse contingencies. For the same, banks could raise long-term funds for lending to infrastructure sector with minimum regulatory preemption such as CRR, SLR and priority sector lending.Corpus towards the Pooled Municipal Debt Obligation is increased from Rs. 5,000 crore to Rs. 50,000 crore and also extended upto March 31, 2019.

Ensuring funding support from banks through relaxation of norms for lending to infrastructure sector will be an impetus to construction industry. The increased corpus towards Pooled Municipal Debt Obligation is expected to finance public transport, solid waste disposal, sewerage treatment and drinking water projects in urban areas.

Impact on Companies


Hindustan Construction Company Limited +

Increased allocation towards various infrastructure projects is expected to result in increased order inflow to the construction companies along with improved funding avenue from banks.

NCC Limited +Gammon India Limited +IVRCL Infrastructures and Projects Limited +Sadbhav Engineering Limited +Simplex Infrastructures Limited +Patel Engineering Limited +

24

Consumer DurablesIndustry Snapshot:

The Consumer Goods industry is broadly classified into consumer appliances and consumer electronics. Consumer appliances, also popularly known as White Goods include refrigerators, sewing machines, washing machines, air conditioners, microwave ovens, fans etc. Consumer electronics, widely referred to as Brown Goods include Televisions, Mobile phones, CD and DVD players, kitchen appliances etc. These goods include various kinds of domestic appliances used on a regular basis to facilitate our day to day living.

The Indian Consumer Goods industry, one of the largest growing electronics market in the world is characterised by presence of large domestic producers (Videocon, MIRC electronics, Bajaj Electricals, Godrej, Blue Star, Voltas, TTK Prestige, etc) and strong MNCs (Multinational Companies) like Sony, Samsung, LG, Whirlpool etc. have healthy presence in most of the product categories they are present. The size of the industry is estimated at around Rs 400 billion during FY13. Global players dominate this space and have around 65% market share of the Indian Consumer Goods Industry.

The urban market forms a major chunk (i.e. 65%) of revenues of the industry. The key growth drivers are rising income levels, easy availability of consumer credit, various policy support from the government like relaxation in customs duties and excise duty, encouragement to FDI policies in the sector, awareness of brands and products, change in lifestyle, new model launches with technological improvements and ease of shopping through various online formats. Further, large domestic market with growing youth population, lower penetration levels in rural areas and lower per capita daily consumption indicates opportunities for further growth of thisindustry.

The key challenges faced by the players in the industry are volatile input prices, slowdown in GDP growth, adverse monsoon, high inflation, high interest rates, intense competition, high advertisement costs and currency depreciation.In a view to boost the consumerdemand, the Interim Union Budget for 2014-15, has slashed excise duty across the consumer durable categories. This excise duty cut is applicable till 30th June, 2014. CARE Ratings expects these challenges to remain in the short term and growth in domestic demand for the sector would be impacted to some extent. However, the long-term prospects for the industry would remain healthy on the back of growth expected from rural demand as a result of higher disposable rural income, low penetration in rural markets, improvement in GDP growth rate and various measures expected to be undertaken by GOI (Government of India) like simplification of tax structure through introduction of GST etc. CARE Ratings estimates the Consumer Goods Industry to grow by around 10% on CAGR basis during FY13-FY18.\

Duty Structure


Cathode ray TVs 10 0 + Electrical manufacturing and equipments (chapter 85)*

10 10 =

LCD/LED TV panels of below 19 inches

10 0 +E-Book Reader 7.5 0 +

*The Union Budget 2014-15 has proposed to extend duty concessions beyond June 30, 2014 for a period of 6 months up to December 31, 2014

25

Proposal and Impact

Budget proposals Impact on the IndustryBasic customs duty on cathode ray TVs, LCD/LED TV panels of below 19 inches reduced from 10% to Nil The reduction in customs duty will be positive for the industry as it

will increase the demand for the products due to decrease in cost and will discourage sales in the grey market.Basic customs duty on E-Book Reader reduced from

7.5% to NilExcise duty on electrical manufacturing and equipments (chapter 85) is to be maintained at 10% for a further period of 6 months upto December 31, 2014

The extension of concession in excise duty till December 31, 2014 will provide much needed relief needed to revive the industry.

Impact on Companies


Mirc Electronics Ltd +The proposed reduction in customs duty would positively impact the demand for LCD/LED TV panels of below 19 inches which would consequently increase the revenues.

26

EducationIndustry Snapshot:

Education sector in India is a mix of government-operated & privately operated educational institutions and allied education products & services providers. Educational sector is highly influenced by the various government schemes and policies launched primarily to improve the quality of education and the planned expenditure by government to improve the literacy level in the country. The government has been laying a lot of emphasis on increasing the reach and quality of the education system in the country and this has also provided increasing opportunities for private sector players engaged in providing education and also related allied products / services. In the past, the government had initiated several schemes including the Sarva Shiksha Abhiyan and Rashtriya Madhymik Shiksha Abhiyan to improve the quality of education and eventually the literacy level in the country.

In the interim budget presented in February 2014, the central government’s yearly allocation towards the education increased by 21% to Rs.79,451 crore for 2014-2015 as against Rs.65,867 crore allocated in the budget for 2013-2014 . Additionally there was budget allocation of Rs.2,600 crore for taking over partial interest burden on education loans outstanding as on December 31, 2013 and availed by students prior to 31/03/2009 as an extension of similar scheme extended in the previous budget. This was expected to benefit over 9 lakh student borrowers.

The budget for 2013-14 also had allocations of Rs.27,258 crore for Sarva Shiksha Abhiyan and Rs.3,983 crore for Rashtriya Madhymik Shiksha Abhiyan in addition to Rs.5,284 crore provided to various ministries for giving scholarships to students belonging to Scheduled Castes, Scheduled Tribes, Other Backward Classes and Minorities, and girl children and Rs.13,215 crore towards mid day meal scheme.

The growth in the Indian Education sector would be driven by growing personal disposable incomes, increasing government spend and also efforts of government to improve the regulatory framework for the education sector.

Proposal and Impact

Budget proposals Impact on the IndustryBudgetary allocation to SSA at Rs.28,635 crore The government reemphasized its focus on school education with

y-o-y increase in government expenditure on various schemes. This continued focus on school education with an objective of increasing gross enrollment ratio is expected to result in increase in enrollment in the higher education segment. Given its significant presence in higher education, private sector educational institutions are likely to benefit.

Budgetary allocation to RMSA at Rs.4,966 crore

School assessment programme being initiated at a cost of Rs.30 crore In the last decade, the government has spent significant amount

in increasing school education infrastructure. In a move towards assessment and improvement of quality in education, these programmes have been proposed in the current budget. This is likely to improve the quality of education in the long term.

To infuse new training tools and motivate teachers, ‘Pandit Madan Mohan Malviya New Teachers Training Programme’ being launched. Initial sum of Rs.500 crore is set aside for the same.

Impact on Companies

Company Impact CommentsEducomp Solutions + The increased budgetary allocation to the education sector opens new sources of

revenues along-with increasing demand of up-gradation of existing infrastructure. The increase in budgetary allocation to the education sector is expected to result in higher inflow of orders to the private sector players especially for companies engaged in information and communication technology segment of education.

Everonn Education +Aptech +NIIT +

27

Engineering & Capital GoodsIndustry Snapshot:

Performance of the domestic engineering & capital goods sector reflects the current state of the investment cycle in the economy and is generally considered a leading indicator for the industrial production cycle.

The demand in the sector is driven largely by private and public sector capex, mainly in the base industries like oil & gas, power, chemicals, construction & infrastructure, metals, etc. During the last two-three years, various factors like sub-5% growth in GDP, issues in land acquisition, delays in statutory and other clearances, elongated cash conversion cycle and weak growth in demand for end products has led to curtailment/deferment of capex by most of the players, dampening of the order inflows and deterioration in the financial profile of the players in the sector.

Nevertheless, with the long-term fundamentals of the economy remaining in-tact despite large external shocks and with a strong domestic-demand led economy, major players in the sector are expected to do well in the medium-term, despite the recent turbulences in the economy.

CARE expects the capex cycle to show improvement in the medium-term, with growing business confidence, expectations from a stable and decisive government and likely improvement in investment policy environment.

Duty Structure


Stainless Steel (Flat Products)

5 7.5 - Stainless Steel 12 12 =Electrical Steel 5 5 = Aluminium 12 12 =Copper 5 5 =Aluminium 5 5 =

Proposal and Impact


Increase in ceiling of FDI from 26% to 49% under the approval route in defence manufacturing

This will provide some incentive for foreign manufacturers to set up factories in India, given that India is one of the largest importers of defence equipments. Management control that should rest with the Indian partner could be crucial for some investors, especially in the technologically intensive industry

PSU capex of Rs.247,000 crore in FY15This is in line with the capex incurred in FY14. However, any thrust over increasing the pace of execution of projects would be crucial to percolate its effect down the value chain.

Setting up Infrastructure Investment Trusts (InvITs) with tax efficient pass through status, modeled on the Real Estate Investment Trust (REITs) structure

This could provide much needed risk capital to the infrastructure sector, which in turn could boost competitiveness of domestic manufacturers and could also contribute to the local demand growth

Feeder separation under ‘Deen Dayal Upadhyay Gram Jyoti Yojana’

Would give boost to distribution infrastructure products. However, a large number of the distribution infrastructure projects depend upon the initiatives of the respective state entities

28

New investments proposed in all types of infrastructure projects including roads, seaports, airports, gas pipelines, inland waterways, power transmission lines, etc.

This will, in turn, trigger a higher demand for construction equipments used for these projects

Additional 15,000 KMs of gas pipeline to be constructed under PPP model

Once rolled out, it would boost the demand of gas compressors and other associated capital goods.

Investment allowance on investments of Rs.25 crore and above (earlier on Rs.100 crore and above)

This would provide additional incentive to SMEs to undertake capex, but the impact is likely to be contingent upon revival for demand of end products

Extension of 10 year tax holiday to entities which commence power generation, transmission and distribution of power till March 31, 2017

This could act as a catalyst for speeding up of projects under implementation and pre-pone the demand for related capital goods

Customs Duty and Excise Duty benefits for domestic manufacture of solar power panels, wind turbine parts as well as Bio-CNG plants

This would incentivize procurement of the domestically produced plants

Impact on Companies


ABB India Ltd. = Stable

Action Construction Equipment Ltd. + Large investment in roads network envisaged in FY15 through NHAI would improve the demand for construction equipments

Alstom India Ltd. + Extension of tax benefit to power plants to be commissioned till 31-March-2017 is likely to speed up implementation of power plants

Bharat Heavy Electricals Ltd. + Extension of tax benefits for power plants

C.R.I. Pumps Pvt. Ltd. + Likely to receive boost in demand due to its large and established presence in agricultural pumps

Emico Elecon (India) Ltd. = Stable

Elecon Engineering Company Ltd. = Stable

Engineers India Ltd. = Stable

Kalpataru Power Transmission Ltd. +Extension of tax benefit to power transmission and distribution projects to be commissioned till 31-March-2017 is likely to boost demand from customers

KEC International Ltd. +Larsen & Toubro Ltd. = Stable

Shanti Gears Ltd. = Stable

Siemens Ltd. = Stable

Sterlite Technologies Ltd. +Extension of tax benefit to power transmission and distribution projects to and thrust on broadband connectivity be commissioned till 31-March-2017 is likely to boost demand from customers

Texmaco Rail & Engineering Ltd. = Stable

Thermax Ltd. + Extension of tax benefits to power plants

TRF Ltd. = Stable

Voltamp Transformers Ltd. + Extension of tax benefit to power transmission and distribution projects

29

FertilizersIndustry Snapshot:

Domestic fertilizer consumption reduced by 4% year on year (y-o-y) in FY14 to 51 million metric tonnes (MMT) with urea consumption remaining stable at 30 MMT while the demand for non urea (decontrolled) fertilizers reduced by 10% y-o-y in FY14. The fertilizer subsidy budget of Rs.67,971 crore for FY14 fell short by around Rs.35,000 crore of subsidy payments which carried over to FY15.

The fertilizer industry is facing the challenges and uncertainties such as delays in subsidy payments, unavailability of domestic gas for urea units which were required to change their feedstock base to gas under new pricing scheme–III (NPS-III), high cost of regasified liquefied natural gas (R-LNG), likely upward revision in domestic gas price and removal of guaranteed buyback provision in new urea investment policy (NIP) for fresh urea capacity addition. Further, the production of urea above the cut-off quantity would become unviable due to subsidy linkage to international parity price (IPP) with rise in domestic gas and R-LNG price. Some of the concerns are expected to be addressed in forthcoming budget.

The demand for fertilizers under the present scenario is likely to increase marginally in FY15 with stable urea consumption and likely increase in demand of non urea fertilizers due to reduced IPP of raw material and finished fertilizers, which might be affected by delayed monsoon. The sales data of fertilizers in Q1FY15 exhibit a growth rate of 7% y-o-y mainly due to low inventory level carried over from previous year due to liquidity pressure created by delayed subsidy payment.

CARE expects the fertilizer subsidy budget for FY15 to remain around the level declared during interim budget for FY15 (Rs.68,000 crore) mainly due to Government of India’s (GoI) target to contain the fiscal deficit and reluctance to increase the price of urea and other fertilizers. However, the estimated requirements are likely to be around Rs.1,10,000 crore which includes rollover of subsidy from FY14, likely increase in subsidy due to higher gas cost and increase in fixed cost for urea.

GoI is expected to boost the domestic urea production by revival of sick units of Fertilizer Corporation of India Ltd and Hindustan Fertilizers Corporation Ltd, however, it would be capitalized over the period of 3-4 years and would require substantial capital outlay. GoI is also expected to encourage setting up of joint venture (JV) fertilizer plants abroad in countries with availability of gas at reasonable price to reduce the subsidy burden.

Duty Structure


Urea 5% 5% = Urea 12% 12% =DAP 5% 5% = DAP 12% 12% =MOP 5% 5% = MOP 12% 12% =Ammonia 5% 5% = Ammonia 12% 12% =Phosphoric Acid 5% 5% = Phosphoric Acid 12% 12% =Sulphur 2.5% 2.5% = Sulphur 12% 12% =Rock Phosphate 2.5% 2.5% = Rock Phosphate 12% 12% =

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Proposal and Impact


Formulation of new urea policy

New urea policy is likely to aim at boosting domestic production of urea which is short of domestic demand. The exact contours of the policy are not yet known, however, the way the new policy deals with issues like guaranteed buy back and allocation of cost effective gas would be crucial.

Increase in subsidy for urea

Urea comprises 59% of the total fertilizer consumption in India based on volume. The increase in subsidy for urea would certainly aid all the stakeholders of urea. However, the overall subsidy budget over the past few years have fallen short of the actual figures. This is expected to continue for FY15 also.

Enhanced credit to the farm sector through agriculture credit outlay of Rs.8 lakh crore, extension of interest subvention scheme, creation of long term rural credit fund of Rs.5,000 crore, increased allocation to short term cooperative rural credit by Rs.5,000 crore and credit to landless joint farming groups

Fertilizer demand would to get a fillip on account of easier credit availability and may also influence farmers to use complex fertilizers suiting their soil needs rather than opting for the low cost urea. This may lead to improved yield especially in the scenario of delayed monsoon.

Improve access to irrigation through ‘Pradhan Mantri Krishi Sinchayee Yojana’ with an outlay of Rs.1,000 crore

The move is expected to reduce dependence on monsoon and provide assured irrigation. Assured irrigation would also entail stable demand for fertilizers.

Impact on Companies

Company Impact CommentsIndian Farmers Fertiliser Cooperative Ltd = The increase in subsidy allocation to urea would certainly reduce the gap

between budgeted and actual subsidy witnessed during past few years.

The new urea policy is expected to address the shortfall in domestic production. The exact contours of the policy are not yet known, however, the way the new policy deals with issues like guaranteed buy back provision and allocation of cost effective gas would be crucial.

The easier farm credit would influence farmers for balanced use of fertilizers.

National Fertilizers Ltd =Rasthriya Chemicals & Fertilizers Ltd =Chambal Fertilizers & Chemicals Ltd =Gujarat Narmada Valley Fertilizers & Chemicals Ltd =Gujarat State Fertilizers & Chemicals Ltd =

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FMCGIndustry Snapshot:

Fast Moving Consumer Goods (FMCG) are also commonly known as consumer packaged goods. These goods have a swift turnover with relatively low cost as compared to other products and are consumed on a regular basis to form as a daily part and parcel of our life. FMCG is mainly classified into various segments such as household care, personal care, packaged foods and beverages, spirits and tobacco etc. Various examples of FMCG under different segments (as classified above) include a wide range of repeatedly purchased consumer products such as detergents, oral/hair/skin care products, deodorants, perfumes, feminine hygiene, paper products, packaged food products, cigarettes etc.

The Indian FMCG industry is the fourth largest sector in the economy exhibiting double digit growth rate for the past few years. The Industry is characterised by presence of large domestic producers (for e.g. Nirma, Godrej Consumer, Amul, etc) and strong MNCs (Multinational Companies) like Hindustan Unilever Limited, Procter & Gamble, Nestle etc); well established distribution network, prevailing intense competition between the organised and unorganised sector players and low operational cost. The urban market forms a major chunk (i.e. 66%) of revenues of the Indian FMCG Industry. According to Confederation of Indian Industries (CII), the size of the Indian FMCG industry was more thanUS$ 33.4 billion in CY12.

Various factors such as growing trend in urbanisation, rise in income levels driving purchase, evolving consumer lifestyle, ease of shopping through various online stores, growth in modern trade, increase in FDI inflows over the past few years, awareness of brands, low operational costs, new product launches etc. have been key growth drivers for this sector. Further, large domestic market with growing youth population, lower penetration levels in rural areas and lower per capita daily consumptionindicates opportunities for further growth of thisindustry.

The key challenges faced by the industry are slowdown in GDP growth, high inflation, high interest rates and cumbersome tax and regulatory structure. CARE Ratings expects these tough headwinds are likely to persist in the short term and growth in domestic demand for the sector would be impacted to some extent. However, the long-term prospects for the industry would remain healthy on the back of growth expected from rural demand, improvement in GDP growth rate and various measures expected to be undertaken by GOI (Government of India) like simplification of tax structure through introduction of GST etc. CARE Ratings estimates the FMCG sector to grow by around 11 -12% during the next 4-5 years.

Duty Structure


Fatty acids/crude palm stearin and specified industrial grade crude oil used for manufacturing of soaps

7.5 0 + Pan Masala 12 16 -

Crude glycerine for manufacturing of soaps

12.5 0 + Unmanufactured tobacco

50 55 -MOP 5% 5% = Jarda scented

tobacco, gutkha and chewing tobacco

60 70 -

Ammonia 5% 5% = Aerated waters containing added sugar

0 5 -

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Phosphoric Acid 5% 5% = Non-filter cigarettes(not exceeding 65mm-70mm)

669(Rs./1000sticks)

1150(Rs./1000sticks)

-

Rock Phosphate 2.5% 2.5% = Non-filter cigarettes(exceeding 65mm-70mm)



-

Filter cigarettes(exceeding 65mm)

669(Rs./1000sticks)


-

Filter cigarettes (exceeding 70mm-75mm)



-

Filter cigarettes (exceeding 75mm-85mm)


Tariff item omitted

-

The Union Budget 2014-15 has proposed increase in excise duty on cigars, cheroots and cigarillos

Proposal and Impact


Reduction in basic customs duty for Fatty acids/crude palm stearin and specified industrial grade crude oil, crude glycerine used for manufacturing of soaps

The reduction in custom duty is expected to have a positive impact on the soap industry as it would relieve the manufacturers from high input costs and if passed, it would lower the prices marginally to end-consumers.

Increase in excise duty on cigarettes, tobacco items such as cigars, cheroots and cigarillos.

The hike in excise duty if passed on the end-consumers that could impact demand for cigarettes and other tobacco products.

Increase in excise duty on aerated water containing added sugar

The imposition of additional duty of excise is expected to increase the prices of such products marginally resulting into negligible impact on the demand of such products.

Impact on Companies


ITC, Godfrey, VST Industries -Hike in excise duty would have a negative impact on the revenues due to decline in demand for these products as well as negatively impact margins as the hike may not be fully passed on to end-users instantly.

HUL, GCPL, Nirma Ltd +Decline in customs duty would have a positive impact on the margins of the company as this would result in lower cost for manufacturing soaps and if such benefit is passed to the end-consumers, it would result in increase in revenues of the company.

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Gems & JewelleryIndustry Snapshot:

India is the second largest consumer of gold, as well as leader in diamond processing. India’s unquenchable affinity towards gold has transcended the ages. Gold is considered as the primary saving instrument in rural areas of India. The estimated gold holdings in India would be about 20,000 tonnes valued more than USD 1 trillion. The Indian Gems and Jewellery (G&J) industry is crucial to the Indian economy in terms of exports earnings and employment generation. The Government of India (GoI) has always incentivized the industry in the past, with measures such as interest rebates, extension of credit periods (for pre-shipment and post-shipment credit) and export duty benefits in order to endure the effects of slowdown.

During FY14, G&J industry was closely monitored and was highly regulated in order to ease current account deficit (CAD) and to curb inflation. In July 2013, the government had enforced an 80:20 rule by linking import of gold to exports. All nominated banks and agencies had to set aside 20 per cent of the total imported quantity for exports. Under that, only six nominated banks and three state-run trading agencies that had facilitated export of gold or jewellery were allowed to import. In addition to this, the import (custom) duty on gold was gradually raised to 10 per cent. Following this, there was a stark slowdown in the quantity of gold imported in India.

India’s exports of gold jewellery as well as gold medallions & coins fell by 39-40 per cent in 2013-14, mainly due to insufficient availability of raw materials and subdued gold prices. However, exports of cut & polished (CPD) diamonds surged by approximately 25 percent during the same period, primarily on account of a lower base effect (sales had declined sharply by 25 percent during 2012-13 on y-o-y basis), increased trading activity and increase in demand. As a result, the fall in India’s gems & jewellery exports got restricted to 11 per cent. The country exported gems & jewellery worth USD 34.7 billion as compared to USD 39 billion in fiscal 2012-13.

Duty Structure


Semi-processed, half cut or broken diamonds Nil 2.50 -Cut and polished diamonds and coloured gemstones 10 2.50 -Pre-forms of precious and semi-precious stones 2.00 Nil +

Proposal and Impact


The custom duty exemption on Pre-forms of precious and semi-precious stones

A pre-formed stone is rough gem shaped closer to that of a finished stone to be further processed into a cut and polished stone. The total export for precious and semi-precious gemstones (including colored gemstones, pearls and synthetic stones) accounted for 1.75% of total exports of Gems & Jewellery for the period April 2013 to March 2014. The duty exemption therefore is likely to have a minimal impact for exports of G&J industry as a whole.

Increase in Basic Custom Duty on Cut and polished diamonds and colored gemstones by 0.5%

The imports of C&P Diamonds are comparatively lower vis-à-vis rough diamonds, and with marginal increase in basic custom duty, the impact is likely to be minimal.

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Imposition of duty on semi-processed, half-cut or broken diamonds

The impact of imposition of duty on semi-processed, half-cut or broken diamonds is minimal as negligible proportion of semi-processed, half-cut or broken diamonds are imported in India.

Overall the budget impact is neutral from Gems and Jewellery industry perspective.

Impact on Companies


C. Mahendra Exports =The Union Budget 2014-15 will have a neutral impact on G&J industry as duty structure of key segments in the industry remains unchanged.

Rajesh Exports =Tribhonvandas Bhimji Zaveri =Tara Jewels =

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Hospitals & HealthcareIndustry Snapshot:

The healthcare industry in India can be broadly classified into hospitals, pharmaceuticals, diagnostic centres and others (medical equipment, pharmacies, etc.). The hospital segment account for approximately 70% of the industry, which can be divided into three sub-segments - primary, secondary and tertiary, based on the nature of services rendered.

The evolving demographics and changing disease profile are key factors leading to increasing demand of health services in India. On the other hand, rising per capita income and greater penetration of health insurance are leading to higher spending on health care. In addition, the medical tourism market is growing at a rapid pace. All these drivers are leading to fast expansion of the hospital and healthcare industry.

Industry players have opted for asset-light business models to combat increasing real estate prices and rising interest debt burden. Shortage of skilled workforce (qualified specialists & skilled paramedics) is another major challenge for the industry. However, due to the dilapidated state of public health care system in India and limited scope for increase in public health expenditure (amidst fiscal constraints), private institutions are likely to be the major beneficiary of the growing healthcare market.

Duty Structure


Healthcare Equipment 7.5 7.5 = Healthcare Equipment 12 12 =

Proposal and Impact

Budget proposals Impact on the IndustryAnnouncement of ‘Free Drug Service’ and ‘Free Diagnosis Service’

These are first steps towards ensuring availability of ‘Universal Health Care’ facilities, a long-term objective of the government.

26% increase in budgeted outlay for 2014-15 over revised estimates of 2013-14

Actual spending was only 89% and 81% of the budgeted amounts for FY12 and FY13. It would be challenging for the government to spend the entire amount allocated, if any fiscal issues crop up during the year.

4 new AIIMS-like centres (Andhra Pradesh, West Bengal, Maharashtra, Uttar Pradesh), 12 new government medical colleges and 15 Model Rural Health Research Centres

Setting up AIIMS-like centres and medical colleges may help improve penetration of health services. Rural Health Research centres are expected to lead research efforts in analyzing rural health scenario and provide insights in making affordable healthcare available in rural areas.

Central assistance to States’ Drug Regulatory Authorities

This may help in strengthening capabilities in 31 existing drug testing laboratories, and provide for setting up new such centres.

Raising composite FDI cap in insurance space It would make raising fresh capital easier for health insurance players, leading to expansion of activities and spread of health insurance.

Facility of Electronic Travel Authorization (e-Visa) at select airports

The government recently approved the extension of visa-on-arrival scheme to 180 countries (as against 11 earlier). In addition, the E-Visa facility announced in the Budget would enable medical tourists to plan visits swiftly to the selected urban centres in India for their treatment.

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Outlays for Healthcare Sector

The outlays for the various departments which fall under the domain of the Ministry of Health and Family Welfare are detailed below:(INR Crores) 2012-13 2013-14 2014-15

Actuals Revised BudgetedMin. of Health and Family Welfare 27,884 30,848 38,738Dept. of Health and Family Welfare 25,133 27,531 34,663Department of AYUSH* 715 936 1,272Department of Health Research 720 881 1,018Department of AIDS Control 1,316 1,500 1,785

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HotelsIndustry Snapshot:

Significant addition of inventory coupled with slower economic growth, rising inflation, etc continue to drag both occupancy rate as well as average room revenue of the hotel industry over the last couple of years. However, going forward supply is expected to grow at a moderate CAGR of 10% up to FY18E. Of this, the upscale category rooms will be around 40% of the total supply.

Revenues from renting out of rooms, the primary business of the hoteliers continue to remain the highest contributor to the hotel companies. However with growing number of conferences and conventions, the banqueting services are expected to grow at a fast rate. Also, Food and Beverage, the second-largest revenue earner for the industry is also expected to show a robust growth.

Domestic Tourist Arrivals has grown at a healthy CAGR of 15% during 2009-13 and has become a major revenue contributor to the hotel industry, thereby reducing dependence of the industry on foreign tourist arrivals for its growth. Consequently, the domestic tourists, both business and leisure will continue to remain the largest customer segment for the hotel industry in India.

Duty Structure


Hotels NA NA Hotels- Room service- Foods and Beverages

7.424.94

7.424.94

==

Proposal and Impact

Budget proposals Impact on the IndustryIntroduction of Electronic Travel Authorization (e-Visa) facilities at nine airports in the next six months. Allocation of Rs.500 crores for creation of tourist circuits around specific themes.

Both these aforesaid measures are expected to boost the tourism industry and concomitantly provide a positive impetus to the hospitality sector.

Impact on Companies


Hotel Leela +The aforesaid measures to have a positive impact on the demand for hotel rooms going ahead.

EIH Ltd. +Indian Hotels +

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IT & ITeSIndustry Snapshot:

U.S. economy continues its modest recovery whereas Euro Area is still under pressure. CARE believes that IT Services exports will grow at a moderate pace of 12% in FY2015 driven by a good mix of discretionary spending primarily from the US and traditional outsourcing deals. Growth will be led by services like software testing and Information Systems (IS) Outsourcing driven by newer opportunities around social media, mobility, analytics and cloud (SMAC) and emerging verticals like healthcare, retail and utilities.

The domestic IT services is expected to grow at around 13.7% in FY2015. Under penetrated market in SMEs, government’s spending in e-governance projects, growing e-commerce, mobile apps in consumer market will be the key drivers of domestic IT services growth.

According to NASSCOM, the Indian IT-BPM industry has grown to the size of USD 108 billion at a Compounded Annual Growth Rate (CAGR) of 11.4% during FY08-13. Exports are expected to grow by 13-15 per cent, domestic sales by 9-12 percent and industry to add revenues of USD 13-14 billion to cross USD 130 billion in FY2015.

IT Services can be classified into Project based services, Outsourcing and Support & Training services. CARE expects both Project based and Outsourcing services to grow at similar rates of 12% in FY2015. Project based services are expected to catch up in FY2015 once the discretionary spending rebounds.

CARE expects the annual contract value (ACV) of IT outsourcing contracts to recover in FY2015 as the world economy recovers but will shy of achieving the average ACV of last few years. There is expected to be some traction in the short term contracts as the deals are sweetened for short term to pass on some of the exchange rate benefits.

Globally, BFSI and manufacturing remain the two largest verticals accounting for nearly 40% of total IT spending. Newer verticals like government, healthcare, retail and utilities add next 30% of the total IT spend. For Indian IT-BPM exports, BFSI is the most prominent vertical accounting for 41% of revenue in FY13. The vertical mix for FY2015 is expected to be led by BFSI at 40% followed by Hi-Tech/Telecom at 17%, manufacturing at 16%, retail at 11% and healthcare at 6%.

Duty Structure


Personal Computer - - = Personal computers 12.4 12.4 =CD-ROM and other storage devices

- - + CD-ROM and other storage devices

6.2 6.2 =Motherboards - - + Motherboards 12.4 12.4 =Printers, keyboards, scanners, mouse

- - + Keyboard, Mouse 12.4 12.4 =Microprocessors - - + Microprocessors 6.2 6.2 =Routers, Modems - - + Routers, Modems 12.4 12.4 =

*the above carry a Countervailing Duty (CVD) of 10% and Special Additional Duty (SAD) of 4%. # inputs/components used in the manufacture of personal computers exempt from special additional duty of 4%

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Proposal and Impact


Exemption from special additional duty from 4% on inputs/components for PC manufacturing

Presently, an inverted duty structure prevails with effective tax rate on finished product less than tax on imported components. However, the proposal for exemption of SAD is likely to boost domestic production and reduce the dependence on imports.

Impact on Companies


HCL Infosystems + Exemption of 4% SAD is expected to improve domestic production and reduce dependence on imports.

TCS =Infosys =Firstsource Solutions =

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Media and Entertainment Industry Snapshot:

The Media and Entertainment (M&E) 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 estimates, the M&E industry grew at 11.8% yoy in CY13 to Rs.918bn backed by digitisation, increasing penetration in Tier 2 and Tier 3 cities, regionalisation and new media business. Television (45%), Print (26%) and Film (14%) continue to be the major contributing sectors to the industry. The contribution of advertising revenues to the overall M&E industry revenues has increased from 38% in CY08 to 39.5% in CY13. Television and print media accounted for 84% of the total advertising revenues garnered by the industry.

CARE Research believes that Indian M&E industry is facing the heat of slowdown in advertising spend on account of sluggish growth and falling margins for corporates. Advertisers are shifting from print and television to niche media like digital media which is cheaper and more focused. Hence CARE Research expects the growth in CY14 to be around 8-10% CAGR. However over CY15-CY17, CARE Research expects the industry to grow at 10-12% CAGR, given the impetus introduced by digitization, continued growth of regional media, ongoing state level elections, strength in the film sector and fast increasing new media businesses. Besides growth in the long run will also be driven by favourable demographics, rising disposable income and increased spend on discretionary items.Challenges for the sector like piracy and inadequate industry measurement systems leading to revenue leakages are being addressed albeit gradually.

Duty Structure

Service Tax (%) Before After Impact

Online and Mobile Advertising NIL 12% -

Proposal and Impact

Budget proposals Impact on the IndustryLevy of service tax on online and mobile advertising

Likely to have a marginally negative impact on the digital advertising industry. Given the increased cost of digital advertising, the advertisers may resort to alternate traditional media channels.

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Mining and MineralsIndustry Snapshot:

The mining and metallurgical sector remains vital to the development and economic growth of the developing countries and India remains geologically endowed with a number of mineral resources. Currently, India produces around 87 minerals which include 4 fuel minerals, 10 metallic, 47 non-metallic, 3 atomic and 23 minor minerals. However, the mining sector in India in dominated by coal comprising around 80 percent of the mined reserve while the balance 20 percent comprises various other minerals which includes copper, iron, lead, bauxite, zinc, gold, uranium, etc.

Although the country is more or less self reliant in respect of a number of minerals, a significant gap exists with regards to a large number of critical minerals and metals such as coal, uranium, copper ore etc. for which the country is partly or largely dependent on imports. Various inefficiencies in the sector including policy lacuna, political interference, stringent government regulations, environmental issues, lack of infrastructure and financing mechanism have hampered the growth of the sector. Accordingly, the share of Indian mining and quarrying sector (around 2 percent of its GDP) vis-à-vis other mining nations (around 5-6 percent of its GDP) has remained significantly low. Further, exposure of various illegal practices being prevalent in mining sector has led to closure of a number of mines, which in turn resulted in attracting increased vigilance and Govt. regulations for the sector.

In this backdrop, the Govt. in the 12th five-year (2012 to 2017) plan is focussing on exploration, search of strategic, scarce, and deficit minerals to reduce imports. Further, the Ministry of Mines has recently framed a new draft Mines and Minerals (Development and Regulation) Bill, 2011 which would replace the MMDR Act 1957 and emphasizes on benefit sharing and local area development which would lead towards sustainable development of the sector amidst environmental security and industrial growth.

Duty Structure


Iron ore 2 2 =Coking Coal 0 2.5 -Bauxite 2.5 2.5 =Manganese Ore 2.5 2.5 =Chrome Ore 2.5 2.5 =Limestone 5 5 =

Proposal and Impact


Increase in export duty of bauxite from 10 % to 20 %. The same is likely to have a negative impact on the bauxite mining companies exporting the ore.

Increase in clean cess from Rs.50/tonne to Rs.100/tonne

Per tonne increase in cost of mining owing to increase in clean energy cess

Proposed to increase the royalty rate, which is due for revision in order to ensure greater revenue to the state governments

Royalty rate is the rate, which the miners pay to the state governments. Increase in Royalty Rate will increase the liability of the mining companies towards the state governments.

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Impact on Companies


NMDC = The Union Budget 2014-15 has proposed to increase the Royalty Rate. Furthermore, it is also proposed to increase the clean energy cess from Rs.50/tonne to Rs.100/ tonne. The export duty on bauxite is proposed to be increased to 20% from the existing 10%, which will restrict miners from exporting bauxite. While there is a likely increase in the cost of mining, CARE believes the mining companies would be able to pass on the increase in cost to its end-users.

SesaSterlite =OMDC =MOIL =

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Non-ferrous MetalsIndustry Snapshot:

Demand and prices for non-ferrous/base metals are directly correlated with the industrial production. The base metal industry is bearing the brunt of the downward revision in global macroeconomic outlook. Muted industrial activity along with sluggish demand outlook from the developed economies and the persisting concerns of the slowing Chinese economyare putting pressure on the overall demand and subsequently the prices of these metals.

Fundamentally, the prices of all base metals depend upon the rate of demand growth and the underlying inventory position of a particular base metal. Decrease in the prices of the base metals in the last one year can be attributed to the muted demand growth on the global front and sufficient inventory holding of the underlying base metal. However, the changing socio-economic conditions and expected recovery of demand from the developed and theEuropean markets is likely to stabilize the demand for these metals in the long-run.

CARE expects prices of all base-metals to remain volatile on the back of the ongoing macroeconomic development in the Euro zone and the US, Chinese economic outlook and the strengthening of the US dollar vis-a-vis the other major currencies in the world.

Duty Structure


Bauxite 5 5 = Alumina 12 12 =Aluminium Scrap 5 5 = Caustic Soda 12 12 =Alumina 5 5 = Aluminium Ingots 12 12 =Caustic Soda 7.5 7.5 = Copper Concentrates 12 12 =Aluminium Ingots 5 5 = Refined Copper 12 12 =Copper Concentrates 2.5 2.5 = Zinc Concentrates 12 12 =Copper Scrap 5 5 = Refined Zinc 12 12 =Refined Copper 5 5 = Lead Concentrates 12 12 =Zinc Concentrates 2.5 2.5 = Refined Lead 12 12 =Refined Zinc 5 5 = Non-Coking Coal 12 12 =Lead Concentrates 2.5 2.5 = Petroleum Coke 12 12 =Refined Lead 5 5 = Calcined Petroleum Coke 12 12 =Steam coal 2 2.5 -Petroleum Coke 2.5 2.5 =Calcined Petroleum Coke 0 2.5 -

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Proposal and Impact


Increase in export duty of bauxite from 10 % to 20 %.

The same is likely to have a marginally positive impact on the aluminium-manufacturing players not having captive sources of bauxite. However, the export volume is not significant and as such, the impact is not much.

Exemption in basic customs duty is being provided on flat copper wire for use in the manufacture of Photo Voltaic ribbons (tinned copper interconnect) for solar PV cells or modules

This is likely to have a marginally positive impact on the copper value-added products manufacturers.

The customs duty on steam coal is being raised from 2% to 2.5%

This is likely to have a negative impact on the non-ferrous metal producers due to increase in cost of production.

Increase in Clean Cess from Rs.50/tonne to Rs.100/tonne and the likely upward revision of Royalty Rates

This is likely to have a negative impact, as the cost of captive raw material products, which are mined, is likely to increase.

Impact on Companies


Hindustan Zinc Ltd - Increase in customs duty on steam coal to increase the cost of production for zinc manufacturers.

Hindalco Ltd =Increase in customs duty on steam coal to increase the cost of production for aluminium manufacturers, however, the increase in export duty of bauxite will help in procuring bauxite.

NALCO -Increase in customs duty on steam coal to increase the cost of production for zinc manufacturers. In addition, likely increase in the royalty rate will further increase the cost of captive bauxite mined.

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Oil and GasIndustry Snapshot:

Indian Oil & Gas sector comprises of primarily three segments, namely Exploration & Production (upstream), Midstream and Downstream (Refining & Marketing). The size of the oil and gas industry in terms of turnover stands at about US$ 180bn, contributing about 15 per cent to the national GDP. In India, oil and gas sector is dominated by few large players, mainly Public Sector Undertakings (PSUs) and is highly regulated by the government. The sector caters to the energy needs of the economy and hence is directly linked to the economic activity of any country or region.

Prices of sensitive petroleum products (Diesel, LPG, Kerosene) are regulated by government hence oil marketing companies (OMCs) incur huge under-recoveries. The under-recovery during FY14 stood at Rs 1,399 billion. The continued incurrence of under-recoveries by OMCs adversely impacts their financial and liquidity position.

India’s oil import dependency was at 85 per cent in FY14 indicating the economy’s high dependence on imported crude oil. Indian crude oil demand is expected to grow at a steady rate of 2-3 per cent. However, domestic crude oil supply is not expected to keep pace with rising demand, making India vulnerable to not only international crude oil prices but also to exchange rates.

India’s natural gas industry is also characterized by a supply deficit due to low domestic production and inadequate distribution infrastructure. Domestic gas production has been on a declining trend particularly due to fall in Reliance Industries’ KG-D6 production. Decline in most of the country’s ageing fields has further compounded the supply deficit. Going forward, domestic gas supply is expected to grow at a CAGR of 6% in the next two fiscal while gas demand to grow at a CAGR of 17% during the same period; thus, aggravating the deficit situation. India is expected to continuously rely on expensive imported LNG to meet its energy needs. LNG imports are anticipated to grow at a CAGR of 29% during the same period to partially meet the shortfall.

Duty Structure


Crude oil 0 0 = Diesel Rs 3.5/litre Rs 3.5/litre =Ethane, Propane, Ethylene, Propylene, Butadiene and Ortho-xylene

5 2.5 +Petrol Rs 9.2/litre Rs 9.2/litre =

LNG 5 5 = Branded Petrol Rs 7.5/litre Rs 2.35/litre +

Proposal and Impact


To develop 15,000 km gas pipeline grid by using appropriate PPP model

The increased pipeline network would increase the usage of both domestic as well as imported gas. In the long term, this could be beneficial in reducing the dependence on one energy sources. This would be positive for gas distribution companies like GAIL and GSPL

Usage of PNG to be rapidly scaled upNatural gas being green gas and cheap in comparison to liquid fuel would reduce cooking fuel subsidy. This would be positive for CGD players like IGL, Gujarat Gas Company, Mahanagar Gas, GAIL Gas, Adani Gas.

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To accelerate production and exploitation of Coal Bed Methane (CBM) reserves

Positive for companies allocated with CBM blocks like Great Eastern Energy Corporation, Essar Oil, RIL, ONGC. This will increase the domestic production of gas.

To revive aged or closed wells

Fields of ONGC and Oil India have aged and production from such fields has declined over the span. The government plans to use modern technology to revive such closed and aged well would be positive. Any additional production from such well will contribute to the overall domestic production.

Impact on Companies


GAIL , GSPL + Increased pipeline grid connect their customers well

IGL, Gujarat Gas + Scale up in PNG usage would overall increase the sales volume of CGD players

RIL, ONGC, Oil India + Government plans to revive aged and closed wells

RIL, Essar Oil + Accelerate CBM production

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PipesIndustry Snapshot:

The Indian pipe Industry is one of the top manufacturing hubs globally with a presence across all categories of pipes viz steel, cement and plastic. Also, owing to its locational advantage and quality of products, India has centred itself as a major steel pipe exporter to destinations like the USA, Europe and the Middle East.

Demand for pipes depends on the level of economic activity as pipes derive their application from diverse industries such as chemicals, agriculture, construction, oil & gas, etc.

The pipe industry is highly raw material (RM) intensive; RM cost accounts for about 75-80% of total cost for steel pipe companies whereas, it constitutes around 70-75% of total cost for plastic pipes companies. The key RMs used for manufacturing steel pipes is HR Coil, steel plates and Billets. For plastic pipes, Polyvinyl Chloride (PVC), High-Density Polyethylene (HDPE) and Ethylene are the major raw materials used.

During the last two fiscals, pipes industry has tread a difficult path owing to moderation in domestic as well as global economy. However, CARE expects that the demand for the Indian pipe industry is expected to remain healthy in the long term, on the back of increasing demand arising from oil and gas, infrastructure, water supply and sanitation projects. Also, the lower oil and gas pipeline penetration level in India provides huge opportunity for laying new pipeline infrastructure in the country, considering its vast geographical area.

Duty Structure


Steel pipes 10 10 = Steel pipes 12 12 =Plastic pipes 10 10 = Plastic pipes 12 12 =Cement pipes 10 10 = Cement pipes 12 12 =HR Coils 7.5 7.5 = HR Coils 12 12 =Polyvinyl Chloride (PVC) 7.5 7.5 = Polyvinyl Chloride (PVC) 12 12 =High-Density Polyethylene (HDPE)

7.5 7.5 = High-Density Polyethylene (HDPE)

12 12 =

Proposal and Impact

Budget proposals Impact on the IndustryAllocation of Rs.1,000 crore for irrigation via “Pradhan Mantri Krishi Sinchayee Yojana (PMKSY)” scheme

This will drive the demand for SAW (Submerged Arc Welded), DI (Ductile Iron) and plastic pipes required for laying the pipeline infrastructure for water supply to farms and houses.

National Rural Drinking Water Programme allotted Rs.3,600 crore to provide safe drinking water in approximately 20,000 habitations affected with arsenic, etc

Government is planning to cover every household with total sanitation by year 2019

As per census 2011 data, out of 25 crore households in India around 46% have sanitation facility within their premises. Covering the remaining 54% household in the next 5 years will require huge pipeline infrastructure leading to a robust demand opportunity for plastic and cement pipes in India.

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The budget has proposed to create additional 15,000 km of pipelines using PPP (Public Private Partnership) model to complete the gas grid across the country and increase the usage of domestic as well as imported gas.

The proposed pipeline infrastructure will lead to more demand for steel pipes in India. However, availability of gas is an important prerequisite towards effective implementation of this proposal.

Slurry pipelines for the transportation of iron ore allowed investment-linked deduction

This proposal is expected to boost investments in this sector and would in turn increase the demand for SAW pipes.

Impact on Companies


Welspun Corp Ltd. +The company operates in HSAW and LSAW pipe segments. The demand for the company’s products is likely to increase due to proposals in the budget towards encouraging gas and slurry pipelines.

Jindal Saw Ltd +The company operates in HSAW, LSAW, Seamless and DI pipe segments. The allocation to drinking water and sanitation projects will drive the demand for DI pipes while the demand for HSAW pipes will get a boost due to the completion of gas grid proposed.

Indian Hume Pipe Co. Ltd. +The company primarily deals in cement pipes. The proposal in the budget to provide sanitation facility to every household in five years will drive the demand of cement pipes for the company.

Jain Irrigation Systems Ltd. +Jain Irrigation Systems is engaged in manufacturing of micro irrigation systems, PVC pipes, HDPE pipes and other agricultural inputs. The finance minister’s proposal to provide assured irrigation via PMKSY scheme will increase demand for its plastic pipes and other irrigation products.

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PortsIndustry Snapshot:

India has 7,517-km long coastline with 13 major ports and 187 non major ports, which handle around 90% of India’s total international trade in terms of volume and 70% in terms of value. The total volume of traffic handled by all the major Indian ports during FY14 (refers to the period April 1 to March 31) was about 555 million tonnes as compared with about 546 million tonnes handled in FY13, a Y-o-Y growth of about 2%.

The key challenges faced by the sector are full utilization of capacities at the major ports, draft constraints and operating inefficiencies. On the other hand, development of new minor ports have been affected by inadequate connectivity with the hinterland, the absence of multi-modal connectivity to and from ports and the differential royalties and revenue sharing among ports.

As a result of allowance of the 100% FDI in the port sector, the port privatization has gained momentum. While in the past, most of the private initiative in ports was restricted to development of container terminals, the past couple of years have witnessed significant investment in the minor ports, dominated by bulk capacities added in Gujarat and the eastern coast, predominantly through PPP projects.

The Planning Commission has estimated the total traffic growth at about 14% during the 12th Five Year Plan (2012 to 2017). However, given the plethora of issues surrounding the projects in the power, steel and coal sectors coupled with the slowdown in overall economic growth, CARE expects the total annual traffic at all ports to grow at a CAGR (Cumulative Annual Growth Rate) of 6.2% and reach a level of 1,232 million tonnes by FY17.

Duty Structure


Port Projects 5 5 = Port Projects 10 10 =

Proposal and Impact

Budget proposals Impact on the IndustryProposed to award 16 new port projects in FY2015 and has also allocated Rs.11,635 crore for the development of outer harbour project in Tuticorin.

This is expected to enhance the overall capacity of the Indian port sector, thereby decongesting the existing ports and improve turnaround time.

Impact on Companies


Gujarat Pipavav Port Ltd + Both these existing port operators having significant track record are expected to bag some of these projects.Adani Ports and Special Economic Zone Ltd +

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PowerIndustry Snapshot:

The all-India installed capacity stood at 248.5GW as on 31st May, 2014. In FY2014 (period refers to April 1st to March 31st), India added 17.3GW of capacity. In FY2013, the base power deficit was 8.7%, which shrunk 450bps to 4.2% in FY2014, while peak deficit also narrowed by 550bps to 4.5% over the same period.

Despite the record capacity addition of 17.3GW in FY2014, the sector is plagued by 1) fuel constraints i.e. coal and (lack of) gas adversely impacting the operating levels of various power plants and 2) weak financial health of power distribution companies.

Encouraging policy framework in renewable energy (RE) sector has resulted in rising share of capacity addition for RE from 5.9% (7.7GW) in FY2007 from 12.9% (31.7GW) in FY2014.

Duty Structure


Non-Coking Coal 2 2.5 - Forged steel rings 12 NIL +Countervailing Duty on Non-coking coal

2 2 = Machinery and equipments for Solar power plants

12 NIL +

Clean Energy Cess Rs50/Tonne

Rs100/Tonne

- Raw material for Manufacturing (back sheet and EVA sheet)

12 0 +

Forged steel rings 10 5 + Machinery and equipments for Bio Gas Plants

12 NIL +

Machinery and equipments for Solar power plants

7.5 5 +

Raw material for Manufacturing (back-sheet and EVA sheet)

10 0 +

Machinery and equipments for Bio Gas Plants

7.5 5 +

Parts and components required for the manufacture of wind operated electricity Generators

4 0 +

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Proposal and Impact


Extension of 10-year tax holiday (u/s 80IA) till FY17

The Power companies continue to enjoy lower tax rate till FY2017. Since, the power generation capacity addition is expected at 18-20GW per year in the next two-three years, it will benefit power generators and transmission (PGCIL) companies.

Launch of feeder separation scheme in rural areasIt is likely to aid distribution sector (DISCOMs) where it would strengthen transmission and distribution in rural areas and is likely to improve the service levels.

Increase in clean energy cessIncrease in clean energy cess from Rs50/tonne to Rs100/tonne is expected to raise Rs30 bn for the purpose of National Clean Electricity Fund for FY2014-2015.

Reduction in basic customs duty for machinery and equipment for Solar power plants

The reduction in customs duty and excise on imported machinery and domestic for solar power plants will reduce the costing for solar power plants (per MW cost) thereby boosting the power capacity addition in Solar sector.

Impact on Companies


NTPC, PGCIL, Adani Power, Tata Power JSW Energy other GENCOs, TRANSCOs, DISCOMs +

Extension of 10-year tax holiday (u/s 80IA) till FY17 is likely to benefit power generation, transmission and distribution companies

Adani Power, JSW Energy, JPL and other merchant players - Merchant Power plants would be adversely impacted since

increase in coal cost would not be a pass-through.Orient Green Power Limited (OGPL) and other Renewable Energy Companies + Increase in corpus of National Clean Energy Fund is likely to be

utilized for various renewable-based projects.

OGPL and Solar Independent Power Producers (IPPs) +

The reduction in customs duty on imported machinery and domestic for solar power plants will reduce the costing for solar power plants (per MW cost) thereby boosting the power capacity addition in Solar sector.

Various Power IPPs + Allocation of funds towards Solar UMPPs.

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Real EstateIndustry Snapshot:

The demand for the Indian real estate industry can be categorized mainly into three segments, viz, residential, commercial and retail. It contributes around 5-6% to the gross domestic product and it is also amongst the highest employment generating sector. In the past few decades, rising population, increasing trend of urbanisation, rising income levels of a growing middle class, nuclearisation of families and tax incentives provided momentum to the demand for housing. The demand for commercial real estate is mainly driven by IT/ITES (Information Technology Enabled Services), BSFI, FMCG and telecom sectors.

The real estate sector in the country is highly fragmented with many regional players who have a significant presence in their respective local markets. The key risks associated with the real estate sector are mainly the cyclical nature of the business, interest rate fluctuations and changes in government policies. Currently, the industry has been marred by liquidity concerns, rising inventories and softening volumes. The demand for real estate has remained sluggish on account of the slowing economy, apprehensions in the job market, sticky inflation and high interest rates that deterred buyers from making their purchase decision. Also, delay in approvals in certain major/ micro markets affected the progress of ongoing projects and fresh launches, thereby dragging down the sales further.

Banks/financial institutions have been cautious in lending to the sector due to high perceived risk while capital markets have remained unfavorable. Lower cash accruals and increased input costs due to inflation have forced many leveraged players to sell non-core assets and offer discounts.

CARE expects gradual recovery in the real estate sector with improved buyer sentiment and expectations of reversal in interest rate cycle.

Duty Structure


Steel 12 12 =Cement 12% ad-valorem*+’120 12% ad-valorem*+’120 =

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

Proposal and Impact


REITs (Real Estate Investment Trust) would be given a tax pass-through status to avoid double taxation

This would give a boost to REIT market India. It would pave way for increased funds in the sector and provide access to investors the benefit of regular income and appreciation from real estate.

Increase in deduction limit from Rs.1.5 lakh per annum to Rs.2 lakh per annum on account of interest on loan in respect of self-occupied house property

This would provide an impetus to overall housing sector.

Reduction in built up area from 50,000 sq mtr to 20,000 sq mtr, and minimum capitalization from USD 10 million to USD 5 million for smart cities

The reduction in built-up area and size of projects will allow mid-sized and smaller developers better access to FDI.

Smart Cities – Rs.7,060 crore for development of 100 smart cities

This would provide thrust for real estate and infrastructure development and creation of new cities.

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Impact on Companies


DLF Ltd +Incentives for REITs and low cost housing (allocation of Rs.4,000 crore for National Housing Bank), development of 100 smart cities, increase in deduction of interest on self-occupied properties, and inclusion of slum rehabilitation under CSR will benefit real estate developers as these measures will create a favorable environment that will boost housing sector in the country.

Sobha Developers Ltd. +Unitech Ltd +HDIL +Mahindra Lifespace Developers Ltd +Orbit Corporation Ltd +Indiabulls Real Estate Ltd. +

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Roads & HighwaysIndustry Snapshot:

Road transport plays a pivotal role in the economic development of the country. In India, roads carry about 65% of the total freight traffic and 80% of the total passenger traffic. As of June 30, 2014, India has a road network of about 4.2 million km – the second largest in the world. The road network in India comprises of National Highways (NHs), Expressways, State Highways, District roads and Rural roads. NHs and state highways together constitute about 5% of the total road network in the country while 95% comprises rural and district roads.

Over the years, Government of India has emphasized on enhancing country’s road network through various programs such as National Highway Development Project (NHDP), Pradhan Mantri Gram Sadak Yojna (PMGSY), Special Accelerated Road Development Programme for the North-Eastern Region (SARDP-NE). The road sector witnessed investment to the tune of about Rs.1,526 bn during the Tenth Five Year Plan (2002-2007), which increased to more than two fold in the Eleventh Five Year Plan (2007-2012). However, in the Twelfth Five Year Plan (2012-2017), the investment in the road sector is expected to be around Rs.9,150 bn with 33% of the investments contributed by the private sector. Apart from NHDP, state projects are likely to drive the investments in the road sector as the focus of state governments on strengthening the road infrastructure has gathered momentum with expected rise in the economic activity.

Whilst there are positives in terms of thrust from government to clear the backlog of the under implementation projects and premium restructuring for few high value projects, introducing enabling clauses for easy exit to developers, the challenges in the form of delay in clearances and cumbersome approval processes for projects under implementation phase, has led to continued slower progress. As a result, in the medium term, the private sector participation is likely to remain muted and the proportion of investment from the Government is expected to be higher than envisaged.

Duty Structure


Cement Retail

12 * + Rs.120 per tonne 12 * + Rs.120 per tonne =Bulk Cement 12 ad-valorem# 12 ad-valorem# =Steel 12 12 =

*An abatement of 30% on the Retail Sale Price and is on ad-valorem; #ad-valorem

Proposal and Impact

Budget proposals Impact on the IndustryTarget of NH construction of 8,500 km to be achieved in FY15

Continued thrust from the government for the development of roads with the priority on the execution rather than awarding of new projects with the emphasis on EPC mode.

An allocation of Rs.37,880 crore for road development in NHAI and State Roads which includes Rs.3,000 crore for the north east. Allocation of Rs.14,389 crore towards PMGSY

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To develop more nuanced models of contracting in order to remove the rigidities in contractual arrangements and develop quick dispute redressal mechanism, an institution called 4P India will be set up with a corpus of Rs.500 crore.

The intent is to boost the private participation in the road sector in the long term which has remained subdued in the past one year. This is viewed positive.

Work on select expressways in parallel to the development of industrial corridors to be initiated. For the purpose of project preparation, NHAI shall set aside a sum of Rs.500 crore.

The industry players shall have more clarity before taking up the projects on expressways, which is likely to result in minimal setbacks during execution phase.

Banks to be permitted to raise long-term funds for lending to infrastructure sector with minimum regulatory pre-emption such as CRR, SLR and Priority Sector Lending (PSL). The banks shall be able to extend longer tenure credit to the

infrastructure sector including roads, which is a mutually benefiting proposition. Besides the infrastructure developers would also be able to access alternate source for long-term funding which in turn will propel growth in the road sector.

A modified REITS type structure for infrastructure projects is introduced as Infrastructure Investment Trusts (InvITs), which would have a similar tax efficient pass through status for PPP and other infrastructure projects. Increase in the corpus from Rs.5,000 crore to Rs.50,000 crore under Pooled Municipal Debt Obligation Facility.

Impact on Companies


IRB Infrastructure Developers Ltd. +The increase in the budgetary allocation, target for NHs and the availability of long-term funds shall be beneficial for the players.

IL&FS Transportation Networks Ltd. +Reliance Infrastructure Ltd. +

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ShippingIndustry Snapshot:

With the greater proportion of world trade being routed through the sea, the shipping business remains positively co-related to the developments in the global economy. Also, globalization of production processes has resulted in increase of merchandise trade which in effect has resulted in growth in trade of intermediate goods & components, extending the global supply chains across countries. As a result, any decline in economic activity has a negative effect on volumes of shipping business.

In line with the buoyant economic growth during FY04 – FY08, the country’s sea-borne trading volumes witnessed a Y-o-Y growth in the range of 11-16 percent. However, with the onset of the global financial crisis and, thereafter, the slower-than-expected growths in the recent past, the country’s sea-borne trading volumes were adversely affected. In FY08, the Y-o-Y growth in GDP was recorded at 9.3 percent and the growth in sea borne trade was as high as 15.8 percent, whereas, the GDP growth in FY13 was a subdued 4.4 percent and the growth in sea borne trade stood at a dismal 2.1 percent.

Going ahead, CARE Research expects the global fleet size to increase from about 1,170 million GT in CY14 to about 1,322 million GT by the end of CY18, implying a CAGR of 3.1 percent. With global sea-borne trade estimated to increase at a

Proposal and Impact


Introduction of Indian controlled tonnage

This would encourage foreign flag liners controlled by Indian owners to register in India and get all tax benefits and cheaper credit that foreign flag carriers enjoy over domestic carriers. This in turn would increase the national tonnage.

Impact on Companies


Mercator Limited =

No ImpactGESCO Limited =SCI Limited =Essar Shipping Limited =

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SteelIndustry Snapshot:

India has about 95 million tonnes of installed steel capacity with per capita steel consumption of 57.8 kg in 2013. The per capita consumption is nearly one-fourth of the global average of 225.2 kg in 2013. Due to slowdown in infrastructure investment in last two-three years, domestic steel demand grew by 0.6% in 2013-14 vis-a-vis GDP growth of 4.7% during the similar period.

Steel industry has been reeling under the impact of slowdown in demand from the major end user industries like automobiles and real estate & construction on one hand and increase in cost of production on the other due to the continued disruption in availability of iron-ore and coal impacting capacity utilisation. The sector has suffered de-rating since 2011-12 due to various factors like weak macro environment, higher inflation, volatility in raw material prices, depreciating rupee, delays in allocation of coal blocks and iron ore mines for captive consumption by GoI, delay in commissioning of projects and high interest rates.

Amidst all challenges, it was in the last fiscal that India turned out to be net exporter of steel for the first time in FY13 and 100% FDI through the automatic route was allowed in the steel sector. CARE expects the revival in demand from sectors like construction, infrastructure and automobiles to improve the long-term outlook for steel. With the government planning to increase its infrastructure spending to US$ 1 trillion during the 12th Five-Year plan, taking 15% as steel component in the total investment, then it can generate additional demand worth US$ 75 billion of steel in the next few years, the future of the Indian steel industry looks bright.

The short term outlook on the profitability of Indian steel players has improved, given the lenient price trends of key raw materials. CARE expects that the adverse impact of a low volume growth will get neutralise from the benefits of lower raw material cost in the near term, even if a part of the benefits of lower costs are passed on to customers to protect sales volumes. However, in the long term, the volume growth would be critical for improvement in capacity utilisation levels and profitability of steel players.

Going forward favourable economic policy, prudent regulatory process, broad anti-dumping measures and increased investment in research and development are needed to provide impetus to the industry as a whole.

Duty Structure


HR Coils 7.5 7.5 = HR Coils 12 12 =Bars and Rods 5 5 = Bars and Rods 12 12 =Alloy Steel 5 5 = Alloy Steel 12 12 =Pig Iron 5 5 = Pig Iron 12 12 =Sponge Iron 0 0 = Sponge Iron 12 12 =Steel Melting Scrap 0 0 = Steel Melting Scrap 12 12 =Iron Ore 2.5 2.5 = Iron Ore 12 12 =Forged Steel Rings 10 5 + Forged Steel Rings 12 Nil +Stainless Steel Flat products (CTH 7219 and 7220)

5 7.5 + Bituminous Coal 0 0 =

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Dolomite & Limestone ( Steel Grade)

5 2.5 + Steam Coal 0 0 =

Anthracite Coal & Other Coal

5 2.5 +

Coking Coal Nil 2.5 -Bituminous Coal 2 2.5 -Steam Coal 2 2.5 -Metallurgical coke Nil 2.5 -

Countervailing Duty (CVD) (%) Before After ImpactAnthracite Coal & Other Coal 6 2 +Coking Coal 6 2 +

Proposal and Impact


Increase in custom duty of coking coal, bituminous coal, steam coal and metallurgical coke

Increase in customs duty on coal (bituminous coal, steam coal and coking coal) and metallurgical coke is likely to result in increase in cost of production of steel manufacturers, who import coal & coke for production of sponge iron & pig iron and use steam coal as a fuel in captive thermal power plants.

Decrease in customs duty of anthracite coal and countervailing duty (CVD) on anthracite coal and coking coal

The cost of production of pig iron players will be moderately impacted due to reduction of custom duty & CVD on anthracite coal and reduction of CVD on coking coal.

Increase in custom duty on stainless steel flat products

The domestic producers of stainless steel flat products are expected to enjoy better price realizations based on the higher landed costs of imports due to hike in customs duty of imported stainless steel flat products from 5% to 7.5%.

Decrease in excise duty on forged steel rings The production of forged steel ring will get an impetus with the abolition of excise duty (earlier 12%).

Impact on Companies

Company Impact CommentsSAIL Ltd.

-

Increase in customs duty on coal (bituminous coal, steam coal and coking coal) and metallurgical coke is likely to result in increase in cost of production of steel manufacturers, who import coal & coke for production of sponge iron & pig iron and use steam coal as a fuel in captive thermal power plants.

Accordingly, while the margins of sponge iron players will be negatively impacted that of pig iron players will be moderately impacted due to reduction of custom duty & CVD on anthracite coal and reduction of CVD on coking coal.

Tata Steel Ltd.JSW Steel Ltd.Essar Steel Ltd.Bhushan Steel Ltd.

Usha Martin.

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SugarIndustry Snapshot:

Sugar which was a highly regulated industry witnessed partial decontrol in April 2013, during which, the Government lifted the levy obligation of 10% and abolished the regulated release mechanism. However control on cane procurement cost continues. The sugar mills in general have suffered losses on account of high cane prices set by State Governments. For most part of FY14, realisation from sugar was below the cost of production as abundant supplies had kept the sugar prices under pressure.

The competition in the sugar industry is intense as approximately 526 units are engaged in sugar production in India, 41 per cent of which are from co-operative sector producing about 37 per cent of the total sugar output. Maharashtra and Uttar Pradesh are the two largest sugar producing states in the country.

ISMA estimates the sugar production for SS 2013-14 at 24.2 million tonnes. (SS 2012-13: 24.7 million tonnes). This marks the fourth consecutive season where India’s sugar production surpasses consumption. Recent moves by the government including raising import duty to 40% from the present 15% and extending sugar export incentive of Rs.3300 per tonne to continue till September 2014 is expected to help the industry manage the surplus sugar scenario.

Duty Structure


Raw Cane Sugar 40 40 = Raw Beet Sugar 12 12 =Refined Sugar 40 40 = Raw Cane Sugar 12 12 =

Refined Sugar 12 12 =

Proposal and Impact

Budget proposals Impact on the IndustryPre-budget announcement of hike in customs duty from 15% to 40% and Rs.4,400 crore additional interest-free loans to sugar companies to clear off cane arrears.

Higher customs duty is expected to reduce sugar import and help manage the surplus stock position in the domestic market. Additional interest-free loan is expected to ease the liquidity profile of sugar companies.

Impact on Companies


K.C.P Sugars and Industries Corporation Ltd +Pre-budget announcement of hike in customs duty and Rs.4,400 cr of interest-free loan would help sugar companies manage the surplus stock scenario and ease liquidity.

Bajaj Hindustan Ltd +Balrampur Chini Mill Ltd +Bannari Amman Sugars Ltd +

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TextilesIndustry Snapshot:

The Indian textile industry is one of the major sectors of Indian economy and contributes almost 14 per cent of India’s industrial production, 4 per cent of National GDP and almost 17 per cent of India’s export earnings. Being a manpower-intensive industry, it provides employment to about 35 million people (both directly and indirectly).

The Indian textile industry can be divided into anumber of segments such as cotton, silk, woolen, readymade, jute and handicraft, however; it isskewed towards cotton. It has come of age and is gaining acknowledgment on the world platform with excellent textiles manufacturing base and easy availability of raw material. India is self-sufficient in cotton, being the second-largest producer in the world.

Technical Textiles is one of the most promising sector of the textile industry in India, with a current market size of Rs.57,000 crores and a growth rate poised to take off from 11%, to almost 20% during the 12th Five Year Plan. Technical Textiles are material products used primarily for their functional properties.

Duty Structure


Raw Cotton 0 0 = Raw Cotton 0 0 =Cotton Yarn 10 10 = Cotton Yarn# 12 12 =Cotton Fabric 10 10 = Cotton Fabric# 12 12 =PTA 10 10 = PTA 12 12 =MEG 10 10 = MEG 12 12 =Polyester Chips 10 10 = Polyester Chips 12 12 =PSF 10 10 = PSF 12 12 =Viscose Staple Fibre 10 10 = Viscose Staple Fibre 12 12 =DMT 10 10 = DMT 12 12 =Manmade Yarn 10 10 = Manmade Yarn 12 12 =Manmade Fabric 10 10 = Manmade Fabric 12 12 =Branded RMG 10 10 = Branded RMG 12@ 12@ =

@The companies may opt for ‘zero excise duty route’ in addition to the CENVAT route now available

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Proposal and Impact

Budget proposals Impact on the IndustryAllocation of Rs.500 crore for developing a Textile mega cluster at Varanasi and six more at Rae Bareily, Lucknow, Surat, Kutch, Bhagalpur & Mysore

Government’s announcement to set up Textile clusters would benefit the players operating in the Textile segment.

Financial assistance for handloom/handicraft/other crafts sector

Government’s announcement to develop and promote handloom products/other crafts would benefit the players operating in these sectors specially the un-organised segment.

Certain items have been added for duty-free import by garment manufacturers for exports. Duty-free entitlement for import of trimming & embellishments and other goods used by garment manufacturer for export is increased from 3% to 5%.

These steps are expected to improve competitiveness of Indian garment exporters.

Excise duty at the rate of 2% (without CENVAT) or 6% (with CENVAT) is being imposed on PSF and PFY manufactured from plastic waste or scrap or plastic waste including waste PET bottles.

Likely to affect players making recycled PSF/ PFY

Service tax exempted on loading, unloading, storage, warehousing and transportation of cotton, whether ginned or baled.

Marginally beneficial for cotton yarn players

Impact on Companies


Alok Industries Limited - No major impact

Mandhana Industries Limited + Positive for the company as it is into garment exports

JBF Industries Ltd - No major impact

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Warehouse / LogisticsIndustry Snapshot:

The industry remains largely unorganized and fragmented with the share of organized players in the industry accounting for mere 6 percent of the total industry size. The industry is characterized by its capital- intensive nature with the capital being required for the establishment of logistic parks, warehouses, CFS/ ICDs etc.

The demand of the Indian Logistics and Warehousing industry is expected to remain upbeat in the long-run owing to the increasing trade requirements of the Indian industries coupled with the rise in domestic consumption backed by the growth in the disposable income of the Indian households. Particularly, factors such as increased government spending on transport infrastructure, reforms in the government policy and increased participation of the private players especially in the development of ICDs, Free- trade warehousing zones (FTWZs), air cargo centers, integrated transport centers etc. augurs well for the growth of the industry.

CARE Research expects the logistics industry to grow in the range of 12-14 percent during FY14-18 period on CAGR basis with the penetration of organized logistics players expected to increase from 6 percent to 12 percent by FY17.

Proposal and Impact

Budget proposals Impact on the IndustrySet up of warehouse infrastructure fund and thereby an allocation of Rs.5,000 crore for the same.

This will increase the shelf life of agricultural produce and thereby increase the earning capacity of the farmers.

DisclaimerThis report is prepared by Credit Analysis & Research Limited [CARE Ratings]. CARE has taken utmost care to ensure accuracy and objectivity while developing this report based on information available in public domain. However, neither the accuracy nor completeness of information contained in this report is guaranteed. CARE is not responsible for any errors or omissions in analysis/inferences/views or for results obtained from the use of information contained in this report and especially states that CARE (including all divisions) has no financial liability whatsoever to the user of this report.

Union Budget Analysis 2014-15

Documents

Transcript of Union Budget Analysis 2014-15