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UNION BUDGET ANALYSIS FY2011-12
Intent clear, is implementation near?
q The FM has presented a reform-oriented budget, focusing equally on
containing inflation while promoting growth in a challenging environment.
Targeted fiscal deficit of 4.6% is a big positive, provided the Government is
able to control the expenditure to the desired extent.
q In a bid to reduce supply side constraints, the FM has allocated significant
sums to agriculture, especially for commodities, which have seen sharp price
rise. More importantly, there is significant stress on removing supply
bottlenecks, in line with our pre-budget expectations.
q To sustain growth, investments in infrastructure have been increased and
the FM has also announced measures to attract more private and foreign
funds, especially in debt. We expect rigorous implementation of the
allocated sums. Plan expenditure is up by 11.8% over and above the 31%
rise in FY11 (RE). Equitable growth has rightly been focused on with higher
allocations for education, public health, agriculture and employment.
q The FM has announced his intention to introduce various reforms during
FY11-12. Some of the important bills relating to banking, insurance and
pension can be introduced. The FM has announced that, eligible foreign
investors will be allowed to invest in Mutual Funds. Cash - based direct
subsidy is expected to be launched in FY11-12. A constitutional amendment
bill on GST will be introduced in the budget session and DTC is expected to
be implemented WEF FY12-13.
q The 4.6% fiscal deficit target for FY11-12 came as a pleasant surprise.
However, the Government will have to rely on effective implementation to
control expenditure to the desired extent. Removing control on fuel prices
and effective implementation of direct cash subsidy can help in reducing
overall expenditure.
q On indirect taxes, the headline rates have been left unchanged. However,
additional services have been brought under service tax net and base excise
duty rate has been increased from 4% to 5%.
q With a view to compensate consumers for inflation, income tax exemption
limit has been increased by Rs.20,000 to Rs.180,000, in effect putting
Rs.2,000 more in the hands of the individuals. A marginal increase in MAT
will be largely offset by a reduction in surcharge. Non-MAT companies will
see tax burden reduce marginally.
q The budget is largely in line with our expectations as far as larger issues of
growth, inflation and fiscal discipline are concerned. While the market's
concern on excise duty rise was addressed (no increase) the concern on
fiscal deficit will likely be resolved during the year, we opine.
q Thus, we do not expect any major impact on the markets in the near term.
Over the medium - to - long term, we expect the valuations and global
economic scenario to dictate market movements. We opine that, valuations,
based on FY12E consensus earnings, leave scope for gains over this period.
Attacking supply side constraints in agriculture
With WPI inflation remaining at elevated levels and food inflation at 11.5%, Mr.
Mukherjee has tried to address some long pending structural issues in agriculture.
These issues are expected to attack the supply side constraints and ease inflation.
We had expected higher focus on removing supply bottle-necks to increase supplies.
We opine that, in the backdrop of a challenging fiscal situation, effective
implementation rather than high spends, will alleviate the supply side issues effectively.
The budget has stated the Government’s express intent to removal of production
and distribution bottlenecks for items like fruits and vegetables, milk, meat, poultry
and fish. Approval is being given to set up 15 more Mega Food Parks during 2011-
12. Moreover, efforts are being made to augment storage capacity through private
entrepreneurs and warehousing corporations area also being fast tracked.
Another important provision is that of making capital investment in creation of
modern storage capacity eligible for viability gap funding of the Finance Ministry. It
is also proposed to recognize cold chains and post-harvest storage as an infrastructure
sub-sector allowing them to avail additional benefits.
There is a repeat mention of bringing about a second green revolution in parts of
Eastern India and allocation of Rs.4bn have been made towards improving ricebased
cropping system in this region. Also, the FM has tried to address the structural
short-fall in important commodities like pulses and oil palms. Allocations have
been made to promote 60,000 pulses villages in rain-fed areas.
As per the first advance estimates, production of kharif crop in 2010-11 is estimated
to be 114.63 mn tonnes, which is lower than the target of 125.31 mn
tonnes set out for the year (but higher than 103.84 mn tonnes during last year).
To provide support to agriculture, the target credit growth for farmers has been
raised to Rs.4.75trn v/s Rs.3.75trn in FY11. Allocation under Rashtrita Krishi Vikas
Yojana has been increased from Rs.67.5bn to Rs.78.6bn YoY.
However, there have been no duty cuts, either excise or customs, to cushion the
impact of high prices. The FM was likely constrained by the significant volatility in
the crude prices during the year as well as in past years, which may render the
duty changes non-effective. We believe that, the FM may act once the volatility
subsides.
Sustained focus on growth …
The Finance Minister has rightly focused on sustaining and improving the high
growth rates of the economy.
After experiencing a slowdown in FY09 and the early part of FY10, Indian
economy has recovered smartly. According to the advance estimates of CSO, the
Gross Domestic Product (GDP) growth for 2010-11 is pegged at 8.6%, which will
be the second fastest growth across major economies. The growth is expected to
be led by all three segments viz agriculture (5.4%), industry (8.1) and services
(9.6%)
The economic survey for 2010-11 has laid down targets of 9% in FY12 and
double-digit growth rates in the future years. However, these are subject to several
challenges like high crude prices, monsoons and global economy in the short term
and structural changes in the economy over the longer term.
…through investments
Towards this objective, the FM has allocated significant sums towards investments
in agriculture as well as infrastructure. The plan expenditure has thus, been
increased by about 11.8% as compared to the revised estimates for FY11. This is
over and above the 30% rise in FY11 (RE).
The allocation for infrastructure has been increased to Rs.2.14trn, about 23%
higher YoY. Infrastructure allocation now forms 48.5% of total plan allocation. To
boost infrastructure development, tax free bonds of Rs.300bn are proposed to be
issued by Government undertakings during 2011-12.
Financial assistance will be made available for metro projects in Delhi, Mumbai,
Bengaluru, Kolkata and Chennai. Moreover, capital investment in fertiliser
production is now proposed to be included as an infrastructure sub-sector.
More private partnership and administrative reforms targeted
While allocations have been increased, thrust is also on attracting more private
funds and removing procedural and administrative bottlenecks. To attract more
private funds, Government will come up with a comprehensive policy for further
developing PPP projects.
To enhance the flow of funds to the infrastructure sector, the FII limit for investment
in corporate bonds, with residual maturity of over five years issued by companies
in infrastructure sector, has been raised by $20bn to $25bn. FIIs would also
be permitted to invest in unlisted bonds with a minimum lock-in period of three
years. However, they will be allowed to trade amongst themselves during the lockin
period and this may make the bonds more attractive for FIIs.
To attract foreign funds for financing of infrastructure, the FM has proposed to
create special vehicles in the form of notified infrastructure debt funds. The interest
payment on the borrowings of these funds is proposed to be subjected to a
withholding tax rate of 5% instead of the current rate of 20%. The income of the
fund is proposed to be exempted from tax.
Also, the income tax exemption of Rs.20,000 available to individuals for investing
in infrastructure funds, has been extended by one year.
With a view to facilitate smooth functioning, two Committees have been set up
for greater transparency and accountability in procurement policy and for allocation,
pricing and utilisation of natural resources. Environmental aspects have
gained importance of late and have been a prime reason for delays in a few
projects. Issues relating to reconciliation of environmental concern from various
departmental activities including those related to infrastructure and mining are
proposed to be now considered by a Group of Ministers.
Moreover, in pursuance of recommendations of Second Administrative Reforms
Commission, 62 departments have been covered under Performance Monitoring
and Evaluation System (PMES) to assess their effectiveness.
Inclusive growth remains the corner-stone…
With a view to make the growth more sustainable, the Government has continued
its focus on inclusive growth. The Government has announced various measures
for the social sector and agriculture. We concur with the Government's assessment
that, high growth in the economy can be sustained only if it is equitable and
inclusive growth.
The most important announcement made was that the National Food Security Bill
will be introduced in the Parliament during FY12. We see this as a big reform push,
if implemented.
Higher allocations have been made for farmers, poor, women, children, etc.
Allocation for social sector has increased to Rs.1.61trn i.e. 36.4% of the total plan
outlay.
Social sector schemes allocations
Scheme/Initiatives Allocation
Bharat Nirman (Pradhan Mantri Gram Sadak Yojna (PMGSY), Accelerated Rs. 580 bn
Irrigation Benefit Programme, Rajiv Gandhi Grameen Vidyutikaran Yojna,
Indira Awas Yojna, National Rural Drinking Water Programme and Rural
telephony)
MGNREGA Rs. 400 bn
Rashtriya Swasthya Bima Yojana Rs. 267 bn
Sarva Shiksha Abhiyan Rs. 210 bn
Pradhan Mantri Gram Sadak Yojna Rs. 200 bn
National Program for Mid Day meals in school Rs. 103 bn
National Rural Health Mission Rs. 178 bn
Source: Budget document 2011-12
Significant reforms proposed - implementation to be the key
In our opinion, this is a reforms oriented budget in the sense that, the FM has introduced
or has indicated that he will introduce several long - pending reforms
during FY11-12, post political consultations.
The Constitutional Amendment Bill for GST is expected to be introduced in the
current budget session with the GST itself expected to be rolled out in FY13. The
FM has also indicated that DTC will be rolled out WEF April 1, 2012.
Apart from these, the FM has indicated that, the National Food Security Bill will be
introduced during the year. To ensure greater efficiency, cost effectiveness and
better delivery for LPG, kerosene and fertilisers, the FM has proposed that, Government
will move towards direct transfer of cash subsidy to people living below poverty
line in a phased manner. This, we opine, will be a significant reform, if implemented,
which can lead to benefits flowing to targeted people and leakages in
subsidies being sealed.
As part of the financial sector reforms, the FM has also proposed to move the following
legislations : The Insurance Laws (Amendment) Bill, 2008, The Life Insurance
Corporation (Amendment) Bill, 2009, The revised Pension Fund Regulatory
and Development Authority Bill, Banking Laws Amendment Bill, 2011, Bill on Factoring
and Assignment of Receivables, The State Bank of India (Subsidiary Banks
Laws) Amendment Bill, 2009 and Bill to amend RDBFI Act 1993 and SARFAESI Act
2002.
Mr. Mukherjee has also proposed to bring suitable legislative amendments in the
budget session to the Banking Regulations Act for giving some additional banking
licences to private sector players.
Thus, several important reforms are expected to be introduced during the year. We
view this intent very positively. However, these will be implemented only after extensive
political consultations and hence, we believe that, implementation will once
again be the key.
FY12BE fiscal deficit at 4.6% - will it, won't it
FM has announced a reduction in the fiscal deficit to 4.6% of GDP from an
estimated 5.1% in FY11; targets fiscal deficit at 4.1% in FY13 and 3.5% by FY14.
The net market borrowing is budgeted at Rs3.4 tn (excluding Rs200bn MSS,
Rs.150bn from T bills and draw down of Rs.200bn of cash balance). The total
liquidity outflow is budgeted at Rs4 trn.
If the FM is able to achieve this target, it will be viewed very positively. Lower fiscal
deficit and a consequent reduction in net borrowing requirement would reduce
the risk of crowding out private sector credit demand as well as help in containing
sharp increase in yield.
However, digging deeper into the numbers, we understand that, some of them
may be difficult to achieve, in case the economic scenario does not pan out along
expected lines.
On the expenditure front, the non - plan expenditure is budgeted to fall marginally
over revised estimates of FY10-11. The petroleum subsidy is expected to fall by
about 38% over FY11RE. This comes at a time when crude prices are above the
$100 per barrel mark, making the budgeted number seen very low.
We also believe that, higher amount may have to be provided in the budget unless
the crude price reacts down sharply (as it did in FY09). Alternatively, the
Government may deregulate the diesel prices at an opportune time when the
inflation rate moderates. However, there is a risk of this figure trending higher
during FY12. We note that, the FM has committed to implementing the cash -
based subsidy scheme on LPG and Kerosene, which, if implemented, can reduce
the subsidy burden.
We also opine that, FM has made some strong reduction assumptions on the
expenditure side :
n Total revenue expenditure is budgeted to grow by only 1% in FY12BE against
13% in FY11RE; similar estimates were made in FY11BE
n Allocation for Social security and welfare is budgeted at Rs50bn against
Rs200bn in FY11RE and Rs173bn in FY11BE
On the revenue front, corporate taxes are expected to grow by 21.5% v/s about
21% growth in FY11 (RE). Given the current high commodity prices (and
consequent impact on margins), recent slowdown in manufacturing and delays in
closures of major projects, this number may turn out to be optimistic.
Thus, we believe it may be difficult for the deficit targets to be met unless reforms
on subsidy front are undertaken or global commodity prices cool down
significantly.
DIRECT TAXES
Corporate tax
n No change in corporate tax rate; MAT rate increased by 50bps; surcharge
reduced
There have been no changes in the corporate tax rate. However, the MAT rate has
been raised from 18% to 18.5%. On the other hand, the surcharge has been
reduced from 7.5% to 5%. This will bring down the effective tax rate for non-
MAT corporates from 33.2% to 32.45%.
On the other hand, for MAT paying companies, the burden will marginally rise by
0.075bps as the increase in MAT is set-off by a reduction in surcharge.
n MAT for SEZ developers and SEZ units WEF FY12 - a negative
The budget has imposed MAT for SEZ developers and for units operating in SEZs.
Companies have to pay MAT on the Book profits as against the profits derived
under the Income Tax Act, if the taxable income is less than 30% of the book
profits.
This will have an impact on the cash flows of these companies. These companies
will now have to pay MAT WEF FY12 despite they being eligible for tax breaks.
This will have an impact on their cash flows but not on reported profits as they will
be able to claim deferred tax benefits. Thus, we believe that, this will be largely a
cash-flow impact.
Further benefits on personal income tax front
Increase in basic exemption limit
The budget has provided further benefits to individual tax payers by increasing the
basic exemption limit from Rs.160,000 per annum to Rs.180,000 per annum. The
tax benefit is expected to be about Rs.2,000. The exemption limit for women
assessee has been left unchanged at Rs.190,000. However, exemption limit has
been enhanced to Rs.250,000 (v/s Rs.240,000) and qualifying age reduced from
65 years to 60 years for senior citizens. Higher exemption limit of Rs.500,000 has
been recommended for Very Senior Citizens, who are 80 years or above.
We believe that, this has been done to provide more money into the hands of the
lower income class and the senior citizens, in the backdrop of rising inflation. This
increase of Rs.2000 per individual will also not result in any increase in
discretionary spends, thus having no impact on inflation.
On the other hand, by doing this, the FM has brought the exemption limit more in
line with the proposed limit of Rs.200,000 per individual under DTC.
Investment - linked tax incentives have been continued. A deduction of Rs.20,000
per annum will continue to be allowed on investments in infrastructure bonds.
While on the one hand, it will induce savings, it will also generate funds for
infrastructure investments.
A net revenue loss of Rs.115bn is estimated to be incurred as a result of the direct
tax proposals.
INDIRECT TAXES
The budget has kept the headline rates of excise duty, customs duty and service
tax unchanged, in line with our expectations. Markets were expecting an increase
in excise duties by 200bps to 12%. Rate of tax on services has been retained at
10% to pave the way forward for GST. Peak customs duty rate has been left at
10%. However, some rationalization has been done to unify three rates namely,
2%, 2.5% and 3% at the middle level of 2.5%.
Certain services, hitherto untaxed, brought within the purview of the service tax
levy. Proposals relating to Indirect Taxes are estimated to result in a net revenue
gain of Rs.113bn for the year. Taking into account the direct taxes, the net
revenue loss is estimated to be Rs.2bn for the year. Major proposals are listed later.
Capital markets - neutral in short-term but positive in the longterm
The budget is largely in line with our expectations as far as larger issues of growth,
inflation and fiscal discipline are concerned. While the market's concern on excise
duty rise was addressed (no increase) the concern on fiscal deficit will likely be
resolved during the year, we opine.
Thus, we do not expect any major impact on the markets in the near term. Over
the medium term, we believe that, strict implementations of proposals,
implementation of reforms and positive action on subsidy (important from fiscal
deficit perspective) would be the likely positive triggers for the market. However,
unfavourable developments on the global economic front or a sharp rise in
commodity prices may have a negative impact on markets.
We opine that, given current conditions, valuations, based on FY12 consensus
earnings are reasonable, and leave scope for gains over this period. Foreign
investors who meet KYC requirements for equity schemes will now be allowed to
invest in mutual funds and this could be a positive for the equity markets over the
medium term.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UNION BUDGET ANALYSIS FY2011-12
Intent clear, is implementation near?
q The FM has presented a reform-oriented budget, focusing equally on
containing inflation while promoting growth in a challenging environment.
Targeted fiscal deficit of 4.6% is a big positive, provided the Government is
able to control the expenditure to the desired extent.
q In a bid to reduce supply side constraints, the FM has allocated significant
sums to agriculture, especially for commodities, which have seen sharp price
rise. More importantly, there is significant stress on removing supply
bottlenecks, in line with our pre-budget expectations.
q To sustain growth, investments in infrastructure have been increased and
the FM has also announced measures to attract more private and foreign
funds, especially in debt. We expect rigorous implementation of the
allocated sums. Plan expenditure is up by 11.8% over and above the 31%
rise in FY11 (RE). Equitable growth has rightly been focused on with higher
allocations for education, public health, agriculture and employment.
q The FM has announced his intention to introduce various reforms during
FY11-12. Some of the important bills relating to banking, insurance and
pension can be introduced. The FM has announced that, eligible foreign
investors will be allowed to invest in Mutual Funds. Cash - based direct
subsidy is expected to be launched in FY11-12. A constitutional amendment
bill on GST will be introduced in the budget session and DTC is expected to
be implemented WEF FY12-13.
q The 4.6% fiscal deficit target for FY11-12 came as a pleasant surprise.
However, the Government will have to rely on effective implementation to
control expenditure to the desired extent. Removing control on fuel prices
and effective implementation of direct cash subsidy can help in reducing
overall expenditure.
q On indirect taxes, the headline rates have been left unchanged. However,
additional services have been brought under service tax net and base excise
duty rate has been increased from 4% to 5%.
q With a view to compensate consumers for inflation, income tax exemption
limit has been increased by Rs.20,000 to Rs.180,000, in effect putting
Rs.2,000 more in the hands of the individuals. A marginal increase in MAT
will be largely offset by a reduction in surcharge. Non-MAT companies will
see tax burden reduce marginally.
q The budget is largely in line with our expectations as far as larger issues of
growth, inflation and fiscal discipline are concerned. While the market's
concern on excise duty rise was addressed (no increase) the concern on
fiscal deficit will likely be resolved during the year, we opine.
q Thus, we do not expect any major impact on the markets in the near term.
Over the medium - to - long term, we expect the valuations and global
economic scenario to dictate market movements. We opine that, valuations,
based on FY12E consensus earnings, leave scope for gains over this period.
Attacking supply side constraints in agriculture
With WPI inflation remaining at elevated levels and food inflation at 11.5%, Mr.
Mukherjee has tried to address some long pending structural issues in agriculture.
These issues are expected to attack the supply side constraints and ease inflation.
We had expected higher focus on removing supply bottle-necks to increase supplies.
We opine that, in the backdrop of a challenging fiscal situation, effective
implementation rather than high spends, will alleviate the supply side issues effectively.
The budget has stated the Government’s express intent to removal of production
and distribution bottlenecks for items like fruits and vegetables, milk, meat, poultry
and fish. Approval is being given to set up 15 more Mega Food Parks during 2011-
12. Moreover, efforts are being made to augment storage capacity through private
entrepreneurs and warehousing corporations area also being fast tracked.
Another important provision is that of making capital investment in creation of
modern storage capacity eligible for viability gap funding of the Finance Ministry. It
is also proposed to recognize cold chains and post-harvest storage as an infrastructure
sub-sector allowing them to avail additional benefits.
There is a repeat mention of bringing about a second green revolution in parts of
Eastern India and allocation of Rs.4bn have been made towards improving ricebased
cropping system in this region. Also, the FM has tried to address the structural
short-fall in important commodities like pulses and oil palms. Allocations have
been made to promote 60,000 pulses villages in rain-fed areas.
As per the first advance estimates, production of kharif crop in 2010-11 is estimated
to be 114.63 mn tonnes, which is lower than the target of 125.31 mn
tonnes set out for the year (but higher than 103.84 mn tonnes during last year).
To provide support to agriculture, the target credit growth for farmers has been
raised to Rs.4.75trn v/s Rs.3.75trn in FY11. Allocation under Rashtrita Krishi Vikas
Yojana has been increased from Rs.67.5bn to Rs.78.6bn YoY.
However, there have been no duty cuts, either excise or customs, to cushion the
impact of high prices. The FM was likely constrained by the significant volatility in
the crude prices during the year as well as in past years, which may render the
duty changes non-effective. We believe that, the FM may act once the volatility
subsides.
Sustained focus on growth …
The Finance Minister has rightly focused on sustaining and improving the high
growth rates of the economy.
After experiencing a slowdown in FY09 and the early part of FY10, Indian
economy has recovered smartly. According to the advance estimates of CSO, the
Gross Domestic Product (GDP) growth for 2010-11 is pegged at 8.6%, which will
be the second fastest growth across major economies. The growth is expected to
be led by all three segments viz agriculture (5.4%), industry (8.1) and services
(9.6%)
The economic survey for 2010-11 has laid down targets of 9% in FY12 and
double-digit growth rates in the future years. However, these are subject to several
challenges like high crude prices, monsoons and global economy in the short term
and structural changes in the economy over the longer term.
…through investments
Towards this objective, the FM has allocated significant sums towards investments
in agriculture as well as infrastructure. The plan expenditure has thus, been
increased by about 11.8% as compared to the revised estimates for FY11. This is
over and above the 30% rise in FY11 (RE).
The allocation for infrastructure has been increased to Rs.2.14trn, about 23%
higher YoY. Infrastructure allocation now forms 48.5% of total plan allocation. To
boost infrastructure development, tax free bonds of Rs.300bn are proposed to be
issued by Government undertakings during 2011-12.
Financial assistance will be made available for metro projects in Delhi, Mumbai,
Bengaluru, Kolkata and Chennai. Moreover, capital investment in fertiliser
production is now proposed to be included as an infrastructure sub-sector.
More private partnership and administrative reforms targeted
While allocations have been increased, thrust is also on attracting more private
funds and removing procedural and administrative bottlenecks. To attract more
private funds, Government will come up with a comprehensive policy for further
developing PPP projects.
To enhance the flow of funds to the infrastructure sector, the FII limit for investment
in corporate bonds, with residual maturity of over five years issued by companies
in infrastructure sector, has been raised by $20bn to $25bn. FIIs would also
be permitted to invest in unlisted bonds with a minimum lock-in period of three
years. However, they will be allowed to trade amongst themselves during the lockin
period and this may make the bonds more attractive for FIIs.
To attract foreign funds for financing of infrastructure, the FM has proposed to
create special vehicles in the form of notified infrastructure debt funds. The interest
payment on the borrowings of these funds is proposed to be subjected to a
withholding tax rate of 5% instead of the current rate of 20%. The income of the
fund is proposed to be exempted from tax.
Also, the income tax exemption of Rs.20,000 available to individuals for investing
in infrastructure funds, has been extended by one year.
With a view to facilitate smooth functioning, two Committees have been set up
for greater transparency and accountability in procurement policy and for allocation,
pricing and utilisation of natural resources. Environmental aspects have
gained importance of late and have been a prime reason for delays in a few
projects. Issues relating to reconciliation of environmental concern from various
departmental activities including those related to infrastructure and mining are
proposed to be now considered by a Group of Ministers.
Moreover, in pursuance of recommendations of Second Administrative Reforms
Commission, 62 departments have been covered under Performance Monitoring
and Evaluation System (PMES) to assess their effectiveness.
Inclusive growth remains the corner-stone…
With a view to make the growth more sustainable, the Government has continued
its focus on inclusive growth. The Government has announced various measures
for the social sector and agriculture. We concur with the Government's assessment
that, high growth in the economy can be sustained only if it is equitable and
inclusive growth.
The most important announcement made was that the National Food Security Bill
will be introduced in the Parliament during FY12. We see this as a big reform push,
if implemented.
Higher allocations have been made for farmers, poor, women, children, etc.
Allocation for social sector has increased to Rs.1.61trn i.e. 36.4% of the total plan
outlay.
Social sector schemes allocations
Scheme/Initiatives Allocation
Bharat Nirman (Pradhan Mantri Gram Sadak Yojna (PMGSY), Accelerated Rs. 580 bn
Irrigation Benefit Programme, Rajiv Gandhi Grameen Vidyutikaran Yojna,
Indira Awas Yojna, National Rural Drinking Water Programme and Rural
telephony)
MGNREGA Rs. 400 bn
Rashtriya Swasthya Bima Yojana Rs. 267 bn
Sarva Shiksha Abhiyan Rs. 210 bn
Pradhan Mantri Gram Sadak Yojna Rs. 200 bn
National Program for Mid Day meals in school Rs. 103 bn
National Rural Health Mission Rs. 178 bn
Source: Budget document 2011-12
Significant reforms proposed - implementation to be the key
In our opinion, this is a reforms oriented budget in the sense that, the FM has introduced
or has indicated that he will introduce several long - pending reforms
during FY11-12, post political consultations.
The Constitutional Amendment Bill for GST is expected to be introduced in the
current budget session with the GST itself expected to be rolled out in FY13. The
FM has also indicated that DTC will be rolled out WEF April 1, 2012.
Apart from these, the FM has indicated that, the National Food Security Bill will be
introduced during the year. To ensure greater efficiency, cost effectiveness and
better delivery for LPG, kerosene and fertilisers, the FM has proposed that, Government
will move towards direct transfer of cash subsidy to people living below poverty
line in a phased manner. This, we opine, will be a significant reform, if implemented,
which can lead to benefits flowing to targeted people and leakages in
subsidies being sealed.
As part of the financial sector reforms, the FM has also proposed to move the following
legislations : The Insurance Laws (Amendment) Bill, 2008, The Life Insurance
Corporation (Amendment) Bill, 2009, The revised Pension Fund Regulatory
and Development Authority Bill, Banking Laws Amendment Bill, 2011, Bill on Factoring
and Assignment of Receivables, The State Bank of India (Subsidiary Banks
Laws) Amendment Bill, 2009 and Bill to amend RDBFI Act 1993 and SARFAESI Act
2002.
Mr. Mukherjee has also proposed to bring suitable legislative amendments in the
budget session to the Banking Regulations Act for giving some additional banking
licences to private sector players.
Thus, several important reforms are expected to be introduced during the year. We
view this intent very positively. However, these will be implemented only after extensive
political consultations and hence, we believe that, implementation will once
again be the key.
FY12BE fiscal deficit at 4.6% - will it, won't it
FM has announced a reduction in the fiscal deficit to 4.6% of GDP from an
estimated 5.1% in FY11; targets fiscal deficit at 4.1% in FY13 and 3.5% by FY14.
The net market borrowing is budgeted at Rs3.4 tn (excluding Rs200bn MSS,
Rs.150bn from T bills and draw down of Rs.200bn of cash balance). The total
liquidity outflow is budgeted at Rs4 trn.
If the FM is able to achieve this target, it will be viewed very positively. Lower fiscal
deficit and a consequent reduction in net borrowing requirement would reduce
the risk of crowding out private sector credit demand as well as help in containing
sharp increase in yield.
However, digging deeper into the numbers, we understand that, some of them
may be difficult to achieve, in case the economic scenario does not pan out along
expected lines.
On the expenditure front, the non - plan expenditure is budgeted to fall marginally
over revised estimates of FY10-11. The petroleum subsidy is expected to fall by
about 38% over FY11RE. This comes at a time when crude prices are above the
$100 per barrel mark, making the budgeted number seen very low.
We also believe that, higher amount may have to be provided in the budget unless
the crude price reacts down sharply (as it did in FY09). Alternatively, the
Government may deregulate the diesel prices at an opportune time when the
inflation rate moderates. However, there is a risk of this figure trending higher
during FY12. We note that, the FM has committed to implementing the cash -
based subsidy scheme on LPG and Kerosene, which, if implemented, can reduce
the subsidy burden.
We also opine that, FM has made some strong reduction assumptions on the
expenditure side :
n Total revenue expenditure is budgeted to grow by only 1% in FY12BE against
13% in FY11RE; similar estimates were made in FY11BE
n Allocation for Social security and welfare is budgeted at Rs50bn against
Rs200bn in FY11RE and Rs173bn in FY11BE
On the revenue front, corporate taxes are expected to grow by 21.5% v/s about
21% growth in FY11 (RE). Given the current high commodity prices (and
consequent impact on margins), recent slowdown in manufacturing and delays in
closures of major projects, this number may turn out to be optimistic.
Thus, we believe it may be difficult for the deficit targets to be met unless reforms
on subsidy front are undertaken or global commodity prices cool down
significantly.
DIRECT TAXES
Corporate tax
n No change in corporate tax rate; MAT rate increased by 50bps; surcharge
reduced
There have been no changes in the corporate tax rate. However, the MAT rate has
been raised from 18% to 18.5%. On the other hand, the surcharge has been
reduced from 7.5% to 5%. This will bring down the effective tax rate for non-
MAT corporates from 33.2% to 32.45%.
On the other hand, for MAT paying companies, the burden will marginally rise by
0.075bps as the increase in MAT is set-off by a reduction in surcharge.
n MAT for SEZ developers and SEZ units WEF FY12 - a negative
The budget has imposed MAT for SEZ developers and for units operating in SEZs.
Companies have to pay MAT on the Book profits as against the profits derived
under the Income Tax Act, if the taxable income is less than 30% of the book
profits.
This will have an impact on the cash flows of these companies. These companies
will now have to pay MAT WEF FY12 despite they being eligible for tax breaks.
This will have an impact on their cash flows but not on reported profits as they will
be able to claim deferred tax benefits. Thus, we believe that, this will be largely a
cash-flow impact.
Further benefits on personal income tax front
Increase in basic exemption limit
The budget has provided further benefits to individual tax payers by increasing the
basic exemption limit from Rs.160,000 per annum to Rs.180,000 per annum. The
tax benefit is expected to be about Rs.2,000. The exemption limit for women
assessee has been left unchanged at Rs.190,000. However, exemption limit has
been enhanced to Rs.250,000 (v/s Rs.240,000) and qualifying age reduced from
65 years to 60 years for senior citizens. Higher exemption limit of Rs.500,000 has
been recommended for Very Senior Citizens, who are 80 years or above.
We believe that, this has been done to provide more money into the hands of the
lower income class and the senior citizens, in the backdrop of rising inflation. This
increase of Rs.2000 per individual will also not result in any increase in
discretionary spends, thus having no impact on inflation.
On the other hand, by doing this, the FM has brought the exemption limit more in
line with the proposed limit of Rs.200,000 per individual under DTC.
Investment - linked tax incentives have been continued. A deduction of Rs.20,000
per annum will continue to be allowed on investments in infrastructure bonds.
While on the one hand, it will induce savings, it will also generate funds for
infrastructure investments.
A net revenue loss of Rs.115bn is estimated to be incurred as a result of the direct
tax proposals.
INDIRECT TAXES
The budget has kept the headline rates of excise duty, customs duty and service
tax unchanged, in line with our expectations. Markets were expecting an increase
in excise duties by 200bps to 12%. Rate of tax on services has been retained at
10% to pave the way forward for GST. Peak customs duty rate has been left at
10%. However, some rationalization has been done to unify three rates namely,
2%, 2.5% and 3% at the middle level of 2.5%.
Certain services, hitherto untaxed, brought within the purview of the service tax
levy. Proposals relating to Indirect Taxes are estimated to result in a net revenue
gain of Rs.113bn for the year. Taking into account the direct taxes, the net
revenue loss is estimated to be Rs.2bn for the year. Major proposals are listed later.
Capital markets - neutral in short-term but positive in the longterm
The budget is largely in line with our expectations as far as larger issues of growth,
inflation and fiscal discipline are concerned. While the market's concern on excise
duty rise was addressed (no increase) the concern on fiscal deficit will likely be
resolved during the year, we opine.
Thus, we do not expect any major impact on the markets in the near term. Over
the medium term, we believe that, strict implementations of proposals,
implementation of reforms and positive action on subsidy (important from fiscal
deficit perspective) would be the likely positive triggers for the market. However,
unfavourable developments on the global economic front or a sharp rise in
commodity prices may have a negative impact on markets.
We opine that, given current conditions, valuations, based on FY12 consensus
earnings are reasonable, and leave scope for gains over this period. Foreign
investors who meet KYC requirements for equity schemes will now be allowed to
invest in mutual funds and this could be a positive for the equity markets over the
medium term.
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