Elara Securities_Budget - 1 March 2012 (1)

8/2/2019 Elara Securities_Budget - 1 March 2012 (1)

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Ashish Kumar [email protected] +91 224062 6836

GlobalMark

etsResearch

Elara Securities (India) Private Limited

FY13 Budget: Burdened w ith hopeUncannily, the Union Budget this time around is burdened with

expectations from the industry, the street and the aam admi alike. Mr

Pranab Mukherjee has the onerous task (once again!!!) to resurrectgrowth amidst uncertainties in the macros set-up and policy

environment both globally and locally. We believe that there are low

chances of a game changer of a budget given the weak macros and

political compulsions of the ruling UPA. We believe that budget 2012

will be centered on the follow ing themes:

1. Striking a mix of expenditure restructuring and fiscal consolidation2. Inclusive growth through centrally sponsored schemes like

MNREGA

3. A step towards taxation reforms: DTC and GST4.

Stimulating the investment cycle

5. Focus on reviving infrastructure and power sectorsWe believe that the government w ill target a fiscal deficit of ~ 5% over

FY13E compared to 5.6% for FY12E (initially budgeted at 4.6%). The

calculation is subject to balance sheet jugglery of deferment of a part

of subsidies bill to next fiscal. The budget will work on real growth of

~7.1% and inflation of around ~6.5-7%, implying a nominal growth of

~14%. We believe that the sharp deterioration in fiscal health will take

few years to mend. The transition to FRBM has to be in a phased

manner rather than by setting up an ambitious and unrealistic target

like in the current fiscal. We estimate the gross borrowing of the

Centre at INR5.3tn. Post the announcements of the borrowingprogramme coupled with signs of fiscal consolidation and monetary

easing, the yields should stabilise in ~8.0% range.

Subsidies hold the key: Even as the finance minister has made somestrong comments on the fallout of rising subsidy bill, it remains to be

seen if words are converted into action. The union budget to be

presented on March 16 could be the last serious attempt at fiscal

consolidation ahead of LS elections due in May-14. The level of subsidy

restructuring and timing the introduction (and extent) of food subsidy

bill are key events to w atch out for.

Fiscal consolidation to trigger monetary easing: The central bank willkeenly track the governments borrowing requirements and fiscal

consolidation which will determine its monetary policy in these

uncertain times. The RBI stance is now in favour of growth, though it

maintains that inflationary risks persist in the economy. We maintain

our stance that on March-15th, the central bank will cut the CRR by

50bps but the first cut (probably a token one) could only be seen in

the April meet of the central bank. Unlike the aggressive cuts seen in

2008, we foresee a total 100bps cut in policy rates over FY13E.

Sector w ise expectations: Our in-house analyst team expects thebudget to lay down a flurry of measures for the revival in infrastructure

capital spending. Power equipment import duties are unlikely to be

hiked in the current budget given limited ability of government to pass

on tariff hikes. Government is unlikely to deviate much from its socialschemes which will ensure that consumption will continue to hold

steady. However, consumer discretionary in form of two wheelers and

four wheelers will suffer from the governments effort to raise revenue

and target diesel subsidy accurately.

India Strategy | Economics 1 March 2012India Budget 2012

Exhibit 1: An impending slow dow n ahead

Source: CMIE, Bloomberg, Elara Securities Research

Exhib it 2: needs the Union budg et tofocus on revival of t he investment cycle

Source: CEIC, Elara Securities Research

Exhib it 3: A step tow ards fiscalconsolidation could be seen

(% to GDP) FY08 FY09 FY10 FY11 FY12E FY13ECenter FiscalDeficit

2.5 6.0 6.4 5.1 5.6 5.1

State FiscalDeficit

1.7 2.5 3.0 2.7 2.4 2.5

Inter-governmentadjustments

(0.1) (0.1) (0.1) 0.0 0.0 0.0

Combined Deficit 4.1 8.4 9.3 7.8 8.0 7.6Off-budgetexpenditures

0.8 1.6 0.2 0.6 0.9 1.1

Overall FiscalDeficit 4.9 10.0 9.5 8.4 8 .9 8.7Source: Various Budget documents, Elara Securities

Research

Exhibit 4 : added by of some subsidyrestructuring

Source : India Budget, Elara Securities Research

2.0

4.0

6.0

8.0

10.0

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

(%)

yoygrow

t

2000 2002 2004 2006 2008 2010

(5)

0

5

10

15

20

0

1

1

2

2

3

3

FY07

FY08

FY09

FY10

FY11

FY12BE

FY12E

FY13E

(%toGDP)

Food Subsidy Fertil ized Subsidy Fuel Subsidy


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India Budget 2012

2 Elara Securities (India) Private Limited

FY12 Budget Preview : Not a GameChanger

The union budget 2012 is coming at a time when the

government is caught in an unenviable mix of slowing

growth, worsening fiscal, poor governance and a weakcurrency. Add to that rising crude prices amidst

unabated global worries and the Indian economy has a

perfect recipe for a slowdown. In this perspective, the

union budget 2012 is burdened with huge expectations

from market participants and policymakers alike.

The budget to be presented on March 16 could be the

last serious attempt at fiscal consolidation as LS elections

are due in May 2014 and the intervening budget in Feb-

13 (and a vote on account in Feb-14) are expected to be

populist as suggested by trends. Even as the finance

minister has made some strong comments on the falloutof rising subsidy bill, it remains to be seen if words are

converted into action. The key question is whether the

finance minister can deliver a game changer of a

budget-- aiming at raising revenues and lowering

expenditure that could lead to lower fiscal deficit,

simultaneously giving an impetus to ailing infrastructure

and pow er sector (key to the grow th revival in future).

From the perspective of political economy, we don't

think the government could maneuver the finances to a

great extent. Factors that led to slippages on the fiscal

side in FY12 are likely to persist over FY13 if credibleactions are not taken on fiscal consolidation. Even as the

government has run out of choices on revision of fuel

prices (expected post assembly elections), the resulting

savings could largely be offset by an early

implementation of the Food Security Bill. These together

with the restructuring of SEBs losses are key events to

watch out for in budget 2012. With the CSO forecasting

6.9% growth (AE) for FY12E and inflationary risks

restraining the central bank from monetary easing, these

are desperate times for policymakers in New Delhi.

Meanwhile, the INR 928bn additional borrowing

announcement led to sharp jump in the yield curves over

Q3FY12 and the central bank had to step in with open

market operations (OMOs) to buy back government

bonds. Expectedly, the central bank will need to track the

federal borrow ing requirements and fiscal consolidation

measures before embarking on rate cuts as a rising fiscal

deficit has inflationary implications. In this backdrop,

fiscal consolidation is one of the key triggers for a grow th

revival. Having said that, the political compulsions of the

ruling UPA will mean that the extent of consolidation

could be marginal, even if there is intent. And with this,

market's skepticism about the centre's will on fiscalconsolidation w ill get vindicated.

Exhibit 5: Grow th threshold low ered


Exhib it 6: amidst discussions of grow th inflat ion

trade-off


Exhibit 7: Aggressive monetary policy over FY12

Source: OEA, Elara Securit ies Research

Exhib it 8: Fiscal deficit w ill miss the budgeted target

by ~100bps in FY12

(% to GDP) FY08 FY09 FY10 FY11 FY12E FY13ECenter Fiscal Deficit 2.5 6.0 6.4 5.1 5.6 5.1

State Fiscal Deficit 1.7 2.5 3.0 2.7 2.4 2.5

Inter-governmentadjustments

(0.1) (0.1) (0.1) 0.0 0.0 0.0

Combined Deficit 4.1 8.4 9.3 7.8 8.0 7.6Off-budget

expenditures

0.8 1.6 0.2 0.6 0.9 1.1

Overall Fiscal Deficit 4.9 10.0 9.5 8.4 8.9 8.7Note: Off budget include Oil, food and fertilizer subsidy. Crude prices

assumed at USD 102.5/ bbl

Source: Various Budget documents, Elara Securit ies Research

2.0

4.0

6.0

8.0

10.0

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

(%)

0

2

4

6

8

10

12

14

FY93

FY94

FY95

FY96

FY97

FY98

FY99

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

(Yo

YGrow

th)

Real GDP grow th WPI Inflation

(2.0)

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Apr-08

Jul-08

Oct-08

Jan-0

9

Apr-09

Jul-09

Oct-09

Jan-1

0

Apr-10

Jul-10

Oct-10

Jan-1

1

Apr-11

Jul-11

Oct-11

Jan-1

2

(%)

Repo rate WPI


3/12

India Budget 2012

Econ

omics

3 3

We have estimated the fiscal deficit of FY12E at 5.6% of

GDP against the budgeted 4.6%, mainly on the back of

low budgeting of subsidies and unrealistic revenue

targets in a year when the Indian economy showed

distinct signs of a slowdown. Assuming oil subsidies are

not (partially) rolled over into FY13, the current mix ofmacro signals suggest that our fiscal deficit targets for

FY12 might actually turn out to be a conservative

estimate.

Macro out look calls for credible fiscalmeasure

Indian economy has show n early signs of a slowdow n in

FY12. The macro environment was largely driven by a

monetary policy that remained hawkish on the

inflationary spiral. This sharp trade-off between inflation

and growth resulted in a significant sacrifice on thegrowth part. The ensuing industrial slowdown amidst

weakening investment climate created major hindrances

to growth. Amidst rising g lobal uncertainties and a flight

to safety, the domestic currency depreciated to an all-

time low which incidentally was the highest amongst all

emerging markets. We believe domestic factors are not

supporting an inflexion in growth cycle even as global

environment remains turbulent. The expansionary

policies of the government which were employed to

revive the economy after the 2008 credit crisis, fuelled

consumption without creating adequate capacities into

the system. The ensuing demand pressures in the

economy resulted in a headline inflation that is over 5%

for 24 months in a row. A consumption led growth is not

sustainable in the medium to long run as it fuels inflation

and raises the risks of twin deficits in the economy. In this

context, any measure that will boost the consumption

(through fiscal or monetary easing) in budget could pose

inflationary risks by reviving the demand pressures

amidst capacity constraints in the economy.

In th is backdrop, the government has to shift focus from

consumption to investment and design policies that will

revive the investment cycle in the economy. We believe

that under present circumstances, the fiscal policy

(through the budget) has a greater role to play (than the

monetary policy) to boost investments in the economy as

investment cycle remains key to next leg of growth. Anaggressive monetary easing is impossible if the central

bank sees consumption led demand pressures emerging

in the economy which in turn will mean prolonged

weakness in the capex cycle. It will depend a lot on the

emerging political environment post the assembly

election that could unleash the next wave of reforms

over FY13. But such a counter-cyclical push requires an

aggressive policy w ith a strong centre. Some actions are

already taking place at the Prime Minister's Office (PMO)but sustainability remains the key. We believe that some

key pending reforms like mining bills, GST and FDI in

multi brand retail could see the light of the day that

could revive the capex cycle if the assembly results favour

the ruling UPA.

Exhib it 9: Consumption led grow th is not sustainable

in medium to long run

Source: CMIE, Elara Securit ies Research

Exhibit 10: and th e focus has to shift to reviving

investment cycle


Expenditu re restructuring is the key

In this context, we expect a growth recovery in H2FY12

subject to policy commitment added by a monetary

easing in early FY13 and a stable global environment.

The budget will work on a real growth of ~7.1% and an

inflation of around ~6.5-7%, implying nominal growth of

~14% (we estimate nominal growth at 14.3% on the

back of 6.8% real growth and 7.5% inflation). We believe

that the sharp deterioration in fiscal health w ill take some

time to mend. The transition to FRBM has to be in a

phased manner rather than an ambitious and unrealisticmove like in the current fiscal. The phenomenon of large

expenditure and higher subsidy bill amidst a slowing

revenue growth has distorted all fiscal calculations. In

(25)

0

25

50

75

100

2005 2006 2007 2008 2009 2010 2011

(%)

Consumption Government Investments Net Exports

yoygrow

t

2000 2002 2004 2006 2008 2010

(5)

0

5

10

15

20

Running a fiscal deficit is not bad as long as it is used to

create capacities into the system. The problem in theIndian case however is that deficits usually finance the

unnecessary subsidies and populist schemes. This

phenomenon is too strong to be overcome in a short

eriod of time.


4/12

India Budget 2012


this context, the budget has to aim not only at reducing

the fiscal deficit but also restructure the expenditure

patterns in a way that puts investments on priority.

Exhib it 11: Trends in revenue expend itu re suggest

% ofRevenueExpenditure InterestPayments DefenseExpenditure Subsidiesallocation OtherExpenditureFY05 42.8 14.8 15.5 27.0

FY06 40.5 14.7 14.5 30.3

FY07 40.4 13.9 15.3 30.4

FY08 40.6 12.9 16.9 29.6

FY09 34.4 13.1 23.2 29.3

FY10 32.4 13.8 21.5 32.3

FY11RE 33.1 12.5 22.6 31.8

FY12BE 36.5 13.0 19.6 30.9

Source: India Budget , Bloomberg, Elara Securit ies Research

We believe that the government w ill target a fiscal deficit

of around 5% over FY13E compared to 5.6% for FY12

(init ially budgeted at 4.6%). Some key movers of revenue

will be a 200bps rise in central excise across the board

and expanding the ambit of services tax. However, the

government may find it difficult to raise taxes in light of

the weak macro environment and weak business

confidence among private investors.

Exhib it 12: impendin g subsidy restructuring

Source: India Budget, Elara Securities Research

On the expenditure side, review of subsidy allocation

and expenditure restructuring hold the key. A full

decontrol of existing subsidised items is neither advisable

nor feasible (as it will create high inflationary risks in the

short run) but a sustained road map that will aim at

reducing (1) non-merit subsidy and (2) leakages in the

government s welfare schemes, is prudent. This is critical

to ensure that private corporate capex is revived in

addition to containing the aggregate demand pressures

and thus inflationary risks in the economy.

Exhibit 13: Expenditure on government welfare

schemes could remain at similar levels in FY13

(INR bn) FY08 FY09 FY10 FY11BE FY12BEMahatma Gandhi National

Rural EmploymentGuarantee (NREGA)

163 375 391 401 400

Swarnajayanti GramSwarozgar Yojana (self-employment for rural poor)

17 23 24 30 29

DRDA (District RuralDevelopment Agency)Administration

3 3 3 4 5

Rural Housing 39 88 88 100 100

Pradhan Mantri GramSadak Yojana (Rural roads)

65 78 120 120 200

Grants to National Instituteof Rural Development

0 0 0 1 1

Council for Advancementof People's Action andRural Technology

1 1 1 1 1

PURA (Provision of UrbanAmenities in Rural Areas)

- - 0 1 1

Management support toRural DevelopmentProgrammes

1 1 1 1 1

BPL (Below Poverty Line)Census

- - - 2 3

Non-Plan 0 0 0 0 0

Total: Department of RuralDevelopment 288 569 627 661 741Source: Various Budget documents, Elara Securit ies Research

The performance of the UPA on fiscal consolidation has

not been as bad. Over the past six years, it will only be

second time (in FY09, it floated an expansionary fiscal

policy aimed at reviving the economy in the backdrop of

the global credit crisis) when the government will not be

able to meet its projected deficit target. Obviously the

key to fiscal consolidation lies in implementation rather

than mere announcements.

Exhib it 14: Credibilit y of UPA on f iscal deficit t argets

Source: Various Budget documents, Elara Securit ies Research

0

1

1

2

2

3

3

FY07

FY08

FY09

FY10

FY11

FY12BE

FY12E

FY13E

(%toGDP)

Food Subsidy Fertil ized Subsidy Fuel Subsidy

3.32.5

6.8

5.5

4.6

2.5

6.06.4

5.15.6

0.0

2.0

4.0

6.0

8.0

FY08 FY09 FY10 FY11 FY12E

(%toGDP)

BE Actuals/ RE


5/12

India Budget 2012

Econ

omics

5 5

Borrow ing programme and bondyields

Exhibit 15: Negligible rise in market borrowing seen

over FY13


Over FY12, the government has already borrowed

INR5.1tn from the market against the budgeted target of

INR4.2tn which put a lot of strain on bond yields over

Oct-Dec 2011 until RBI intervened and conducted large

OMOs (~INR 1000 bn) that helped stabilise the yields.

We believe that the market borrowing over FY13 will be

largely similar to FY12, around INR5.3tn assuming a fiscal

deficit of 5.1% is achieved. The gross market borrowing

will however be similar to FY12 if the state fiscal deficit

stabilises at 2.5% (of GDP). The financing will not be an

issue with growth in bank deposits, insurance andpension funds. The government could also go for a

further relaxation in foreign investment in government

bonds. As far as bond yields are concerned, they remain

artificially low as of now due to heavy OMOs. Post the

announcements of the borrowing programme coupled

with signs of fiscal consolidation and monetary easing,

yields should stabilise in ~8.0% range over FY13E.

What does a large fiscal deficit meanfor India?

Exhibit 16: Gross government liabilities has been

declining on t he back of high nominal growth


Even as a large fiscal deficit is a serious concern for an

emerging economy like India, the fact that it is largely

financed domestically means that it is not a sovereign

issue. The government bonds have a captive demand

from banks, insurance and pension funds. The domestic

economy funds its own deficit and chances of a largescale selling by overseas participants are small. However,

cut to present circumstances, a large fiscal deficit results

in a high aggregate demand in the economy that has

inflationary implications and significant spillover to the

current account deficit. This in turn puts pressure on the

monetary policy to firefight inflation even as loose fiscal

policy means rising bond yields. In such a scenario,

private sector funding is crowded out by government

borrowing and kills much needed capacity creation in

the economy. In the unforeseen circumstance of a global

shock, there is litt le scope for maneuvering.

Risks to our expectat ions

We continue to maintain that assembly elections results

hold the key to the fiscal consolidation. The downside

risks will emanate from a defeat of ruling UPA in majority

of assembly elections that will force the government to

go soft on subsidies restructuring (food, fuel and

fertilisers alike) and raise expenditures on MNREGA and

an early implementation of the Food Security Bill that in

turn will bloat the deficit further. Add to that rising crude

prices and a weak grow th scenario and the situation

could get w orse.

A second scenario where the government can make an

impact is through passthrough of oil prices and other

subsidy restructuring and revive the sentiments in the

economy by unleashing reforms that will aid (1) greater

buoyancy in tax revenues (2) raise receipts by meeting

the disinvestment targets and 2G auction.

Sectoral expectations

Construction , Infrastructure

[email protected] Tax exemption under section 80CCF for investments

up to INR20,000 in infrastructure bonds is expected

to be doubled or raised even further, with a need to

infuse additional liquidity to fund the ambitious

investment target of USD1tn envisaged for the XII

plan.

Approval to issue tax free bonds worth at leastINR300bn to various government undertakings in

FY13 (primarily railways, PFC & NHAI).

Final approvals to financial institutions like IIFCL,ICICI etc. to go ahead with their respective

Infrastructure Debt Fund proposals. IIFCL

disbursements target to be raised.

2,000

2,500

3,000

3,500

4,000

4,500

5,000

5,500

FY10 FY11 FY12E FY13E

(INRbn

)

Net market borrowings Repayments

35

45

55

65

F

Y00

F

Y01

F

Y02

F

Y03

F

Y04

F

Y05

F

Y06

F

Y07

F

Y08

F

Y09

F

Y10

F

Y11

FY

12E

(%toGDP)


6/12

India Budget 2012


Due to high global price and shortage of domesticcoal, steps in the direction of easing the import duty

over coal to support power generation companies

and infrastructure utilities may be taken. At present,

there is 5% customs duty on non-coking coal and 1%

excise duty.

Corpus of Rural Infrastructure Development Fund(RIDF) expected to be raised from INR180bn to

INR200bn.

Pertinent issues relating to execution and ministriescomplying with annual targets need to be

addressed.

Hike in annual corpus of development schemes likeBharat Nirman, JNNURM and RGGVY.

Any further hike in MAT rates could be materiallynegative for asset owners which are already reeling

under the high interest rate burden.

Continuation of full exemption from basic customsduty to bio-asphalt and specified machinery for

construction of national highways; parallel excise

duty exemption for domestic suppliers producing

capital goods for expansion of existing mega/UMPP

pow er projects expected to continue as well.

Oil & Gas

[email protected]

Excise duty cuts in Jun11 might be rolled back asthe government looks for more revenue avenues

and th is impact might be equivalently offset through

a diesel retail price hike, leaving the under-recoveries

and OMCs unaffected.

Extension for eligibility dates for 7-year tax holidaysfor new refineries under construction. Beneficial for

IOC as it is setting up the greenfield 15MMT refinery

in Paradip.

Impact: If the excise dut ies on diesel are rolled back and ifthe government doesnt implement a price hike to offsetthe impact, it can be a huge short term negative for

OMCs. However, eventually the impact may be borne by

the government and upstream players for the added

under-recovery. Further, it would be interesting to see

the governments view on implementing a duty on

purchase of diesel vehicles and how these will be routed

to eventually offset the diesel under-recoveries.

Consumption

anand [email protected]

Specifics

Excise hike of ~10% in cigarettes (Impact partiallyve for ITC but discounted, anything higher wouldimpact stock, however ITC well placed to pass on the

same via price hikes)

Excise cut roll back by ~200bps (from 10% to 12%)would impact margins. However, expect most

companies to pass on the same to consumers

negating any material impact

Macro positives

Any increase in budgetary allocations foragriculture/farmers or implementation of food

security b ill

Change in tax slabs any increase leading to higherdisposable incomes

Clarity on roadmap for implementation of GSTAutomobiles

mohan.lal@elaracapit al.com

Excise duty hike on diesel vehicles Excise duty hike from 10% currently to 12% for small

passenger cars, three wheelers and two wheelers

Impact

Excise duty hike on diesel vehicles will be negativefor M&M, Tata Motors and Maruti, in that order.

Negative impact can be reduced if the excise hike is

2-5% as it can be passed on w ithout severely

impacting the demand for diesel vehicles. Maruti

may indirectly benefit from it too, if the demand for

passenger cars shifts back to petrol models due to

price hikes in diesel models, as it has strong petrol

model portfolio

If the overall excise duty is hiked from 10% to 12%, itwould be negative for the sector as a whole, as, if

passed on, it could mute the already modest

demand sentiments. If the players choose not to pass

or partially pass the hike, then two wheelers players

will be least impacted as they derive significant

production from excise free zones and thus pay the

lowest excise rates (6-7% as compared to 9-10% for

four wheeler manufacturers). Absorption of excise

hike, thus would be least margin dilutive for two

wheeler players v/s four wheeler players.


7/12

India Budget 2012

Econ

omics

7 7

Banking and Financial

parees.purohi [email protected]

On the macro front: A prudent fiscal budget andborrowing programme will facilitate price stability and

liquid ity of the g-sec market

Sector specific:

Commitment to capitalise PSU banks in the run up toBasel III conformation

Firm guidelines and intent on issuing fresh banklicenses

Passing of Insurance Bill, enabling insurancecompanies to increase foreign ownership to 49%

Tax code change with respect to increasing eligibilityamount of long term deposits under Section 80C.

Other:

Policy reforms in power sector, and infrastructure, which

will improve financial viability and assurance of project

completion. This will influence extent of restructuring

required by banks, improve overall asset quality and

improve scope for further bank lending.

Information Technology

[email protected]

Even though there is a persistent buzz aboutremoval/ low ering of MAT on SEZs, given the tightfiscal condit ions, we believe it is unlikely.

We expect clarification on taxation norms for theonsite portion of revenue to clear IT claims on

technology services firms.

Metals

[email protected]

Possible increase in import duty of steel to 10% from5% (doesnt materially affect Indian steel producers

as pricing is not aligned to import parity prices).

Increase in base rate of excise duty (negative for theindustry as ability to pass on increase for ferrous

players remains questionable).

Nothing material expected for the non-ferroussector.

Cement

[email protected]

[email protected]

Excise duty for cement may be hiked. (Neutral forthe industry as any increase in excise is likely to bepassed on by the industry due to strong seasonal

demand).

Increase in outlay for infrastructure projects couldimpact cement demand favourably.

Tours and Travels

[email protected]

Service tax exemption is expected on tour operator'sforeign exchange earnings

Increase service tax abatement to 90% for domestictour operators

Export industry status to tourism Domestic airfares- Taxes on ATF expected to be

revisited

Uniform state luxury tax at 5%. Infrastructure status for hotels and convention

centres.

Pharmaceuticals

suraji [email protected]

Seldom do we expect any significant benefit for

pharmaceutical sector as the budget does not venture

into specifics for the pharmaceutical sector except social

schemes/plans targett ing BPL families. Majority of the

policies which impact the manufacturing sector, apply to

the pharmaceutical sector. We, however, expect a few

specific policies targetting the pharmaceutical sector:

Rise in excise duty, which is expected across theboard would impact pharmaceutical sector,

especially API (active pharmaceutical ingredients)

producers in India (this would directly impact all

domestic pharmaceutical companies and some MNC

pharmaceutical companies as their low value

products are often produced through contract

manufacturers)

Rise in import duty (this would decrease profitabilityof MNC pharmaceutical companies as majority of

high value/ lifestyle drugs/patented drugs are

imported. Domestic pharmaceutical companieswould benefit from rise in import duty as it could

increase competitiveness of their drugs and

encourage more contract manufacturing business to

replace import drugs)

Corporate tax rate increase: This would impact thesector overall as tax outflow will impact net profit .

Increase in tax benefits rate for R&D expenses: Toencourage more clinical trials and fundamental

research in NCEs/NBEs, industry expect more tax

benefits from the current 150% of capital R&Dexpenses. This would benefit R&D focussed

companies such as Biocon, Glenmark, Dr Reddys

Lab, Lupin, Sun Pharma Advance Research, Piramal


8/12

India Budget 2012


Healthcare etc. Hike in tax benefits would also

encourage CROs (clinical research organisation)

such as Suven Pharma, Vimta Labs etc as well as

MNC CRO companies to expand Indian research and

clinical trials. Overall, this would expand CRO

segment in India. Rise in governments welfareschemes for polio and other epidemic diseases: This

would benefit vaccine producers such as Panacea

Biotech, Pfizer and Glaxo Pharmaceuticals. While

additional funds would encourage more vaccine

production in India, we believe that market cap ofpharmaceutical companies would increasemarginally as major beneficiaries are privatecompanies in vaccine and ATM (Anti-TB and Malaria)

segment.

Power

koushik [email protected]

Reduction of customs duty on imported coalexpected which currently stands at 5%.

Power equipment import duties are unlikely to behiked in the current budget given limited ability of

government to pass on tariff hikes.

Tax sops for setting up power projects based onrenewable energy expected to cont inue.


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Exhib it 17: Government of India Accounts

(INR bn) (% to GDP)FY11RE FY12BE FY12EE FY13EE FY11RE FY12BE FY12EE FY13EE

1 Revenue Receipts 7,838 7,899 7,460 8,750 10.2 8.8 8.2 8.42 Tax Revenue (net to centre) 5,637 6,645 6,310 7,500 7.3 7.4 7.0 7.2

3 Non-Tax Revenue 2,201 1,254 1,150 1,250 2.9 1.4 1.3 1.2

4 Capital Receipts (5+6+7) 4,327 4,678 5,875 5,801 5.6 5.2 6.5 5.65 Recoveries of Loans 90 150 150 150 0.1 0.2 0.2 0.1

6 Other Receipts 227 400 300 300 0.3 0.4 0.3 0.3

7 Borrow ings and other liabilities 4,010 4128 5,425 5,351 5.2 4.6 6.0 5.2

8 Total Receipts (1+4) 12,166 12,577 13,335 14,551 15.9 14.0 14.7 14.09 Non-Plan Expenditure 8,216 8,162 8,870 10,025 10.7 9.1 9.8 9.7

10 Revenue Account 7,267 7,336 8,150 9,175 9.5 8.2 9.0 8.8

11 Interest Payments 2,408 2,680 2,680 2,950 3.1 3.0 3.0 2.8

12 Defense expenditure 907 952 952 1,050 1.2 1.1 1.0 1.0

13 Subsidies of which 1,641 1,436 2,480 2,450 2.1 1.6 2.7 2.4

14 Food 606 606 780 1,100 0.8 0.7 0.9 1.1

15 Fertilizer 550 500 950 800 0.7 0.6 1.0 0.8

16 Fuel 384 236 650 450 0.5 0.3 0.7 0.4

Others Subsidies 101 94 100 100 0.1 0.1 0.1 0.1

17 MNREGA 401 400 400 400 0.5 0.4 0.4 0.4

18 Capital Account 948 826 720 850 1.2 0.9 0.8 0.8

19 Plan Expenditure 3,950 4,415 4,136 4,450 5.1 4.9 4.6 4.320 On Revenue Account 3,269 3,636 3,636 3,700 4.3 4.0 4.0 3.6

21 On Capital Account 681 779 500 750 0.9 0.9 0.6 0.7

22 Total Expenditure (9+19) 12,166 12,577 13,006 14,475 15.9 14.0 14.3 14.023 Revenue Expenditure (10+20) 10,537 10,972 11,786 12,875 13.7 12.2 13.0 12.4

24 Capital Expenditure (18+21) 1,629 1,606 1,220 1,600 2.1 1.8 1.3 1.5

25 Revenue Deficit (23-1) 2,698 3,073 4,326 4,125 3.5 3.4 4.8 4.026 Fiscal Deficit (22-1-5-6) 4,010 4,128 5,096 5,275 5.2 4.6 5.6 5.127 Primary Deficit (26-11) 1,602 1,448 2,416 2,325 2.1 1.6 2.7 2.2



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Disclosures & Confident iality for non U.S. Investors

The Note is based on our estimates and is being provided to you (herein referred to as the Recipient) only for information

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The information contained in this note is of a general nature and is not intended to address the circumstances of any

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No one should act on such information without appropriate professional advice after a thorough examination of the

particular situation.


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Disclaimer for U.S. Investors

This material is based upon information that we consider to be reliable, but Elara Capital Inc. does not warrant its

completeness, accuracy or adequacy and it should not be relied upon as such.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument.

Securities, financial instruments or strategies mentioned herein may not be suitable for all investors. Any opinions expressedherein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue.

Prices, values or income from any securities or investments mentioned in this report may fall against the interests of the

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information contained in this report does not constitute advice on the tax consequences of making any particular

investment decision. This material does not take into account your particular investment objectives, financial situations or

needs and is not intended as a recommendation of particular securities, financial instruments or strategies to you. Before

acting on any recommendation in this material, you should consider whether it is suitable for your particular circumstances

and, if necessary, seek professional advice.

Certain statements in this report, including any financial projections, may constitute forward-looking statements. Theseforward-looking statements are not guarantees of future performance and are based on numerous current assumptions

that are subject to significant uncertainties and contingencies. Actual future performance could differ materially from these

forward-looking statements and financial information.


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