Fairwealth Securities has come out with a report on Union Budget Preview 2011-12.
Union Budget Preview 2011-12:
Actions taken in FY11:
- Disinvestments worth ~ Rs 227 billion
- Allocation of 3G spectrum and Broadband Wireless Access that fetched over Rs 1000 billion
- Increased Spending on Infrastructure and Social sector
Grey Areas that remain a major cause of Concern:
- High WPI Inflation, especially food inflation
- Current Account Deficit at elevated levels
- Fiscal Deficit that may further widen in FY12 in the absence of appropriate measures
- Rising prices of Crude oil that may stoke fuel inflation
further and fiscal deficit in case crude oil prices go beyond USD 100
per barrel and Government continues to bear the fuel subsidy
Actions Expected in Union Budget 2011-12:
- Tax reforms such as implementation of GST and DTC
- De regulation of Diesel Prices to contain under recoveries
- Subsidies to Oil and Gas, Fertilizer, Food etc
- Relaxation of FDI norms in sectors like BFSI, Media, Retail etc
- Restoration of Service tax to 12%
- Introduction of Infrastructure fund
Key Expectations…..
Income Tax Exemption Limit could be hiked: Keeping in view the high inflation at 8%-9% which is eroding the incomes, the Finance Minister could hike the
Income Tax
exemption limit from the existing Rs 1.6 lakh. An increase in the limit
would be a step towards aligning the tax structure with DTC which
proposes the income tax exemption limit at Rs 2 lakh, 10% tax for annual
incomes in the range 2-5 lakh, 20% for 5-10 lakh and 30% for incomes
over 10 lakh.
Some Clarity on the implementation of GST and DTC:
Dissension between the Centre and the State have already postponed the
implementation of GST which was scheduled for April 1, 2010. Now the
Government is looking to roll out GST from April 1, 2012. If the issues
are not resolved, the implementation could be further postponed to a
date beyond April1, 2012. We expect a greater clarity on GST
implementation after the government introduces Constitution Amendment
Bill in forthcoming Budget Session.
Restoration of excise duty on selected sectors:
Excise duty that was hiked by 2% in the previous budget could see
another hike in the sectors that are performing well. The excise duty on
two wheelers and small cars could be raised to 12% from the current
10%.
A Wider Base and a Roll back expected in Service Tax:
A greater number of services are expected to come in the ambit of
service tax. In addition to this, the service tax rate that was left
untouched in the previous budget could be hiked to 12% owing to a strong
performance by the services sector.
Customs Duty on petroleum products may be reduced/waived off:
With crude hovering around US$ 100 per barrel and oil companies bearing
the burden of huge under recoveries, we expect the Finance Minister to
reduce/waive off the customs duty on various petroleum products. At
present the customs duties on Crude Oil, diesel and other refined
products are 5%, 7.5% and 10% respectively.
Infrastructure likely to remain as a focus area: Infrastructure
is likely to be a beneficiary in the forthcoming budget with main
thrust on the power sector. We expect that allocations in schemes such
as Accelerated Power Development and Reform Programme (APDRP) and Rajiv
Gandhi Grameen Vidyutikaran Yojana (RGGVY) could be hiked from Rs 3700cr
and Rs.5500cr respectively in Budget FY12. In addition to this the
sunsetdate for power units to avail tax holidays may be extended by a
year to 1st April 2012. The Finance minister might also introduce
infrastructure debt funds in the forthcoming Budget.
Social Sector spending likely to remain flat:
Though the ministry of Rural development has sought an allocation of
Rs.64000cr (60% higher than that in previous year) for the
Mahatma Gandhi
National Rural Employment Guarantee Act (MGNREGA), the act is unlikely
to see a higher allocation in Budget FY12 than that in Budget FY11. In
the Union Budget 2010-11, the finance Ministry had allocated Rs 40,100
Cr. for the NREGA. The allocation for the scheme in Union Budget 2011-12
is likely to be in the range Rs42000-45000 cr. The allocations in other
social schemes are also likely to remain flat since we expect that food
subsidy will be considerably higher this year.
The quantum of fertilizer subsidy likely to be increased:
The allocation for fertilizer subsidy will be increased considering the
under recoveries faced by the fertilizer companies and the rising
prices of inputs globally so that the domestic prices of urea, di
ammonium phosphate and Muriate of Potash do not increase.
Extension of 2% Interest rate Subvention:
Presently farmers can avail a 3% interest subsidy on loans easing the
effective cost of their crop loans to 7%. Besides this, there is an
additional 2% interest rate subsidy for farmers who repay their loans on
time. In the Union Budget 2011-12, the Finance Minister Pranab Mukherjee can extend the 2% interest rate subvention to the farmers in districts that have been declared flood or drought struck.
Sector Wish list…
INFRASTRUCTURE: The requirement for sustainable
infrastructure development is paramount both to provide the backbone for
economic activities as well to ensure that resources are conserved and
used efficiently. The Union Budget 2011-12 would have to explore many
options to see that growth of the economy remains robust next year and
beyond. Emerging challenges such as rising input costs and interest
rates amid still subdued global demand will have to be dealt with. In
this context, expectations of NBFC’s and bank’s being allowed to raise
Infra bonds could provide support to this capital intensive sector. More
focus on PPP can be found place in Union Budget 2011-12 to make the
sector more vibrant and for the timely competition of projects.
CAPITAL GOODS: Capital goods sector is expecting
high worth orders from steel segment leading to an increase in its
backlog since the steel sector is planning to increase capital
expenditure on plants. Huge mismatch in demand and supply of power
sector would claim for setting up more power plans, a positive trigger
for capital goods.
STEEL: With increased focus of Government of India
to build sound infrastructure, the domestic steel industry is expected
to grow at a CAGR of 10% in next five years against the average annual
growth of 8% achieved between 1991-2010. Going forward we expect steel
prices to remain firm on account of strong demand lead by recovering
global economies. However we believe higher raw material prices is a
cause of concern for the Industry. With the resumption of supplies from
Australia, prices of coking coal would also normalize from their highs.
We believe this scenario would be positive for steel companies.
AUTO & AUTO ANCILLARY: We don’t expect any major
move for the automobile industry in the budget except some incentives
regarding green cars technology, as it will help to take the automobile
industry to a new level in the form of hybrid and electric cars which
will be free from pollution and reduce the country’s dependence on
fossil fuels. Hence, we expect additional incentives for technology
development of hybrid cars. In addition reduction in custom duty on
energy efficient completely built units could also be considered. Auto
Component Manufacturers are facing challenges in production as the raw
material prices have soared dramatically in the previous year. Hikes in
prices of steel, aluminium and rubber have dented the margins of the
auto manufacturers.
TELECOM: The Sector is under scrutiny by the
Government on 2G issues. This can result in the additional expenses by
the service provider if additional amount asked to settle the accounts.
The industry expects the mergers and acquisition in near future as the
industry will face consolidation. New Telecom Policy is on the cards. It
is expected to bring more transparency in the sector related to revenue
structure of the companies, mergers & acquisition and spectrum
prices.
INFORMATION TECHNOLOGY: Demand for IT Services
exports is expected to continue to be robust with the recovery in
developed countries like US & Europe. According to NASSCOM exports
are expected to dominate the Indian IT industry, which account for 80%
of total software industry. Any clarifications regarding GST will
provide a sigh of relief to the industry and will avoid double taxation
which it has seen in the past few years.
PHARMA: Growth in the Indian pharmaceutical industry
at 11-12% remains robust surpassing the global average of 5%-6%.
Exports still hold significant charm as Indian Pharma has a market share
of 10% in the USA and a 5% share in the emerging markets. Large first
to file (FTF) opportunities and strong ANDA pipeline signifies that the
opportunities from US market remains attractive. The government has
recently announced the setting up of a venture fund that will target the
infusion of Rs 20bn into the sector. The recent acknowledgment by
Finance Minister for R&D investment as one of the two major concerns
along with infrastructure raises hope for the sector to receive
necessary attention in the Union Budget to be announced.
FERTILIZER: Fertilizer remains a key sector in
Budget 2011-12. Urea will be the key focus in the industry, which
represents around 50% of all fertilizer products consumed in the country
with an annual consumption of 27mt of a total fertilizer consumption of
55mt. Urea production is based on different forms of feedstock such as
gas, naphtha, fuel oil and coal. The finance ministry wants to
immediately decontrol urea prices, but Department of Fertilizers wants
subsidies to be continued until 2013-14. Chemicals and fertilizers
minister has asked the government to further extend the NPS-III regime
for urea prices. Thus, the Committee of Secretaries is currently working
out a viable model to determine how the subsidy component would be
fixed. They can also raise the urea prices by 2-5% in 2011-12.
De-canalisation of urea imports can also happen as at present only
authorized agencies can import urea. The sector also wishes removal of
import and export restrictions.
HOTEL: With the sharp spurt in businesses and
leisure travelers to India, the country is currently experiencing a
shortage of almost 100,000 hotel rooms to meet the accommodation needs
of the foreign and domestic tourists. The hotel industry is a highly
capital intensive industry. Construction of a new hotel project in 5
Star category demands massive capital investment ranging from Rs 500 to
Rs 700cr. The hotel industry is highly capital intensive and require
huge expenditure for construction of new hotels. We expect the
government to come up with favorable clause for the industry resulting
in availability of adequate accommodation.
AVIATION: Presently the Aviation Turbine Fuel (ATF)
is chargeable to Excise duty at the rate of 8%, and VAT is levied by the
States at varying rates generally in the range of 20-30 percent,
thereby resulting in a very high effective tax rate in the range of
30-40 percent for ATF. This coupled with uncertain crude prices results
in a major financial burden for the airlines. With this backdrop, the
industry has been long demanding 'declared goods' status for ATF, which
would help reduce the applicable VAT to 4% or lower. Incentives in the
form of a 10 year tax holiday are available to infrastructure facilities
(including airports) with a view to attract investors in this space.
These benefits are available for developing, operating and maintaining
any new infrastructure facility. Common inference of this is believed to
be that the term 'new infrastructure facility’ would refer to a green
field project however it remains ambiguous whether the tax holiday would
be available in respect of modernization, up gradation, redevelopment
of the existing airports.
BANKS: India is
considering allowing new private sector banks, including industrial
houses, while the formal and final guidelines would be announced by RBI
on the eligibility allowed to set up new banks and related to the terms
and conditions for them, a roadmap on the subject could be announced in
the Union Budget set to be announced on February 28. The Government has
already approved additional capital infusion of Rs 6,000 crore in 10
public sector banks with an objective to raise its holding to a minimum
58% in all state-run banks. With government holding at just 51%, banks
cannot access the capital market for raising additional capital by
dilution of government holding. Banks with Government’s stake less than
58% include, Bank of Baroda, Oriental Bank of Commerce, Andhra Bank,
Dena Bank, IDBI Bank and Vijaya Bank. The exact amount and mode of
infusion in each bank would be decided later.
OIL AND GAS:
India imports almost 80% of its crude oil requirement. Petrol and
Diesel have weights of 1.09% and 4.67% respectively in the wholesale
price index (WPI) inflation and any hike in fuel prices has a direct
impact on consumers. The petrol price has witnessed a sharp increase of
16% after deregulation in June, 2010. We expect that a proper and
defined strategy should be provided regarding subsidy sharing process by
the finance minister in the union budget to be announced. We do not
expect deregulation of diesel prices on the back of high inflation at
8%-8.5%. Agriculture sector is expected to be provided with subsidy on
diesel in the upcoming budget so as to mitigate the impact of any price
rise in diesel post deregulation.
REAL ESTATE: Indian real estate sector plays an
important role in the economy as more than 6% of GDP is contributed by
this sector, comprised of two main categories – residential (75% of real
estate space) and commercial (25%). Real estate sector is one of the
highest FDI attracting sectors in India with recorded FDI inflows worth
more than USD 3 billion every year between 2000 and 2010. Current
financial year for this industry has been quite depressing mainly
because of recent housing loan scam, rising lending rates to curb the
inflation and increasing input cost due to higher commodity prices which
had an adverse impact on the profitability and credibility of
companies.
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