Religare budget special report

research.religare.com

Union Budget FY14 Preview How to get 5.3%/4.8% fisc for FY13/14

We believe and illustrate how the Govt. could meet its fisc targets

of 5.3% for this fiscal, and then a lower, 4.8% for FY14, using a

mix of a tight belt on plan expenditure, and some help from

accounting this fiscal, with some subsidy rationalization in FY14.

Our assessment would be 5.8%/5.2% for FY13/14.

Lower subsidies are desirable, could be inflationary, and

negative for growth and consumption in the near-term, but on the

whole are preferable to a higher-growth-high-fisc scenario. On

these lines, policy-based intervention would be the feasible

choice over fiscal pump-priming for the Govt., given its strained

finances.

Union budgets in India have progressively lost significance for

the markets in the past few years. Despite being the next macro

trigger for the markets, we think this year may not be very

different, other than the sustained equity supply. The budget

recipe is likely to be a sweet-and-sour mix of reform and

populism in a pre-election year, with a potential dose of

regressive policies thrown in.

Expect to see a 5.3%/4.8% fisc for FY13/14: Meeting the fiscal target

is primal for the Govt. this year, and we believe it’s possible for these

seemingly optimistic estimates to be met, with subsidy deferrals,

thanks to cash accounting, and a tighter plan expenditure being the

likely tools of choice. Our estimates are more sedate at 5.8%/5.2%

over this period as we factor in lower tax revenues and lower

deferrals.

Potential consequences of a lower fisc: Apart from the obvious

benefits, we believe a lower subsidy-led fisc would be negative for

growth and consumption in the near-term, with 5.3%/4.8% over

FY13/14 leading to a potential -25bps on growth, implying a lower

FY14 growth estimate to ~5.5% (from 5.8%).

For the market: While it remains the next macro trigger, the

sustained PSU equity supply is likely to remain an overhang for the

markets over the next few months, short of a substantial positive

surprise. A 4.8% fisc for FY14 is structurally positive, save the higher

fuel/fertilizer inflation, potentially back to FY12 levels, delaying the

rate-cut cycle. On the bright side could be steps to channelize long-

term capital into investments (details in the note). Markets would look

at a lower fisc print positively as it improves Govt. finances in the long-

term. Sector-wise impact: Positive – Infrastructure, Energy, Industrials,

Banks; Negative – Consumer, Autos, Real Estate; Neutral – IT,

Telecom, Healthcare, Metals.

This report has been prepared by Religare Capital Markets Limited or one of its affiliates. If the analyst who authored the report is based in the United Kingdom, then the report has been prepared by Religare Capital Markets (Europe) Limited. For analyst certification and other important disclosures, please refer to the Disclosure and Disclaimer section at the end of this report. Analysts employed by non-US affiliates are not registered with FINRA regulation and may not be subject to FINRA/NYSE restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account.

Strategy & Economics

INDIA

13 February 2013

REPORT AUTHORS

Tirthankar Patnaik (91-22) 6766 3446

[email protected]

Prerna Singhvi (91-22) 6766 3413

[email protected]

Saloni Agarwal (91-22) 6766 3438

[email protected]

Subsidy burden in FY13

Actual subsidy burden in FY13

FY13BE FY13E

Food 818 750 1,000

Fertilizers 988 610 610

Oil 1,002 436 700

Others 105 105 105

Total 2,912 1,900 2,414

% of receipts 31.7% 19.4% 26.5%

% of GDP 2.9% 1.9% 2.4%

Source: RCML Research

Fiscal deficit trend


Govt. borrowings vs. incremental deposits – reflects crowding out of private sector

Source: Bloomberg, RCML Research

3.3 2.6

6.0 6.3

4.6

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5.1 5.8

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(%)

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100%

0.0

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FY03 FY05 FY07 FY09 FY11 FY13

(%)(Rstrn) Budgeted

Actual

Actual borrowings/incremental deposits

Union Budget FY14 Preview

How to get 5.3%/4.8% fisc for FY13/14


INDIA

research.religare.com 13 February 2013 of 23

A fight for fiscal consolidation

Would the Govt. get the fisc to 5.3% in FY13 and 4.8% in FY14?

If this year’s Union Budget has something that’s different from the dozen before it, it’s

the inordinate amount of attention given to the fiscal deficit figure. The finance minister

has gone all out promising that the fisc for this year would be capped at 5.3%--marginally

higher than the budget estimate of 5.1%--come what may. Further, the fiscal roadmap

proposed by the Govt. in October’12 also proposes a phased reduction in the fiscal deficit

by 60bps each year till FY17, by which time it would have reached 3% of GDP, within

FRBM guidelines.

Can the finance minister pull this off? Could we really expect a secular downtrend in the

fisc over the next five years? Before we delve into the details, let’s examine the historical

evidence. As the chart below shows, budgeted fisc estimates have mixed chances of

being met. Until the GFC hit us in FY09, budgeted fiscal deficit figures were largely likely

to be met. Actual deficits have been higher about 4/10 times since FY02. It’s when the

UPA-II Govt.’s domestic mismanagement coalesced with a global slowdown, leading to a

sharp drop in growth, that fiscal management became difficult, and conversely relevant,

in terms of getting the economy back on track.

Fig 1 - Fiscal deficit trend

Source: India Budget, RCML Research

So why the skepticism this time towards meeting the targeted figures? In a word,

“Growth”. With GDP growth dipping ~250bps between FY11 and FY12, falling tax

revenues (and stubborn subsidies) have inflated the fisc, leading to the sharp miss from

the budget estimates (5.9% vs. 4.6% in FY12). Macro environment in the new fiscal is

unlikely to be very different, if a little better than what we have now, with 5.5-6% growth

remaining an overhang on revenues, and pre-election year one on expenditure. In other

words, conventional logic would point to a significant fisc in FY14 as well.

Now for the details. We believe a downward fiscal trajectory is not an unthinkable

scenario, and the Govt.’s figures for the fisc can be met over the medium term, with

prudent policy-led initiatives on trimming non-plan expenditure, subsidy rationalization,

and renewing investment focus. In the near-term, however, the Govt. could also employ

use simpler, and more effective ways, like pruning plan expenditure, and deferring

subsidy payments, the latter made possible by the cash (vs. accrual) accounting standards

followed. What this means in simplistic terms is that the Govt. recognizes an accounting

4.7

5.35.6

4.4 4.3

3.8

3.3

2.5

6.8

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4.0 4.1

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7.0

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FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13BE

(%)Budget Estimate Actual

Meeting the fiscal deficit target is key for the budget this year, as is the fiscal trajectory going forward

Historical evidence is supportive of meeting fiscal deficit targets…

…but the macro slowdown has muddied the waters a bit




INDIA


entry or transaction only when the actual transfer of money takes place, as against taking

measure of receivables and payables, as companies usually do.

Cash vs. Accrual accounting

Cash accounting considers transactions on actual transfer of money, like a withdrawal, or

a deposit, as against what’s called accrual accounting, which recognizes receivables and

payables, assets and liabilities. Considering income/expenditure over profit/loss, a cash

accounting framework appears to be clean and simple at first hand, but is usually

considered suboptimal given shortcomings like missing obligations like interest/pension

payable, depreciation, and delayed receivables. For the Govt., this translates into tax and

capex volatility, and to some extent an unreal fiscal picture. For instance, a ‘healthy’

scenario of high tax off-take in one period might simply be undone by large-refunds in

the next. Alternatively, subsidy announcements made in one period could actually be

paid in the next quarter or fiscal. Govt. across the World have shifted to accrual

accounting in recent years, and in India, plans to shift were put in place in November

2011 by the GASAB (Government Accounting Standards Advisory Board), appointed by

the CAG, and are expected to take six years to be completed. Till then, the Govt. can

always defer subsidies and hope for a better fiscal next time around.

The Finmin therefore might actually show a fiscal deficit of 5.3% in FY13 and 4.8% in

FY14, by reducing subsidy paid in each period.

Deferring/reducing subsidy disbursals:

The Govt. could choose to defer subsidies to FY14 (see table 4 for details) and hope to cut

down on subsides then, through sustained Diesel price hikes, urea hike, and with

trimming leakage with Direct Cash Transfers. Not to worry if political compulsions in a

pre-election year limit the extent to which these measures could be undertaken.

Subsidies payments could always be deferred to the next fiscal, cutting down on subsidy

burden in FY14. Let’s see the numbers this year. The actual subsidy burden for FY13 has

reached Rs2.9trn—almost Rs1trn more than the budgeted subsidy figures of Rs1.9trn.

Assuming no further fertilizer subsidy disbursal in FY13 and Rs550bn for oil (disbursed in

9MFY13, Q4 figure to be paid in Q1FY14), the Govt. is expected to release only Rs2.1trn,

thus potentially deferring Rs845bn to FY14. While this would make the FY13 fiscal print

look rosy, it raises concerns on the FY14 finances.

Overall, our scenarios suggest that the Govt. could defer as much as Rs845bn to FY14

towards meeting the targeted fisc for this year. And then with a series of positive steps

(details in table 5), restrict subsidies in FY14 to just Rs1.3trn, thereby restricting the

overall burden to Rs2.2trn, about 1.8% of GDP. The Food Security Bill could be deferred,

or watered down, so that expenses are not front-loaded, Diesel hikes are taken

religiously so as to narrow the under-recovery per litre to zero, LPG, kerosene prices are

raised, as are urea prices.

Of course, we’ve painted a blue-sky scenario, and FY14 could also see deferral of

subsidies to FY15. The point we make is that it’s possible to optically improve the fiscal

indicators of the country, and current politico-economic conditions do not preclude that

possibility.

Yes. The Govt. can meet its fiscal deficit target of 5.3% for FY13, and could actually also promise and meet an FY14 target of sub-5% fisc: 4.8%

Cash vs. Accrual accounting would be part of the trick, potentially a meaningful part

Subsidy deferral could be substantial this year, as much as Rs845bn, double that of the last fiscal




INDIA


Fig 2 - FY13 subsidy – actual burden vs. potential disbursal (to reach 5.3% fisc)

Rs bn FY13 BE subsidies Actual Subsidy burden in FY13

Potential subsidy disbursal in FY13

Actual subsidy disbursed till now

Potential amount deferred to FY14

Food 750 818 818 443 0

Fertilizers 610 988 594 594 393

Oil 436 1,002 550 550 452

Others 105 104.61 104.61 105 0

Total 1,900 2,912 2,067 1,692 845

% of receipts 19.4% 31.7% 0.2% 0.2% 0.1%

% of GDP 1.9% 2.9% 2.0% 1.7% 0.8%


Fig 3 - FY14 subsidy disbursal to reach 4.8% fisc

Rs bn FY13 FY14 Actual subsidy

incurred in FY14 Potential Govt. action

Food 818 725 725 1) No Food Security Bill, and 2) Firm roll-out plan on Direct Cash Transfer which would

help reduce leakages

Fertilizers 594 693 300 1) Steep hike in urea prices or possibly a gradual de-control, and 2) reduction in subsidies

on complex fertilizers

Oil 550 610 158

Best case scenario in the absence of any subsidy deferral to FY15 (though highly

unrealistic) could be 1) complete diesel de-control (Rs9.9 hike), 2) LPG price hike of

Rs450, 3) Rs3 hike in Kerosene prices

Others 105 150 150

Total 2,067 2,178 1,332

% of receipts 0.2% 20.5%

% of GDP 2.0% 1.8%


Reducing Plan expenditure

The Govt., as also pointed out earlier, could reduce its plan expenditure by 10% at the

expense of growth (where expectations are already falling), especially in defence and

outlay on roads. Non-plan expenditure, representing payments, subsidies, etc. is

inherently harder to control, given extant political and economic compulsions.

Reducing Plan Expenditure is another step towards meeting fiscally tight targets




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Fig 4 - Fiscal deficit math –How the Govt. can achieve 5.3% in FY13 and 4.8% in FY14

Rsbn FY12 FY13 BE FY13 revised to

reach 5.3% % diff. % yoy

FY14E to reach 4.8%

% yoy

Central govt. net tax revenue 6,423 7,711 7,322 -5.0% 14.0% 8,566 17.0%

Non-tax revenue 1,247 1,646 1,446 -12.1% 15.9% 1,584 9.5%

Telecom auctions 400 400 200 -50.0% -50.0% - -100.0%

Central govt. revenue receipts 7,670 9,357 8,768 -6.3% 14.3% 10,150 15.8%

Non-debt Capital Receipts 298 417 417 0.0% 40.0% 427 2.5%

Divestment proceeds 155 300 300 0.0% 93.6% 300 0.0%

Total Receipts 7,967 9,773 9,184 -6.0% 15.3% 10,577 15.2%

Non-plan Expenditure 8,921 9,699 9,866 1.7% 10.6% 10,917 10.6%

Of which Capital Expenditure 764 1,043 1,043 0.0% 36.6% 1,172 12.4%

Of which Revenue Expenditure 8,157 8,656 8,823 1.9% 8.2% 9,744 10.4%

Subsidy outgo 2,163 1,900 2,067 8.8% -4.4% 2,178 5.4%

Food 728 750 818 9.1% 12.3% 725 -11.4%

Fertilizers 672 610 594 -2.5% -11.5% 693 16.5%

Oil 685 436 550 26.2% -19.7% 610 10.9%

Others 78 105 105 0.0% 34.2% 150 43.4%

Plan Expenditure 4,266 5,210 4,689 -10.0% 9.9% 5,273 12.4%

Of which Capital Expenditure 804 1,005 905 -10.0% 12.5% 1,034 14.3%

Of which Revenue Expenditure 3,462 4,205 3,785 -10.0% 9.3% 4,239 12.0%

Total Expenditure 13,187 14,909 14,555 -2.4% 10.4% 16,189 11.2%

Nominal GDP 89,749 101,599 101,599 0.0% 13.2% 117,836 16.0%

Fiscal Deficit (5,220) (5,136) (5,371) 4.6% 2.9% (5,613) 4.5%

Fiscal Deficit as % of GDP 5.8% 5.1% 5.3%

4.8%


What do we think? – A more realistic picture

We’ve justified odds of the Govt.’s meeting its target of 5.3% for this fiscal, and

potentially stretching to 4.8% for the next, and its impact on the macro/markets. What

happens if the Govt. does not resort to aggressive payment deferral, or restrict plan

expenditure?

We believe the fiscal calculations then would be fairly different, with the FY13 fisc spiking

to 5.8%, missing the Govt. target by a wide margin. And one can be excused for being

conservative on reforms in a pre-election year, and with muted expectations of a fiscally

prudent budget, we would expect the fisc to improve only marginally to 5.2% in FY14 vs.

the Govt.’s potential target of 4.8%.

Our estimates differ from what we believe the Govt. would do, primarily on more sedate

assumptions of lower tax revenue, and a subsidy burden, with lower deferrals. Corporate

tax growth has been lagging budget estimates, expectedly so, and our conservative view

of FY14 growth (5.8% vs. street expectations of 6.5%) translates into weaker growth

figures for income, and corporate taxes.

On subsidies, our estimates do not include the Food Security Bill as of now, given the lack

of clarity on the targeted spend, and the level of front-ending possible as a political

exigency.

Our estimates for the fisc trajectory ovr FY13/14 are higher than Govt. estimates at 5.8/5.2% vs. 5.3/4.8%




INDIA


Fig 5 - Fiscal deficit math – RCML estimates

Rsbn FY12 FY13E % yoy FY14E % yoy

Central govt. net tax revenue 6,423 7,252 12.9% 8,383 15.6%

Non-tax revenue 1,247 1,446 15.9% 1,583 9.5%

Telecom auctions 400 400 0.0% - -100.0%

Central govt. revenue receipts 7,670 8,698 13.4% 9,966 14.6%

Non-debt Capital Receipts 298 417 40.0% 428 2.8%

Divestment proceeds 155 300 93.6% 300 0.0%

Total Receipts 7,967 9,115 14.4% 10,394 14.0%

Non-plan Expenditure 8,921 10,213 14.5% 11,129 9.0%

Of which Capital Expenditure 764 1,043 36.6% 1,172 12.3%

Of which Revenue Expenditure 8,157 9,170 12.4% 9,957 8.6%

Subsidy outgo 2,163 2,414 11.6% 2,450 1.5%

Food 728 1,000 37.3% 1,000 0.0%

Fertilizers 672 610 -9.3% 600 -1.6%

Oil 685 700 2.2% 700 0.0%

Others 78 105 34.2% 150 43.4%

Plan Expenditure 4,266 4,819 13.0% 5,419 12.4%

Of which Capital Expenditure 804 921 14.6% 1,053 14.3%

Of which Revenue Expenditure 3,462 3,898 12.6% 4,366 12.0%

Total Expenditure 13,187 15,033 14.0% 16,548 10.1%

Nominal GDP 89,749 101,599 13.2% 117,836 16.0%

Fiscal Deficit (5,220) (5,918) 13.4% (6,153) 4.0%

Fiscal Deficit as % of GDP 5.8% 5.8%

5.2%


Govt.’s fiscal consolidation roadmap for the 12th

plan looks overly optimistic

In a press statement on October 29th

, the Finance Minister unveiled a five-year fiscal

consolidation roadmap for the period FY13-FY17 with an aim to contain India’s twin-

deficit problem and high inflation, spur investments and boost economic growth. As per

the roadmap, India’s fiscal deficit would come down from 5.3% expected in FY13 to 4.8%

in FY14, 4.2% in FY15, 3.6% in FY16 and finally to 3% in FY17.

While supportive of it at a broad, policy level (as we are of the Direct Cash Transfer, and

the Food Security Bill etc.), we find roadmap overly optimistic, especially in the absence

of key recommendations of the Kelkar Committee, such as price increases in food and

fertilizers, sugar de-control, actual (as opposed to announced) price hikes of petroleum

products, and postponement of the food security bill. Recent commentary from the FM

on sticking to the fiscal target, and lowering the fisc steadily (~60bps annually) is a

positive indeed, but now implementation is key.

The Govt. expects to bring down fiscal deficit to 3% by FY17 – we believe this is overly optimistic




INDIA


Fig 6 - Fiscal consolidation roadmap during period FY13-17

Source: Ministry of Finance, RCML Research

Fig 7 - Key economic targets for the 12

th Five Year Plan

% Eleventh plan (FY08-12) Twelfth plan (FY13-17)

Economic growth (avg.)

Real GDP 7.9 8.2

Agriculture 3.3 4.0

Mining and Quarrying 3.2 7.2

Manufacturing 6.9 8.0

Electricity, gas & water supply 6.0 7.8

Construction 7.3 8.6

Services 9.8 9.1

Savings, investment & consumption* (avg.)

Investment 37.6 39.3

Consumption 70.0 67.4

Savings** 35.8 37.1

External sector (avg.)

Exports 14.7 18.0

Imports 23.5 26.9

Trade deficit (8.7) (8.9)

Current account balance (CAD) (2.7) (2.9)

Capital account balance (KAD) 4.1 3.2

Fiscal

Tax revenue (net of states' share) as % of GDP 7.60 in FY12 8.79 in FY17

Subsidies as % of GDP 2.44 in FY12 1.20 in FY17

Fiscal deficit (avg.) 5.15 3.98 (to reach 3% by FY17)

Gross budgetary support as % of GDP (avg.) 4.69 5.23

Infra Investments as % of GDP (avg.) 7.10 8.26

Source: Planning Commission, RCML Research

5.3

4.8

4.2

3.6

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2.0

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5.0

6.0

FY13 FY14 FY15 FY16 FY17

(%)

Fiscal policy roadmap looks overoptimistic, as do the targets for the XII Five Year Plan, given the current growth trajectory




INDIA


Implications on the macro and markets

A lower fisc in India is clearly desirable, as we show below, but we are also worried with

the direction and implications of tighter Govt. spending on the overall macro, esp. in the

near-term. We show that the impact of the Govt. meeting its fiscal targets for FY13/14

could be ~25bps on growth.

Lower fisc is good for economy…

There’s no debate on the benefits of a lower fiscal deficit in the economy, one needs only

to examine the extent of ‘crowding out’ of the private sector over the last few years, as

Govt. spending, and consequently, borrowing has exceeded budgeted targets.

Fig 8 - Crowding out of the Private sector on rising Govt. borrowing


Recent years have seen the Govt. take up a progressively higher share of the capital on

offer in the market, as the previous chart illustrates, and this phenomenon is accentuated

when actual borrowing exceeds targeted levels. The figure for FY13 at nearly 85% is given

the front-ended borrowing program on one hand, and low deposit growth on the other.

And negative surprises on borrowing have also been exacerbated in recent years with

falling credit growth, as the chart below illustrates.

Fig 9 - Budgeted and actual Govt. market borrowings vs. credit growth

Source: India Budget, RCML Research

A sustained rise in Govt. borrowing also implicates national income growth. In the chart

below we juxtapose this indicator with GDP growth over the last decade, and see that

1.21.4 1.5 1.6 1.5 1.6 1.5

4.5 4.6

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(%)(Rstrn) Budgeted Govt. borrowings Actual Govt. borrowings

Actual borrowings to incremental deposits ratio

1.21.4 1.5 1.6 1.5 1.6 1.5

4.5 4.6

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5.7

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(%)(Rstrn) Budgeted Actual Credit growth

Everybody loves a low fisc. but be prepared for ‘costlier’ consequences!

Why lower fiscal deficits are desirable

Exceeding borrowing targets hurts more in a falling credit growth environment




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while a rise in Govt. spending was helpful during the GFC period in boosting economic

growth (FY09-10), its sustained rise since then has only served to crowd out the private

sector in the economy, with the consequent negative implications for growth.

Fig 10 - Share of Govt. borrowing in the economy and GDP growth


The point is made: Relatively speaking, Govt. spending is inferior to private spending for

growth.

… and for the markets

We believe therefore that the markets would cheer a lower fiscal figure for FY14, even as

economic and fiscal performance this year would necessitate subsidy deferral and hence

trust in the final tally for FY13. A low FY14 fisc print, say below 4.8%, would we believe be

viewed positively despite a potential hit on the economic growth as it improves and

brings Govt. finances on track in the long-term.

..and for the central bank

The Reserve Bank of India (RBI) has time and again voiced concerns over high fiscal deficit

and CAD as being key constraints towards an easing monetary policy, besides obviously

high inflation. A fiscally responsible Budget may also mean a more comfortable RBI on

easing rates—another positive for investment in the economy and the markets.

…Expenditure cuts could however hurt in the near-term

Now let’s for a moment examine the near-term consequences.

What we are interested here are in the aftermath of lower Govt. spending on the

economy, and its growth prospects, even if the Govt. is no longer the significant

component of the economy it once was.

A sharp reduction in FY14 subsidies (assuming no deferral) would happen only when the

Govt. takes sharp fuel and fertilizer (urea) price hikes. While structurally a big positive for

Govt. finances, this also implies higher inflation as a necessary corollary with higher

food/fuel/finished goods prices, which in turn would hurt not just consumption in the

near-term (we are worried about urban consumption), but could potentially also extend

the monetary easing on one hand, and a growth revival on the other.

Moreover, a sustained cut in Govt. plan expenditure (esp. defence/infra) in FY13 could

hurt the potential growth trajectory over the next few years, despite near-term fiscal

amelioration. Comparing RCML estimates with the Govt. numbers to achieve the ‘revised’

5.5%

4.0%

8.1%

7.0%

9.5% 9.6% 9.3%

6.7%

8.6%

9.3%

6.2%

5.5%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

0%

2%

4%

6%

8%

10%

12%

FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13E

(%)(Rstrn)GDP growth (L) Actual Govt. borrowings to incremental deposits ratio (R)

Despite the help from fiscal pump-priming during the GFC, rising share of Govt. borrowing is inimical to growth, very clearly so

Near-term pain from a sharp cut in Govt. spending

Govt.’s role in the economy has come off over the last two decades, but every bit counts in a slowdown




INDIA


5.3% fisc in FY13, we estimate that the shortfall of Rs477bn in Govt. expenditure could

negatively hurt growth by ~25bps (that too assuming no multiplier effect).

Fig 11 - Impact of lower capex on growth

Rs bn Capex shortfall in FY13 Govt. vs. RCML est.

Non-plan expenditure 347

Capital Expenditure -

Revenue Expenditure 347

Plan Expenditure 130

Capital Expenditure 17

Revenue Expenditure 113

Total 477

% of Nominal GDP 0.5%

GDP Deflator 1.9

Effective change in GDP 0.24%


So what are we saying here? Clearly that given a choice, we would prefer a lower growth

trajectory over a stubbornly high fisc, even if that means near-term pain.

Sector-wise, higher inflation would hit consumption, esp. in the urban segment, and thus

by negative for the Consumer sector (both discretionary and staples), i.e., Autos, Media,

Household & Personal Products, Food & Beverages, and residential Real Estate (lower

housing demand). The resultant drop in urban consumption could also impact private

banks with significant retail exposures. However, an investment boost would be positive

for Infrastructure, Energy, Industrials and to some extent the Banking space. A lower fisc

print would have a neutral impact on Telecom, Healthcare, IT and Metals.

The price to meet the fiscal deficit target for this year and the next could be 25bps of growth

Near-term pain on lower fisc would be negative for consumption, esp. in the urban segment, with sector implications




INDIA


What can the Govt. do to help investment?

The central bank’s rate cut in January—we’ve maintained earlier—was more towards

easing consciences about comfort on the inflation trajectory going forward, rather than

any significant change in the cost of funds for the economy. To spur growth, when

inflation and a widening CAD restrict the support one can expect from the RBI, would

take Govt. approvals on one hand, and sustained corporate capex on the other. We

believe the fiscal balances do not allow the Govt. to spend money in this environment, or

lower taxes as in during the GFC (FY0-10) years. The feasible route remains policy-based

intervention that incites a constructive environment for investment, esp. for large-cap

projects.

Fiscal pump-priming for investments almost impossible this time around...

Let’s face it: Growth is down to 5.5% in FY13E, and a little better in FY14E (we expect

5.8%). The last time that happened was in FY09, with the fisc at 6% (except that FY10 saw

8.4% growth. i.e., no meaningful bounce this time around). While the Govt. has been

cutting its planned spending at the expense of growth, subsidies and interest payments

remain high (despite large deferrals) and take up more than 75% of the total tax receipts

(as per FY13BE). As such, bold moves such as urea de-regulation/price hikes, sugar de-

control, are inevitable towards meaningfully meeting the fiscal prudence targets till FY17.

Corporate investment in the economy has been flat over the last few years, but the Govt.

is no position to take over especially when some social spending would be required

ahead of general elections. The only tool that will not cost the bucks and still help

improve sentiments, attract investments into India and facilitate growth remains the

continued push on reforms.

...given the messy state of public finances in FY13

Corporate, excise and custom taxes have lagged Budget estimates thus far and the gross

tax collection is likely to miss the budgeted target of 20%YoY (15%YoY so far) despite

strong service tax collections (33%YoY so far versus the budgeted 30.5%). While revenue-

collection is often back-ended, a sharp-pick is unlikely in FY13.

Fig 12 - Tax collections growth in FY13

Source: RCML Research, CMIE

24%

11%

4%

16%

34%

15%17%

14%

22%

30% 31%

20%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Income Corporate Custom Duties Excise Duties Service Gross TaxRevenue

FY13 so far FY13BE

Money is not everything, prudent decision-making is

Fiscal pump-priming for investments looks difficult given messy state of finances

Continued push on reforms important to improve sentiments and attract investments




INDIA


Fig 13 - Tax collections

(Rsbn) FY13BE %YoY FY13E %YoY FY14E %YoY

Direct Taxes 5,690 15.1% 5,621 13.7% 6,375 13.4%

Income Tax 1,958 17.5% 1,983 19.0% 2,301 16.0%

Corporate Tax 3,732 13.9% 3,637 11.0% 4,074 12.0%

Indirect Taxes 5,086 24.9% 4,697 15.3% 5,503 17.2%

Custom Duties 1,867 22.0% 1,607 5.0% 1,735 8.0%

Excise Duties 1,944 29.5% 1,771 18.0% 2,090 18.0%

Service Tax 1,240 30.5% 1,283 35.0% 1,642 28.0%

Source: India Budget, CGA, RCML Research

While we expect the Govt. to meet its divestment target of Rs300bn (Rs216bn already

achieved till now), we remain skeptical on the likely outcome of the second round of 2G

auctions (first round generated only Rs94bn vs. target of Rs400-450bn). As such we

remain conservative on non-debt capital receipts in FY13.

Fig 14 - Govt. disinvestments in FY13 so far

Company Market cap (Rsbn) Govt. stake Actual stake sale No. of shares Amount (Rsbn)

NTPC 1,221 75.00% 9.50% 8,245 115

NMDC 583 90.00% 10.00% 3,965 59.9

Oil India 322 68.43% 10.00% 601 31.4

Hindustan Copper 115 90.41% 9.59% 925 8.1

National Buildings Construction Co. 18 74.00% 10.00% 120 1.3

Total 216


Subsidy expenditure as a share of total receipts of the government has increased from

~13% in FY01-FY08 to ~26% in FY13E. While the Diesel price hike (Rs5 on 13 September

and 45p on 18 January) has provided some support, the impact is expected to be only

marginal at-least in this fiscal (~Rs140bn decline or 14% of total oil subsidy burden in

FY13). However, further diesel hikes mean upside risks to inflation, thus delaying or

reducing the quantum of rate cuts and consequently delaying the pick-up in investment

cycle further.

Fig 15 - Subsidy trend (breakup) for FY13

Source: Budget 2012-13, RCML Research

The double whammy of lower tax/non-tax revenue collections (on lower growth) along

with higher subsidy burden translated into a huge Govt. borrowing target for FY13 at

Rs5.7trn, up sharply from Rs5.1trn last year, signaling little room for investment pick-up

by the Govt. However, a gradual easing of the RBI’s monetary stance, along with further

1,000

610

700750

610

436

0

200

400

600

800

1,000

1,200

Food Fertilizer Oil

(Rs.bn)FY13 RCML Estimates FY13 Budget Estimates

We expect Govt. to meet its divestment target of Rs300bn for FY13 but miss its target from telecom auctions of Rs400bn by a wide margin

Gross tax collections growth so far (9MFY13) at 15% have fallen short of BE of 20%




INDIA


reform push by the Govt., should result in a pick-up in private investments, albeit only

marginally, in FY14.

We expect borrowing levels to remain elevated in FY14, at around Rs5.7trn or so, but

importantly, as we’ve shown earlier, we do not expect the borrowing target of the Govt.

to be exceeded, and hence preclude any major negative surprise on yields in this regard

in FY14.

Fig 16 - Govt. borrowings via dated securities

Source: RBI, RCML Research

Fig 17 - Govt. borrowings via T-Bills

Source: RBI, RCML Research

On the positive side, the Govt. can indirectly boost investment by ‘non-monetary’ steps:

1. Announcing various measures to channelize long-term capital into infrastructure

investment

2. A measured response on plan vs. non-plan expenditure rationalization in FY14,

3. Forcing PSUs to kick-start investment or pay dividends in order to help meet fiscal

revenue targets.

Moreover, a lower fiscal deficit would mean reduced Govt. borrowings which in turn

would dampen yields, and would induce a ‘crowding in’ effect on corporate credit/capex,

and support the INR on sentiment. As the chart below clearly shows, higher Govt.

borrowing over the years has been concurrent with rising yields.

1.1

1.7 1.7

1.1

1.41.5

2.0

2.7

4.24.4

5.1 5.1

0.0

1.0

2.0

3.0

4.0

5.0

6.0

FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13TD

(Rs trn)

0.4 0.5 0.6

1.51.7

2.2

3.1

3.63.9

3.4

6.3 6.3

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13TD

(Rs trn)

The Govt. has raised Rs 5.1trn in FY13 so far via dated securities vs. the budgeted Rs5.7trn

The Govt. has raised Rs 6.3trn in FY13 so far via T-Bills




INDIA


Fig 18 - Actual Govt. market borrowings vs. 10Y yield

Source: RCML Research, FY13E are Budget estimates

Pro-cyclical measures/monetary easing key to spur growth

The capital expenditure/total expenditure ratio—a measure of capital spends by the

Govt.—has fallen from ~17% in FY01-FY08 to ~12% in Apr-Dec’13 as the Govt. cut down

on its spending plan to counter ballooning non-plan revenue expenditure i.e. subsidies

and falling tax collections. This has meant that while Govt. borrowing has increased

substantially at the expense of the private sector, the much-needed capital expenditure

has taken a hit (aggregate plan and non-plan capital expenditure in 9MFY13 at 12.4%

versus 13.7% budgeted). This could in turn hurt FY14 growth, our estimate for which at

5.8% is significantly below consensus and Govt.’s target of 6.5-7%.

While gross fixed capital formation as a percentage of GDP has been gradually falling

over last few years, down from 33% in FY10 to 31% now, what is worrisome is that the

private share of gross capital formation has also fallen from a high of ~39% in FY08 to

~29% in FY12. New project announcements have fallen 55%yoy this fiscal till date to

Rs3.4trn. The share of private projects has also been stagnant over the years, highlighting

the subdued sentiment in the private sector which has been the key driver of

investments during the past decade. This fall in investments could likely affect India’s

potential growth over the next few years.

We reiterate that to turn sentiment around from such an investment-led slowdown,

policy incentives are required in addition to an easy monetary policy, especially when the

scope for pro-cyclical expenditure by the government is limited.

Fig 19 - Private sector capex/GFCF (current prices)

Source: RCML Research, CMIE

1.3 1.4

0.8

1.31.5

1.7

2.7

4.54.4

5.1

5.7

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0


(%)(Rstrn) Actual market borrowings Avg. 10Y yield

21.1%19.1% 18.3%

26.4%

32.5% 32.6%

39.1%

28.5%29.9% 29.1%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12

(%)

With falling Govt. investment to counter burgeoning subsidy burden and subdued demand in the private sector, pro-growth policy incentives along with easing monetary policy remain key to spur growth

Private share of the gross capital formation has fallen from a high of ~39% in FY08 to ~29% in FY12




INDIA


Fig 20 - Annual trend of new project announcements Fig 21 - Public & Pvt. share of outstanding investments

Source: CMIE, RCML Research Source: CMIE, RCML Research

2.3 3.04.1

8.8

18.1

21.0

23.1

16.5 16.1

10.2

7.6

3.4

0.0

5.0

10.0

15.0

20.0

25.0

(Rstrn)

67 6556

44 42 39 33 39 39 43 40 41

33 3544

56 58 61 67 61 61 57 60 59

0

10

20

30

40

50

60

70

80

90

100

(%) Govt. Private




INDIA


Influence of the Budget on the markets

The Union Budget has had progressively lower importance in the past as the last few

budgets have avoided big-ticket policy reform announcements (unlike in the early 90s

when game changing reforms were announced), which in any case tended to come

throughout the year instead of end-Feb. As such, we don’t expect this time to be any

different, especially given the recent reform rhetoric, as our table 24 on the following

page comprehensively illustrates.

The figures below suggest that budget influence on the market performance has been

declining. In 6/12 years, markets have seen negative returns. Also, in 8/12 times we have

different pre-post movement. In other words, a positive return in the month prior to the

budget is generally followed by a negative return in the month post the budget. What

could be different this time is the sustained PSU equity supply overhang that’s likely to

continue at least till the end of 1QFY14.

Fig 22 - Pre- and post-Budget market performance

Source: Datastream, RCML Research

Fig 23 - Pre- and post-Budget market returns (1M)

Source: Bloomberg, RCML Research

(4.0)(3.1)

0.9

(7.0)

(1.0)

(9.0)

5.1 4.6

(2.4)

1.4

7.5

0.3

(2.1)

8.27.4

13.2

(6.9)

1.0

9.0

(5.0)

7.3

(5.1)

(2.6)

(15.1)

(20)

(15)

(10)

(5)

0

5

10

15

2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001

(%) Run-up Follow-up

Significance of budget on the markets is falling as witnessed over last few years amidst lack of big-ticket reform announcements

PSU equity supply is likely to continue till June’13, as the Govt. tries to make ends meet as long as we have a favourable market

Eight out of 12 times we have seen markets performing in different directions




INDIA


Fig 24 - Key reforms initiated by the Govt. in FY13, should continue till 1QFY14, or till the equity supply is on

Date Reforms Description

13-Sep Diesel price hiked by Rs5/ltr Diesel hiked by Rs5 (12%), subsidized LPG cylinders limited to 6 per year. This would reduce fiscal burden

by Rs200bn

14-Sep

Cabinet approves FDI in multi-

brand retail, aviation, broadcasting,

power trading exchanges

FDI allowed in multi-brand retail (upto 51%), aviation (upto 49%), broadcasting (49% to 74%), Power-

trading exchanges (upto 49%)

14-Sep Disinvestment in PSUs Disinvestment approved in MMTC (9.33%), Oil India (10%), Nalco (12.15%), Hindustan Copper (9.59%).

This would help the govt. meet Rs300bn disinvestment target for the year.

21-Sep External borrowing made cheaper Withholding tax on overseas borrowings (ECBs, long term infra bonds) cut to 5% from 20%

21-Sep

Rajiv Gandhi Equity Savings

Scheme approved for retail

investors

The FM approved the Rajiv Gandhi Equity Saving Scheme (RGESS) exclusively for the first time retail

investors in securities market. The Govt. has expanded the scope of this scheme from stocks to mutual

funds and ETFs, meaningfully changing the catchment area of funds for this scheme.

04-Oct Cabinet approves FDI in Insurance,

Pension Funds and Companies Bill

The cabinet approved the increase in FDI limit for Insurance to 49% from 26%, opened the pension sector

to foreign investment and also cleared the Companies Bill. Parliamentary approval awaited, but prima

facie positive for overall market, specifically, Insurance plays, infra plays.

11-Oct

Cabinet approves direct urea

subsidy transfer and Rs50/t hike in

urea prices

The Cabinet approved the new urea subsidy framework which proposes direct transfer of subsidies to end-

users (farmers) in a phased approach and also hike in urea prices by Rs50/t (current price Rs5,310) with

an aim to reduce the subsidy bill and address imbalance in use of soil nutrients due to the rising price gap.

25-Oct PM sets committee on direct cash

transfer

Prime Minister Manmohan Singh constituted a high-power National Committee on Direct Cash Transfers in

a bid to reduce corruption at the cutting edge. The committee is expected to facilitate the introduction of

direct cash transfers to individuals eligible for benefits flowing out of the government’s many welfare

programmes.

08-Dec Rajya Sabha clears FDI in multi-

brand retail

FDI in multi-brand retail cleared the final hurdle on 8th December when it got the approval of the Rajya

Sabha which voted against the motion to withdraw it. It has already got the Lok Sabha approval.

14-Dec Cabinet gives nod to Land

acquisition bill

The Union cabinet cleared the land acquisition bill with some changes to the draft version passed by the

GoM in October

14-Dec Cabinet Committee on Investment

formation approved by the Cabinet

The Cabinet approved the formation of the much-awaited Cabinet Committee on Investment to provide

fast-track approval to mega projects. This is the watered down version of the National Investment Board

14-Dec New Urea Investment policy gets

nod from CCEA The CCEA approved the new urea investment policy

19-Dec Companies bill passed

Lok Sabha passed the new Companies bill that brings the management of the corporate sector in line with

global norms. It introduces concepts like responsible self-regulation with adequate disclosure and

accountability, ushers in enhanced shareholders’ participation and provides for a single forum to approve

mergers and acquisitions.

20-Dec Banking Bill/Sarfesi law passed Parliament paved the way for corporate houses to enter the banking sector by approving the banking bill

and also passed the amendments to the debt recovery laws or Sarfesi law.

07-Jan ECB limit on infra NBFCs raised

from 50% to 75%

The RBI has raised ECB limit for infrastructure NBFCs to 75% of owned funds from 50% under the

automatic route. This will apply to outstanding ECBs as well, and those above 75% will require approval

from RBI. This reform comes at a time when the country needs $1trn investment in infra.

14-Jan FInMin red-lights GAAR

The finance minister on 14th Jan outlined the Govt.’s final reponse to the ‘GAAR Report’—

recommendations of the export panel headed by Dr. Parthasarathi Shome to examine the GAAR proposal

of the Finance Act 2013. Agreeing to most of the recommendations, the Govt. has now to some extent

mitigated concerns on the topic.

17-Jan

Govt decontrols diesel prices; cap

on subsidised LPG cylinders raised

to 9

The Govt. allowed the oil cos to raise the diesel prices by small amounts every month (45p/mth) and

announced inclusion of bulk diesel prices in WPI calculation. The Govt. also increased the subsidized LPG

cylinders from 6 to 9

17-Jan Govt. halves CDMA reserve price The Cabinet approved a 50% cut in the auction reserve price for CDMA spectrum. The decision could

prompt Russia's Sistema to participate in the auction process schedule for March.

17-Jan Committee clears bill on food

security

The standing committee on food, consumer affairs, and public distribution on 17th Jan signed off on the

food security bill that nearly matches the recommendation made by the Sonia Gandhi-headed National

Advisory Council (NAC).

21-Jan Import duty on gold and platinum

raised to 6%

The Govt. has raised import duty by 2% (4% to 6%) in order to reduce CAD and hope for a moderation in

gold demand. The Govt. wants people to cut down their gold purchases, but this will be difficult as India is

the world's largest gold importer.

24-Jan FII debt limit raised to US$25bn

from US$20bn to US$25bn

The Govt. has increased the debt market limit for investments in Govt. and corporate bonds by $5.0bn

each. This is expected by the market as it will boost FII inflows into India that will fund the widening CAD.

This was announced earlier (Nov’12) by the Govt. and has been operationalized now by SEBI.





INDIA


Wish-list/What can we expect

Mix of populist and reformist measures likely to be seen

Given slowing growth with no signs as yet of a sustained recovery yet on one hand, and

deteriorating public finances with the fisc expected to remain at elevated levels in FY13

on the other, the need for a highly frugal, reformist and pro-growth Budget is high,

especially when concerns on core inflation are slowly fading away. However, chances of

one are also relatively poor in a pre-election year. We expect the Govt. to announce a

mix of prudent and populist measures in this year’s Budget.

The street is looking up to the FM (finance minister) to further boost market sentiments

via a continued push on pro-investment reforms even as populist/inefficient expenditure

(welfare programs – NREGS, IAY, SSA, JRY, JNNURM, farm loan waivers) goes up in the

year as the Govt. tries to gain public confidence ahead of the general elections (charts

below show a sharp pick-up in welfare spending during election years). On more

mundane matters, we might see a dip in the STT (Securities Transaction Tax) for equities,

or see one coming in for commodities at last. Also expected is some form of

additional/incremental tax on high-net-worth individuals, particularly given the recent

statements of the FM on the topic.

We believe the markets will give a thumbs-up to a budget with a genuine intent to push

through reforms, boost the investment cycle and reduce subsidies through steps such as:

Improvement in revenue-receipts by bringing in further hikes in the indirect tax

rates (preferably custom duties) and announcing a firm plan towards Goods and

Service Tax (GST) implementation.

What is GST?

GST is a value added tax that would replace all indirect taxes levied on goods and services

by the Indian central and state governments. However, due to non-consensus between

the central and state govt., the proposal is to introduce a dual GST regime – CGST and

SGST.

Roadmap for rationalisation of subsidies and ultimately, market-linked prices

wherever possible, so that demand adjusts to the global commodity prices. While

diesel has been partially de-regulated, a comprehensive plan like this for other fuels

(kerosene, LPG etc) with clearly defined timelines for eventual de-regulation is

important.

Improvement in the subsidy distribution mechanism to avoid leakages and ensure

targeted subsidy disbursal. Direct Cash Transfer (DCT) scheme is an important step

towards this. While DCT implementation has started from 1 January 2013, issues like

extensive Aadhaar coverage (only ~210mn people out of 1.2bn are Aadhaar card

holders) and financial inclusion (bank accounts) need to be addressed quickly for

faster and efficient roll-out of the scheme. The Govt. should announce a

comprehensive plan towards extensive implementation of the scheme.

What is DCT?

Direct Cash Transfers (DCT) is a scheme wherein the Govt. subsidy payments and other

benefits would be credited directly into the bank accounts of the beneficiaries. This

would help the Govt. reach out to identified beneficiaries, reduce leakages and hence

enhance efficiency of the welfare schemes.

A fiscally prudent, reformist and pro-investment budget is the need of the hour

But likelihood of the one is poor given an election year. A mix of the two looks




INDIA


Clear divestment agenda and policy and spreading the activity throughout the year

instead of concentrating it towards the end of year and resulting in another ONGC

episode in FY12.

Opening doors for FDI to new sectors and expanding the limits further in the sectors

where it’s already allowed.

Abolishing or reducing the short-term capital gains tax on various asset classes.

What are short-term capital gains?

Investments in any asset class if held for a very short period (less than a year except for

real estate where the holding period is three years) is taxed as short term capital gains.

Except equity, short-term gains on which are taxed at 15%, that from other assets is

included in investor's income and taxed at slab rate.

Fig 25 - Short-term capital gain tax structure for various asset classes

Asset Holding period for short-term gains Tax Rate*

Equity < 1 year 15%

Debt < 1 year Added to income

Gold Physical/e-Gold: <3 years Added to income

ETF/Gold MF: <1 year

Real Estate < 3 years Added to income

Bonds/NCD < 1 year Added to income


Lowering Securities Transaction Tax (STT) and addressing the issue of its double

incidence (levied on every buy and sell transaction), thus helping broaden the

market participation, boosting investor confidence amidst weak market sentiments,

and ensuring adequate liquidity in the system.

What is STT?

STT, first introduced in 2004, is the tax levied on purchase or sale of equity shares and

derivatives. Currently, 0.1% of the transaction value (revised downwards from 0.125% in

July’12) is levied on the sale and purchase of equity shares.

Boosting infrastructure investment by

o Raising infra bonds’ issuance target for the year,

o Allowing commercial banks to issue tax-free infra bonds. Currently only state-run

infrastructure firms are allowed to issue these bonds.

o Introducing separate limit/carve-outs for tax-free infra bonds. Tax exemption on

tax-saving infra bonds up to a maximum of Rs20,000 was again included in the

Rs1lac limit in the last budget. Increasing this limit to Rs50,000 and separating it

from the Rs1lac investment limit for tax exemption would channelize retail savings

into the infra sector and widen the investor base, thus providing much-needed

long-term financing for the sector.

o Allowing insurance companies to have higher exposure to infra bonds (providing

tax breaks for debt funds).

Easing bond issuance for the private sector thus promoting the bond market in India

which is still very nascent compared to the equity market.




INDIA


Govt. spending on rural welfare programs like NREGA, IAY, and SSA etc. had risen

sharply with UPA-II in 2009, but has petered out in recent years on lower income

growth and utilization. We do not foresee a sharp rise this time around.

Fig 26 - Govt. spending on rural employment – NREGA* Fig 27 - Govt. spending on rural housing – IAY*

Source: RCML Research, Budget Documents *Key head is National Rural Employment Guarantee Scheme

Source: RCML Research, Budget Documents *Key head is Indira Awas Yojna

Fig 28 - Govt. spending on rural education – SSA* Fig 29 - Govt. spending on rural infrastructure – PMGSY*

Source: RCML Research, Budget Documents *Key head is Sarva Shiksha Abhiyan (SSA)

Source: RCML Research, Budget Documents *Key head is Pradhan Mantri Gram Sadak Yojana

117 129142

368391

358

310330

0

50

100

150

200

250

300

350

400

450

FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13BE

(Rs.bn)

25 26

36

79 79

103

90

100

0

20

40

60

80

100

120


(Rs.bn)

72

4337

47

35

102

71

83

0

20

40

60

80

100

120


(Rs.bn)

3851

106

152168

224

182

217

0

50

100

150

200

250


(Rs.bn)




INDIA


Sector-wise expectations Fig 30 - Sector-wise budget expectations and implications

Sector Budget expectations Implication

Auto

Specific excise duty on diesel passenger vehicles

Likely to affect UV/diesel passenger car players, MM, TTMT, MSIL

Any specific duty on large cars especially utility vehicles

Any increase would be negative for MM

Continuation/Increase of allocation to schemes like NREGS

Higher allocation to income transfer schemes would be a positive especially for two-wheelers and tractor segments

Consumer

Excise duty hike on FMCG products Minor negative for all FMCG players but expect to be passed through

Excise duty hike/imposition of any specific ad-valorem duty on cigarettes

Impact on ITC with more than 10% increase in excise likely to be a key negative for the stock

Further hike in Gold import duty Negative for TTAN

Lower spend on flagship schemes Sentimentally negative for FMCG cos. with high rural share such as HUVR and DABUR

Personal Income Tax brackets Hike in personal income tax slabs will be a positive for the sector in general

Infrastructure

Infra-bonds

Increase in the (company) borrowing limit for infra-bonds in order to give a push to infrastructure development, positive for the sector Any increase in the (personal) tax exemption limit for infra bonds will incrementally address funding constraints for the sector

Continued spending on roads and pick-up in rail spending

Likely positive for LT and midcap contractors

Increase in taxes as differential between MAT and IT comes down

Any increase in MAT in the context of a tight fiscal situation would be negative for the sector

Capital Goods

Impetus on railway spending/modernization & urban transport

For signaling and locomotives - positive for manufacturers like BHEL, SIEM, ABB & CRG Positive for contracting companies like LT & KEC

Increased indigenization of defense equipment

Positive for BHEL, LT

Support for renewable energy - solar/wind

Positive for BHEL, SIEM and SUEL (Suzlon)

Budget allocation for power transmission projects

Positive for equipment manufacturers – CRG, BHEL, Positive for contractors – KEC & L&T

Financials

Fiscal deficit and borrowing target Fiscal consolidation is very crucial from macro perspective. Fiscally prudent policies would mean reduced supply of Govt. bonds which in turn would be positive for yields and inflation

Allocation of equity capital for infusion in PSU banks

Positive for SBI and other large PSU banks (BOI, UNBK)

Increase in exemption limit for borrower on housing loans

Positive for the sector and housing finance companies

Cement Increase in excise duty Negative for the sector as a whole

Push for infrastructure spending Positive for the sector

Real Estate

Increase scope/limit of ECB for Real estate companies

ECB issuance is currently allowed for only low-cost and rural housing projects. Extension of the scope/limits will be positive for Real estate companies

Increase in tax benefit for home loan Interest (current Rs.0.15mn) and Principal repayment (Current Rs.0.1mn)

Positive for the residential developers

Signals of including Real estate under GST

Near-term negative but long-term positive for the sector

Tax incentives to developers for mid-income housing/Slum rehab schemes

Positive for developers in mid-income housing segment (UT, HDIL, PVKP)

Change in limit for home loan eligibility for priority sector lending

Marginally positive if home/loan value increased from current limit of Rs2.5mn/1.5mn respectively

Infrastructure status to the affordable housing sector

Positive as it would facilitate liquidity infusion into the sector (PVKP, HDIL)

Further increase in service tax Slightly negative for the sector as it would increase the cost of purchasing homes and result in higher cost of construction (service tax on construction contracts etc.)





INDIA


Sector Budget expectations Implications

Power

Elimination of import duty on thermal coal (reduced from 5% to 1% in FY13 budget)

Likely positive for players dependent on imported coal such as ADANI and JSW

Further extension of 80-IA benefit (MAT exemption based on year of commissioning)

Positive for the sector as a whole

Tax-free bonds for the power sector Positive for the sector as a whole

Increase in taxes as differential between MAT and IT comes down

Negative for the sector

Telecom

Any changes in the duties on telecom equipment such as data cards, phones etc.

Would have minimal impact on the sector

Increase in service tax Could negatively impact the sector and could impact the ARPUs of the operators

Energy

Under-recoveries and fuel taxes Increase in tax and subsidy math for fuel subsidies will likely hint at possible fuel price hikes etc. No change in excise/customs expected for refined products.

Further increase in cess on crude oil production (increased to Rs4500/T from Rs2500/T)

This would mean additional burden on crude oil producers. Negative for ONGC, CAIR, OIL

Reintroduction of Customs duty on Crude

GoI is actively seeking new revenue sources to meet its fiscal deficit target, reintroduction of customs duty of 5% would help them garner close to Rs340bn. However, this is negative for oil refiners/OMCs

Increase in Natural Gas price We expect GoI to consider recommendations of Rangarajan committee on Gas pricing and announce a revision of the same. This is positive for gas producers

Gas to come under GST / Categorised goods

To promote usage and import of gas and ease the substitution of oil products. Positive for the sector as a whole

Media & Distribution

Reduction of customs duty on set-top boxes

Positive for all distribution companies (DITV, HATH, DEN)

Increase in service tax Negative for DITV and HATH

Metals

Increase in custom duty on ferro-alloys from existing 5%

Positive for ferro-alloy companies as threat from import substitutes will be reduced

Increase in export duty on iron ore fines from 5% to 20%

Negative for iron ore companies especially Sesa Goa

Agriculture

Increase in excise duty on pesticides Negative for the sector as a whole

Urea price hikes Positive for urea manufacturers

Road map for bringing Urea under Nutrient-based Subsidy (NBS) ambit

Positive for urea manufacturers

Maintaining/reducing rates in the interest subvention scheme for short-term crop loans (at 7% currently)

Facilitate raising of short-term loans by the farmers which in turn is positive for pesticides/fertilizers/irrigation players

Increased allocation to various agricultural programs (RKVY)

Positive for the sector as a whole



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