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PRE BUDGET NOTE - FEBRUARY 2011
A tight rope walk; implementation to be in focus
The Finance Minister will present the FY2011-12 budget at a time when
inflation is at high levels and is raising concerns on future growth rates. The
FM's priority will be inflation control and sustaining growth rates, we
believe, though fiscal rectitude will also invite his attention. The focus was
more on fiscal prudence last year. We believe that, significant stress will be
laid on more effective implementation of the outlays rather than any
increasing outlays significantly.
With WPI inflation ruling at more than 8% and food inflation at more than
13% levels, we expect several proposals to address supply side issues.
Measures / investments to increase agricultural output, reduce wastage of
perishables and improving supply chain may be announced. However, we
understand that, most supply side constraints can be addressed only in the
long term by focused investments / implementation in agriculture and
irrigation. Reduction of duties on select imports does help reduce import
costs and contain inflation. Significant changes in duties and taxes may not
happen though, pending the introduction of GST and direct tax code WEF
FY12.
While GDP growth remains high as of now, we believe that, the focus of
Mr. Mukherjee will be on sustaining and improving the rate of GDP growth
and that too, equitable (inclusive) growth. Towards this end, infrastructure,
social initiatives and agriculture investments are expected to continue.
However, speedier implementation of allocated budgets will make these
spends more effective. We expect measures towards this to be included in
the budget.
Adherence to fiscal discipline will continue, we feel. FY2010-11 had the
benefit of telecom license revenues and buoyant tax receipts. Also, the
expenditure may not match up to the budgeted levels (including
supplementary demand), we believe. The revised estimate (RE) for FY2010-11
fiscal deficit could be set at 4.85% v/s budget estimate (BE) of 5.5%.
For FY2011-12, we expect the FM to take credit for higher tax revenues due
to the buoyancy in the economy (14% nominal growth GDP expected).
Control on non-plan expenditure is also expected. However, reduction of
subsidy burden may prove difficult especially keeping in mind the high
inflation rate. The target for fiscal deficit is expected to be set at 4.8%, in
line with the road map laid down earlier. We expect the divestment target
to be set at around the FY2010-11 levels.
On reforms, we expect a road-map for entry of new private sector banks.
Relaxation in FDI limits, if any, in sectors like retail, defence, etc may bring
in additional revenues. Possible disclosure of all financial guarantees
provided by the Government will increase transparency. DTC and GST are
expected to be implemented WEF FY13. A constitution amendment bill for
GST is likely to be passed in the budget session. For DTC, some enabling
measures may be announced. We believe that, with inflation being at high
levels, the Government may not tinker much with the subsidy structure.
Critical issues like labour reforms, pension reforms, etc may need broader
political consensus. However, we believe that, a roadmap for introducing a
comprehensive Financial Reforms Bill may be tabled in the Parliament.
On direct taxes, the exemption limit for individuals is expected to increase.
SAD may be removed with a view to reduce import costs. Excise duties are
likely to remain largely stable as inflation is high. Service tax coverage is
expected to go up.
We do not expect any major initiatives for the stock markets. The market is
not expecting any major reforms initiatives and also understands that,
supply side measures will take time to have any impact, we opine. Thus, we
believe that, the focus of the markets will be more on effective
implementation of investments, fiscal discipline and on sectors which are
impacted by the budget proposals.
We believe that, the budget may have positive implications for Banking,
NBFCs, Capital Goods, Cement, FMCG, Hotels, Information Technology, Oil &
Gas, Power sectors and may be Neutral for sectors like Automobiles,
Aviation, Media, Metals & Mining, Real Estate, Telecom.
This year, the FM is faced with twin challenges of controlling inflation and sustaining
/ improving growth rates. Last year, containing fiscal deficit was a bigger concern, in
our view.
Controlling inflation; Food inflation is the culprit
Inflation has remained high for a large part of FY11 and concerns have aggravated
in the last few months as it has not come down despite good monsoons. While prolonged
monsoons have played a part, but nevertheless, inflation has remained disturbingly
and stubbornly high.
If we look at the details, manufacturing inflation (65% weight) has not moved up
significantly. In fact, the index of manufacturing inflation has moved up by only
about 4.5% (average) in 9mFY11 v/s the average in FY10. This reflects slower demand
growth in manufacturing and the consequent moderation in inflation.
On the other hand, food inflation has remained high with the average index for
9mFY11 rising by 14% over its FY10 average. While we understand that, higher
demand has played a part in stoking up inflation, it is largely the supply side constraints
which have resulted in the rate remaining stubbornly high.
In our opinion, the FM will focus on addressing the supply side constraints. Though
this has been the theme of the past few budgets, we do expect more concrete steps
towards this in this budget.
We expect higher outlays towards investments in agriculture and irrigation. In the
2010-11 budget, the Government had allocated Rs.3bn to organise 60,000 "pulses
and oil seed villages" in rain-fed areas during 2010-11. The benefits are visible with
India looking at record pulses production this year. We expect similar allocations to
primary articles in which India is deficient.
The FM had also provided Rs.4bn to extend the green revolution to the eastern region
and Rs.2bn were allocated for sustaining the gains already made in the green
revolution areas. We can expect further investments in these areas.
While the above steps will be in the right spirit, we believe that, these will take time
to yield results. With a view to address some of the supply side constraints, we expect
measures on the supply chain side and also to counter pilferage and wastage.
The Public Distribution System (PDS) in the country facilitates the supply of food
grains to the poor at a subsidised price. The PDS needs to be restructured and we
expect believe there is a possibility of introducing innovative ideas such as smart
cards, food credit/debit cards, food stamps and decentralized procurement, to make
food available to the poor wherever they may be in cost-effective manner.
India loses about 30% of its food-grains / vegetables / fruits, etc to pilferage and
wastage every year. Thus, out of the total production of about 200 mn tonnes of
these perishable commodities, about 60 tonnes do not reach the intended consumers.
If this is addressed, we believe that, supply can be increased to a significant extent.
We expect measures to improve storage facilities and build cold storage facilities,
further encourage refrigerated transport equipment, etc. We note that, in the 2010-
11 budget, several incentives were provided to improve the cold storage and cold
room facilities, including farm level pre-cooling.
Moreover, we expect that, the movement of food-grains between states may be
made simpler and speedier. As of now, there are state level restrictions on foodgrains
moving between states. This leads to shortages in several states and excesses
in the remaining in turn, resulting in wastage. Removing these restrictions can reduce
the periodic and geographical shortages.
Thus, we believe that, the FM will focus on removing supply bottle-necks to improve
supplies in the short term, while increasing agricultural investments to address long
term supply issues.
In addition to these, we expect the duties on several essential commodities to be
reduced with a view to reduce the burden on the consumer. Import duties on several
primary commodities may be brought down. India imports more than 70% of its
crude requirements and reduction of duties on this commodity can have a sobering
effect on crude price as well as prices of several downstream products.
Sustaining GDP growth…
India has built upon the 8% growth of 2009-10 and is expected to grow at a fast
pace of 8.6% (CSO advance estimates) in FY11. Thus, it will remain the second fastest
growing economy, globally.
However, of late, there have been growing concerns about the pace of GDP growth.
The moderation is reflected especially in imports and in IIP. The CSO has estimated
the GDP growth in 2HFY11 at 8.2% v/s 8.9% in 1HFY11. We understand that, it is
only partly due to the base effect.
In this backdrop, we expect the FM to continue focus on investments, both physical
and soft. We expect the focus of the budget to be on sustaining and improving the
high rate of growth. Sustenance of high growth is very important to make the benefits
of this growth reach all sections of the society.
To that extent, investments, mainly in infrastructure, are expected to continue. Segments
like roads, highways, airports, ports, power, etc are expected to receive continued
attention and funding. India's high investment rate (about 35%) has been
largely responsible in India achieving a high GDP growth rate. Thus, we expect the
FM to continue to allocate investments, mainly to the infrastructure sector.
The 11th 5-year Plan has envisaged total investment in physical infrastructure (electricity,
railways, roads, ports, airports, irrigation, urban and rural water supply and
sanitation) to increase from around 5% of GDP in 2006-07 to 9% of GDP by the end
of the plan period if the targeted rate of growth of 9% for the Plan period (2007-12)
is to be achieved. Consistent with the above projection, the investment in physical
infrastructure alone during the Plan has been estimated to be about Rs.20trn. Of this
amount, the share of the Central Government, the State Governments and the private
sector has been projected at 37%, 32% and 31%, respectively.
The Government had indicated it was targeting to construct 15-20 km of roads a
day. We understand that, the average road construction currently stands at nearly 6-
7 kms per day while projects have been awarded for nearly 3500 km in this fiscal.
We expect the further stress on this target under the new Minister, Mr. C P Joshi. On
the other hand, the Power Ministry has indicated its desire to be able to add power
generation capacity of 62,374 MW in the current plan period (reduced from 78,700
MW). It also wants to reach its target of providing electricity to about 100,000 villages
(reduced from 118,000 villages by 2009 earlier) by March 2012 (>78000 villages
already covered). As of now, the government has awarded four UMPP contracts
of 4,000 MW each and expects to award the others at the earliest.
We note that, in 2010-11 budget, allocation for road transport was increased by over
13%. Also, Rs.168bn were provided for Railways, an increment of about Rs.9.5bn v/
s last year. Plan allocation for power sector excluding RGGVY was proposed to be
doubled from Rs.22.3bn in 2009-10 to Rs.51.3bn in 2010-11.
…and promoting equitable growth
Equitable growth has been one of the important cornerstones of the UPA's previous
tenure and we expect the same to continue in the current tenure also. Schemes like
Sarva Shiksha Abhiyan, National Rural Employment Guarantee Scheme, mid-day
meal scheme, etc have lagged targets, tough significant progress on the same has
been achieved.
In 2010-11, allocation for social sector was increased to Rs.1.37trn i.e. 37% of the
total plan outlay. Another 25% of the plan allocations was devoted to the development
of rural infrastructure.
We expect measures to provide further impetus to these schemes to ensure rural
upliftment, employment, education, agricultural growth and public health. Initiatives
on agriculture also help in easing supply side constraints and sustaining the GDP
growth rate.
Implementation is the key
While the intent is there, the implementation issue needs to be addressed. Only
speedier implementation will make these plans more effective, we believe. We expect
greater focus on timely and effective implementation of plan outlays.
We understand that, the actual spends on various plans have been lagging the allocations
made for the fiscal. For eg, out of the total outlay of Rs.420bn towards
NREGS, only about Rs.208.54bn has been spent till January 2011 (source :
rbi.org.in). Also, out of the total capacity addition target of 20359MW of power
(source : Planning Commission), only about 9730MW have been added till December
2010 (source : CEA). About 3500 kms of roads have been awarded till date v/s
expectations of more than 7000kms in the current fiscal.
Moreover, capex spend by private sector has also likely moderated because of the
various bottle-necks and procedural delays, post the expose of various scams and
bribery scandals. There are concerns about delays in decision making in various
projects and the consequent impact on financials.
These are adequately reflected in the lower IIP growth in the last few months (1.6%
for December 2010) and also the reducing imports over this period. Imports have
fallen MoM over the past two months despite crude touching higher levels.
We expect measures towards this end. Stricter monitoring of progress of projects and
linking the release of budgets to actual performance can be good ways of ensuring
better implementation. Regular reviews, say, on a quarterly basis, will ensure even
spending across the fiscal and not bunching up of spends towards the end of the
fiscal.
Conferring the status of a priority sector to the power industry may lead to significant
financing from banks and attract more investments from private sector. Also, looking
at the potential delays in the UMPPs, extension of tax benefits for UMPPs coming on
stream post 2010 is expected. Currently, tax benefits under section 80IA are available
only to UMPPs starting power generation before 2010. Extension of tax holidays
to gas exploration business will also spur investments.
We understand that, several issues may not really fall under the purview of the Budget
and conviction of resolution will have to be seen in legislation and administrative
action over the next few months.
Fiscal deficit - sticking to FRBM
The fiscal deficit picture is expected to be an interesting one. For FY11, we expect
the fiscal deficit to be at 4.85% - lower than the targeted 5.5%.
This is because of the higher tax revenues and also the windfall from the sale of 3G
licenses (about Rs.660bn higher). Tax revenues till December 2010 have already
touched 73% of the budgeted amount (v/s 65% YoY). There are a few divestment
candidates lined up till March and if these fructify, there can be additional revenues
for the Government.
On the other hand, expenditure stands at about 71% of the budgeted figure. The
slowdown witnessed in the spending by Government post the bribery and 2G scams,
may lead to under-utilisation of budgets for FY11, further helping the deficit numbers.
While the 3G revenues will not be available to the Government next year, we expect
higher tax revenues and control on non-plan expenditure to help the FM in
meeting the FRBM target of 4.8% of fiscal deficit.
We expect that the FM will project a 13% rise in direct tax revenues for FY11-12,
based on a 14% projected growth in nominal GDP. There could be some losses due
to an expected increase in personal income-tax exemption limit. We are not expecting
any major increases in duties because of inflation concerns. However, service tax
may be made applicable to more services ahead of the GST roll-out. We expect divestment
targets to remain at around Rs.400bn for FY2011-12E.
There has been a lot of emphasis on bringing back the unaccounted money
Government's subsidy bill rose to Rs.1,310bn in FY10(RE), and was expected to at
Rs.1,162bn in FY11. However, we believe that, the subsidy burden could be higher
than budgeted. This is because of high commodity prices including crude. We believe
that withdrawal of subsidies is not politically feasible. Also, the high inflation
may prevent subsidy burden from moderating.
In view of the above we expect subsidy bill in FY11 could come at about Rs.1900bn
and for FY12E also, it could be budgeted at Rs.1900bn. Please note that petroleum
companies get majority of their subsidies from upstream companies and government
pays its part mostly in oil bonds and hence the subsidy burden due to fuel products
doesn't get reflected fully in the budget figures.
In our opinion, the fiscal deficit /GDP ratio should be about 4.8%, gross tax/GDP at
10.28% and total expenditure/GDP ratio at 14.1% in FY12 budget estimate. We
believe that, any major deviation from the targets set out in the previous budget will
be viewed negatively.
Reforms at work
There have been several road blocks in the reforms process. Due to these, the
implementation of important reforms like DTC and GST has likely been postponed
to FY13, we understand. Thus, there may be no major announcements on these in
the budget. At best, the FM may outline the Government's commitment to implement
the same at the earliest.
As far as GST is concerned, some of the steps which need to be taken are : harmonizing
the service tax and excise duties, removing region-based exemptions, etc.
Currently, while cenvat rate is at 8 - 12%, service tax rate is at 10% and VAT is at
12.5%. We believe that, GST has the potential to improve margins of companies by
way of reduced cost on inter-state transfer of goods. A constitution amendment bill
is likely to be passed in the budget session.
As far as subsidies are concerned, an outline to reduce the subsidy burden on the
Government may be drawn up, though there may be no concrete proposals.
Apart from these, several initiatives in administrative reforms may be outlined in the
budget. However, we believe that pension reforms and labour reforms will need
wider political consensus before they are implemented.
Possible disclosure of all financial guarantees provided by the Government will increase
transparency. FDI limits may be relaxed in several sectors like retail, defence,
etc and these may bring in additional funds.
Few changes in direct tax rates expected
The Direct Tax Code will be discussed in FY12 and will likely be implemented WEF
FY13. Pending its implementation, we expect the FM to make few changes to tax
rates.
We do expect that, the exemption limit for individual tax payers may be raised,
keeping in mind the impact of inflation on the people. An increase in exemption
limit from the current Rs.160,000 will also bring it close to the proposed limit of
Rs.200,000 in DTC.
Tax benefits to 'impacted' and labour-intensive industries like textiles, rubber,
jewellery, leather, IT, etc may be continued with. Also, on the personal tax front, tax
exemptions on investments may be continued to channel funds for infrastructure.
We also expect MAT for companies to rise to 20% v/s the present rate of 18%.
However, the 7.5% surcharge may be abolished, which may largely compensate for
this increase in MAT rate. These initiatives will bring the structure in line with the
proposed structure in DTC.
Continued growth in the economy may encourage the FM to budget for a 13%
growth in direct tax revenues, we opine.
Indirect changes - minor tinkering expected
On indirect taxes, we expect minor changes. With inflation looming, we expect excise
duty rates to be largely stable. Cigarettes may see duty going up. Service tax
rate may also be unchanged.
However, the coverage of service tax may be enhanced, with GST expected to be
operational from FY13. Moreover, with a view to reduce import costs, the special
additional duty (SAD) of 4% on various products may be removed. Any reduction in
import duty of crude will help control inflation, but the revenue implications may not
permit substantial reduction, if any.
Stock markets
We do not expect any significant measures for the stock markets. Markets will be
pleasantly surprised if there are downward revisions in STT and capital gains tax
rates.
The markets are not expecting major announcement on reforms. We opine that, if
the budget focuses strongly on execution (for inflation control and investments) and
adheres to the deficit targets, markets may not be disappointed.
Sectoral implications
We believe that, the focus of the markets will be more on :
n Steps to control inflation - LT as well as ST measures
n Speedier implementation of investment initiatives
n Initiatives to sustain and improve the GDP growth,
n Adherence to FRBM targets and
n Sectors which will be positively impacted by the budget proposals
Expected sectoral impact
Budget impact Sector
Positive Banking, NBFCs, Capital Goods, Cement, FMCG, Hotels, Inforation
Technology, Oil & Gas, Power
Neutral Automobiles, Aviation, Media, Metals & Mining, Real Estate,
Telecom
Source: Kotak Securities - Private Client Research
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
PRE BUDGET NOTE - FEBRUARY 2011
A tight rope walk; implementation to be in focus
The Finance Minister will present the FY2011-12 budget at a time when
inflation is at high levels and is raising concerns on future growth rates. The
FM's priority will be inflation control and sustaining growth rates, we
believe, though fiscal rectitude will also invite his attention. The focus was
more on fiscal prudence last year. We believe that, significant stress will be
laid on more effective implementation of the outlays rather than any
increasing outlays significantly.
With WPI inflation ruling at more than 8% and food inflation at more than
13% levels, we expect several proposals to address supply side issues.
Measures / investments to increase agricultural output, reduce wastage of
perishables and improving supply chain may be announced. However, we
understand that, most supply side constraints can be addressed only in the
long term by focused investments / implementation in agriculture and
irrigation. Reduction of duties on select imports does help reduce import
costs and contain inflation. Significant changes in duties and taxes may not
happen though, pending the introduction of GST and direct tax code WEF
FY12.
While GDP growth remains high as of now, we believe that, the focus of
Mr. Mukherjee will be on sustaining and improving the rate of GDP growth
and that too, equitable (inclusive) growth. Towards this end, infrastructure,
social initiatives and agriculture investments are expected to continue.
However, speedier implementation of allocated budgets will make these
spends more effective. We expect measures towards this to be included in
the budget.
Adherence to fiscal discipline will continue, we feel. FY2010-11 had the
benefit of telecom license revenues and buoyant tax receipts. Also, the
expenditure may not match up to the budgeted levels (including
supplementary demand), we believe. The revised estimate (RE) for FY2010-11
fiscal deficit could be set at 4.85% v/s budget estimate (BE) of 5.5%.
For FY2011-12, we expect the FM to take credit for higher tax revenues due
to the buoyancy in the economy (14% nominal growth GDP expected).
Control on non-plan expenditure is also expected. However, reduction of
subsidy burden may prove difficult especially keeping in mind the high
inflation rate. The target for fiscal deficit is expected to be set at 4.8%, in
line with the road map laid down earlier. We expect the divestment target
to be set at around the FY2010-11 levels.
On reforms, we expect a road-map for entry of new private sector banks.
Relaxation in FDI limits, if any, in sectors like retail, defence, etc may bring
in additional revenues. Possible disclosure of all financial guarantees
provided by the Government will increase transparency. DTC and GST are
expected to be implemented WEF FY13. A constitution amendment bill for
GST is likely to be passed in the budget session. For DTC, some enabling
measures may be announced. We believe that, with inflation being at high
levels, the Government may not tinker much with the subsidy structure.
Critical issues like labour reforms, pension reforms, etc may need broader
political consensus. However, we believe that, a roadmap for introducing a
comprehensive Financial Reforms Bill may be tabled in the Parliament.
On direct taxes, the exemption limit for individuals is expected to increase.
SAD may be removed with a view to reduce import costs. Excise duties are
likely to remain largely stable as inflation is high. Service tax coverage is
expected to go up.
We do not expect any major initiatives for the stock markets. The market is
not expecting any major reforms initiatives and also understands that,
supply side measures will take time to have any impact, we opine. Thus, we
believe that, the focus of the markets will be more on effective
implementation of investments, fiscal discipline and on sectors which are
impacted by the budget proposals.
We believe that, the budget may have positive implications for Banking,
NBFCs, Capital Goods, Cement, FMCG, Hotels, Information Technology, Oil &
Gas, Power sectors and may be Neutral for sectors like Automobiles,
Aviation, Media, Metals & Mining, Real Estate, Telecom.
This year, the FM is faced with twin challenges of controlling inflation and sustaining
/ improving growth rates. Last year, containing fiscal deficit was a bigger concern, in
our view.
Controlling inflation; Food inflation is the culprit
Inflation has remained high for a large part of FY11 and concerns have aggravated
in the last few months as it has not come down despite good monsoons. While prolonged
monsoons have played a part, but nevertheless, inflation has remained disturbingly
and stubbornly high.
If we look at the details, manufacturing inflation (65% weight) has not moved up
significantly. In fact, the index of manufacturing inflation has moved up by only
about 4.5% (average) in 9mFY11 v/s the average in FY10. This reflects slower demand
growth in manufacturing and the consequent moderation in inflation.
On the other hand, food inflation has remained high with the average index for
9mFY11 rising by 14% over its FY10 average. While we understand that, higher
demand has played a part in stoking up inflation, it is largely the supply side constraints
which have resulted in the rate remaining stubbornly high.
In our opinion, the FM will focus on addressing the supply side constraints. Though
this has been the theme of the past few budgets, we do expect more concrete steps
towards this in this budget.
We expect higher outlays towards investments in agriculture and irrigation. In the
2010-11 budget, the Government had allocated Rs.3bn to organise 60,000 "pulses
and oil seed villages" in rain-fed areas during 2010-11. The benefits are visible with
India looking at record pulses production this year. We expect similar allocations to
primary articles in which India is deficient.
The FM had also provided Rs.4bn to extend the green revolution to the eastern region
and Rs.2bn were allocated for sustaining the gains already made in the green
revolution areas. We can expect further investments in these areas.
While the above steps will be in the right spirit, we believe that, these will take time
to yield results. With a view to address some of the supply side constraints, we expect
measures on the supply chain side and also to counter pilferage and wastage.
The Public Distribution System (PDS) in the country facilitates the supply of food
grains to the poor at a subsidised price. The PDS needs to be restructured and we
expect believe there is a possibility of introducing innovative ideas such as smart
cards, food credit/debit cards, food stamps and decentralized procurement, to make
food available to the poor wherever they may be in cost-effective manner.
India loses about 30% of its food-grains / vegetables / fruits, etc to pilferage and
wastage every year. Thus, out of the total production of about 200 mn tonnes of
these perishable commodities, about 60 tonnes do not reach the intended consumers.
If this is addressed, we believe that, supply can be increased to a significant extent.
We expect measures to improve storage facilities and build cold storage facilities,
further encourage refrigerated transport equipment, etc. We note that, in the 2010-
11 budget, several incentives were provided to improve the cold storage and cold
room facilities, including farm level pre-cooling.
Moreover, we expect that, the movement of food-grains between states may be
made simpler and speedier. As of now, there are state level restrictions on foodgrains
moving between states. This leads to shortages in several states and excesses
in the remaining in turn, resulting in wastage. Removing these restrictions can reduce
the periodic and geographical shortages.
Thus, we believe that, the FM will focus on removing supply bottle-necks to improve
supplies in the short term, while increasing agricultural investments to address long
term supply issues.
In addition to these, we expect the duties on several essential commodities to be
reduced with a view to reduce the burden on the consumer. Import duties on several
primary commodities may be brought down. India imports more than 70% of its
crude requirements and reduction of duties on this commodity can have a sobering
effect on crude price as well as prices of several downstream products.
Sustaining GDP growth…
India has built upon the 8% growth of 2009-10 and is expected to grow at a fast
pace of 8.6% (CSO advance estimates) in FY11. Thus, it will remain the second fastest
growing economy, globally.
However, of late, there have been growing concerns about the pace of GDP growth.
The moderation is reflected especially in imports and in IIP. The CSO has estimated
the GDP growth in 2HFY11 at 8.2% v/s 8.9% in 1HFY11. We understand that, it is
only partly due to the base effect.
In this backdrop, we expect the FM to continue focus on investments, both physical
and soft. We expect the focus of the budget to be on sustaining and improving the
high rate of growth. Sustenance of high growth is very important to make the benefits
of this growth reach all sections of the society.
To that extent, investments, mainly in infrastructure, are expected to continue. Segments
like roads, highways, airports, ports, power, etc are expected to receive continued
attention and funding. India's high investment rate (about 35%) has been
largely responsible in India achieving a high GDP growth rate. Thus, we expect the
FM to continue to allocate investments, mainly to the infrastructure sector.
The 11th 5-year Plan has envisaged total investment in physical infrastructure (electricity,
railways, roads, ports, airports, irrigation, urban and rural water supply and
sanitation) to increase from around 5% of GDP in 2006-07 to 9% of GDP by the end
of the plan period if the targeted rate of growth of 9% for the Plan period (2007-12)
is to be achieved. Consistent with the above projection, the investment in physical
infrastructure alone during the Plan has been estimated to be about Rs.20trn. Of this
amount, the share of the Central Government, the State Governments and the private
sector has been projected at 37%, 32% and 31%, respectively.
The Government had indicated it was targeting to construct 15-20 km of roads a
day. We understand that, the average road construction currently stands at nearly 6-
7 kms per day while projects have been awarded for nearly 3500 km in this fiscal.
We expect the further stress on this target under the new Minister, Mr. C P Joshi. On
the other hand, the Power Ministry has indicated its desire to be able to add power
generation capacity of 62,374 MW in the current plan period (reduced from 78,700
MW). It also wants to reach its target of providing electricity to about 100,000 villages
(reduced from 118,000 villages by 2009 earlier) by March 2012 (>78000 villages
already covered). As of now, the government has awarded four UMPP contracts
of 4,000 MW each and expects to award the others at the earliest.
We note that, in 2010-11 budget, allocation for road transport was increased by over
13%. Also, Rs.168bn were provided for Railways, an increment of about Rs.9.5bn v/
s last year. Plan allocation for power sector excluding RGGVY was proposed to be
doubled from Rs.22.3bn in 2009-10 to Rs.51.3bn in 2010-11.
…and promoting equitable growth
Equitable growth has been one of the important cornerstones of the UPA's previous
tenure and we expect the same to continue in the current tenure also. Schemes like
Sarva Shiksha Abhiyan, National Rural Employment Guarantee Scheme, mid-day
meal scheme, etc have lagged targets, tough significant progress on the same has
been achieved.
In 2010-11, allocation for social sector was increased to Rs.1.37trn i.e. 37% of the
total plan outlay. Another 25% of the plan allocations was devoted to the development
of rural infrastructure.
We expect measures to provide further impetus to these schemes to ensure rural
upliftment, employment, education, agricultural growth and public health. Initiatives
on agriculture also help in easing supply side constraints and sustaining the GDP
growth rate.
Implementation is the key
While the intent is there, the implementation issue needs to be addressed. Only
speedier implementation will make these plans more effective, we believe. We expect
greater focus on timely and effective implementation of plan outlays.
We understand that, the actual spends on various plans have been lagging the allocations
made for the fiscal. For eg, out of the total outlay of Rs.420bn towards
NREGS, only about Rs.208.54bn has been spent till January 2011 (source :
rbi.org.in). Also, out of the total capacity addition target of 20359MW of power
(source : Planning Commission), only about 9730MW have been added till December
2010 (source : CEA). About 3500 kms of roads have been awarded till date v/s
expectations of more than 7000kms in the current fiscal.
Moreover, capex spend by private sector has also likely moderated because of the
various bottle-necks and procedural delays, post the expose of various scams and
bribery scandals. There are concerns about delays in decision making in various
projects and the consequent impact on financials.
These are adequately reflected in the lower IIP growth in the last few months (1.6%
for December 2010) and also the reducing imports over this period. Imports have
fallen MoM over the past two months despite crude touching higher levels.
We expect measures towards this end. Stricter monitoring of progress of projects and
linking the release of budgets to actual performance can be good ways of ensuring
better implementation. Regular reviews, say, on a quarterly basis, will ensure even
spending across the fiscal and not bunching up of spends towards the end of the
fiscal.
Conferring the status of a priority sector to the power industry may lead to significant
financing from banks and attract more investments from private sector. Also, looking
at the potential delays in the UMPPs, extension of tax benefits for UMPPs coming on
stream post 2010 is expected. Currently, tax benefits under section 80IA are available
only to UMPPs starting power generation before 2010. Extension of tax holidays
to gas exploration business will also spur investments.
We understand that, several issues may not really fall under the purview of the Budget
and conviction of resolution will have to be seen in legislation and administrative
action over the next few months.
Fiscal deficit - sticking to FRBM
The fiscal deficit picture is expected to be an interesting one. For FY11, we expect
the fiscal deficit to be at 4.85% - lower than the targeted 5.5%.
This is because of the higher tax revenues and also the windfall from the sale of 3G
licenses (about Rs.660bn higher). Tax revenues till December 2010 have already
touched 73% of the budgeted amount (v/s 65% YoY). There are a few divestment
candidates lined up till March and if these fructify, there can be additional revenues
for the Government.
On the other hand, expenditure stands at about 71% of the budgeted figure. The
slowdown witnessed in the spending by Government post the bribery and 2G scams,
may lead to under-utilisation of budgets for FY11, further helping the deficit numbers.
While the 3G revenues will not be available to the Government next year, we expect
higher tax revenues and control on non-plan expenditure to help the FM in
meeting the FRBM target of 4.8% of fiscal deficit.
We expect that the FM will project a 13% rise in direct tax revenues for FY11-12,
based on a 14% projected growth in nominal GDP. There could be some losses due
to an expected increase in personal income-tax exemption limit. We are not expecting
any major increases in duties because of inflation concerns. However, service tax
may be made applicable to more services ahead of the GST roll-out. We expect divestment
targets to remain at around Rs.400bn for FY2011-12E.
There has been a lot of emphasis on bringing back the unaccounted money
Government's subsidy bill rose to Rs.1,310bn in FY10(RE), and was expected to at
Rs.1,162bn in FY11. However, we believe that, the subsidy burden could be higher
than budgeted. This is because of high commodity prices including crude. We believe
that withdrawal of subsidies is not politically feasible. Also, the high inflation
may prevent subsidy burden from moderating.
In view of the above we expect subsidy bill in FY11 could come at about Rs.1900bn
and for FY12E also, it could be budgeted at Rs.1900bn. Please note that petroleum
companies get majority of their subsidies from upstream companies and government
pays its part mostly in oil bonds and hence the subsidy burden due to fuel products
doesn't get reflected fully in the budget figures.
In our opinion, the fiscal deficit /GDP ratio should be about 4.8%, gross tax/GDP at
10.28% and total expenditure/GDP ratio at 14.1% in FY12 budget estimate. We
believe that, any major deviation from the targets set out in the previous budget will
be viewed negatively.
Reforms at work
There have been several road blocks in the reforms process. Due to these, the
implementation of important reforms like DTC and GST has likely been postponed
to FY13, we understand. Thus, there may be no major announcements on these in
the budget. At best, the FM may outline the Government's commitment to implement
the same at the earliest.
As far as GST is concerned, some of the steps which need to be taken are : harmonizing
the service tax and excise duties, removing region-based exemptions, etc.
Currently, while cenvat rate is at 8 - 12%, service tax rate is at 10% and VAT is at
12.5%. We believe that, GST has the potential to improve margins of companies by
way of reduced cost on inter-state transfer of goods. A constitution amendment bill
is likely to be passed in the budget session.
As far as subsidies are concerned, an outline to reduce the subsidy burden on the
Government may be drawn up, though there may be no concrete proposals.
Apart from these, several initiatives in administrative reforms may be outlined in the
budget. However, we believe that pension reforms and labour reforms will need
wider political consensus before they are implemented.
Possible disclosure of all financial guarantees provided by the Government will increase
transparency. FDI limits may be relaxed in several sectors like retail, defence,
etc and these may bring in additional funds.
Few changes in direct tax rates expected
The Direct Tax Code will be discussed in FY12 and will likely be implemented WEF
FY13. Pending its implementation, we expect the FM to make few changes to tax
rates.
We do expect that, the exemption limit for individual tax payers may be raised,
keeping in mind the impact of inflation on the people. An increase in exemption
limit from the current Rs.160,000 will also bring it close to the proposed limit of
Rs.200,000 in DTC.
Tax benefits to 'impacted' and labour-intensive industries like textiles, rubber,
jewellery, leather, IT, etc may be continued with. Also, on the personal tax front, tax
exemptions on investments may be continued to channel funds for infrastructure.
We also expect MAT for companies to rise to 20% v/s the present rate of 18%.
However, the 7.5% surcharge may be abolished, which may largely compensate for
this increase in MAT rate. These initiatives will bring the structure in line with the
proposed structure in DTC.
Continued growth in the economy may encourage the FM to budget for a 13%
growth in direct tax revenues, we opine.
Indirect changes - minor tinkering expected
On indirect taxes, we expect minor changes. With inflation looming, we expect excise
duty rates to be largely stable. Cigarettes may see duty going up. Service tax
rate may also be unchanged.
However, the coverage of service tax may be enhanced, with GST expected to be
operational from FY13. Moreover, with a view to reduce import costs, the special
additional duty (SAD) of 4% on various products may be removed. Any reduction in
import duty of crude will help control inflation, but the revenue implications may not
permit substantial reduction, if any.
Stock markets
We do not expect any significant measures for the stock markets. Markets will be
pleasantly surprised if there are downward revisions in STT and capital gains tax
rates.
The markets are not expecting major announcement on reforms. We opine that, if
the budget focuses strongly on execution (for inflation control and investments) and
adheres to the deficit targets, markets may not be disappointed.
Sectoral implications
We believe that, the focus of the markets will be more on :
n Steps to control inflation - LT as well as ST measures
n Speedier implementation of investment initiatives
n Initiatives to sustain and improve the GDP growth,
n Adherence to FRBM targets and
n Sectors which will be positively impacted by the budget proposals
Expected sectoral impact
Budget impact Sector
Positive Banking, NBFCs, Capital Goods, Cement, FMCG, Hotels, Inforation
Technology, Oil & Gas, Power
Neutral Automobiles, Aviation, Media, Metals & Mining, Real Estate,
Telecom
Source: Kotak Securities - Private Client Research
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