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Incremental, but staying on track
In contrast to most years, the mood going into the FY12 Budget was sombre – reflecting investors concerns
on the macro challenges for equity markets and the lack of loss of policy traction over the past few months.
In this backdrop, the FY12 Budget, even if lacking vision, came as a relief; the FM has been careful to avoid
tax proposals/expenditure plans that could rock the boat and yet raised hopes that some reform signals –
focussed on improving governance - could be pursued as the year goes by.
The intent to continue to move ahead with fiscal consolidation is clearly there, but there is a bit of gamble
with high oil prices and growth expectations; we think the slippage could be to the extent of 40-50bps of
GDP, but with the net borrowing programme for FY12 in line with that in FY11, this is not a major worry. With
consumption growth well supported, the task before the government is to put in place conditions to help
revive the capex cycle; the moderate borrowing target, the 23% higher outlay for infrastructure sectors and
measures to enhance external inflows into these projects is a positive.
The government has admitted that better governance on the ground and pushing ahead with committed
structural initiatives like GST, DTC, further simplification of processes and revamping subsidy delivery
systems will be the key to driving the reform process forward. With the market now at average historical
valuations and some macro challenges set to abate as we get past 1Q, positive signals on governance can be
the trigger for a revival.
Among sectors, autos, banks and consumer sector are positively impacted. The applicability of MAT on SEZ
developers and units should be a negative for Reliance industries. Airlines and retail sector also negatively
impacted. Expected reduction in duties not happening should be a negative for oil, gas sector.
Key tax proposals
Direct tax
Surcharge on corporate tax reduced from 7.5% to 5%; effective tax rate falls from 33.2% to 32.4%
Increase in MAT rate from 18% to 18.5%. Levy of MAT on developers of SEZ and units operating them
Provide concessional rate of tax (15% against 30% earlier) on dividends received by Indian companies from their foreign
subsidiaries in FY12
Increase in basic exemption limit for individual tax payers from Rs160,000 to Rs180,000.
The Govt. estimates that changes in direct tax would result in a revenue loss of Rs115bn
Customs duty
Peak customs duty is retained at existing 10%. Some rationalization is being done to unify three rates namely, 2%,
2.5% and 3% at the middle level of 2.5%
Customs duty for micro-irrigation equipment reduced from 7.5% to 5%.
Increase in export duty for all types of iron ore at 20% ad valorem. Duty on pet coke and gypsum (used in cement
industry) reduced to 2.5%
Excise duty
Excise duty retained at existing 10%.
However, additional 130/370 items were included under the tax net by withdrawing exemptions granted earlier – taxed
at 1%. Most of these items relates to consumer goods. Remaining 240 items would be eventually bought under tax net
once GST is implemented
The Govt. estimates that changes in indirect tax would result in a revenue loss of Rs113bn
Service tax
Service tax was also retained at existing level of 10%
Service tax on air travel (domestic & international) raised. Service tax on hospitality and hospitals as well.
Services provided by life insurance companies in the area of investment are also proposed to be bought in to tax net
Key outlays and reform initiatives
Spending in major areas in FY12
Infrastructure – Rs2,140bn;
23.3%YoY increase and 49% of total
plan outlay
Rs580bn for rural infrastructure
programs under Bharat Nirman.
+21% YoY
Rs242bn for roads (3% YoY
increase)
Social sector – Rs1,609bn (17% YoY
increase)
Health and family welfare – Rs269bn
(15% over FY11)
Education – Rs520bn (24% over
FY11)
NREGA – Rs400bn (Rs410bn in
FY11)
Steps towards structural reforms
Direct transfer of cash subsidy to
BPL families. System will be in place
by Mar’12
Five-fold strategy to tackle issues
relating to generation and circulation
of black money
Consideration of additional banking
licenses to private sector players
Implementation of GST and Direct
Tax Code from April 2012
Allow foreign individual investment
in domestic MF schemes.
Budget FY12: Fiscal responsibility favoured
Budget FY12 resisted the pressure to
go into an overdrive on spending and
populism, but lacked vision.
Nominal GDP growth assumption of
14.0% appears conservative
Real GDP growth in FY12 is likely to be
lower than the 9.0% assumed, while
inflation will be higher than the
assumption of 5.0%
Total revenue forecast to be up 3.6%,
with higher tax revenue expected to
offset the decline in nontax revenue
Total spending higher by 3.4%,
indicating some restraint and some
underfunding of direct subsidies
Fiscal deficit in FY11 came in at a
better-than-expected 5.1% of GDP (BE:
5.5% of GDP)
Fiscal deficit for FY12 pegged at 4.6%
of GDP but could be up to 0.5ppt higher
Net government borrowing in FY12 at
Rs3.43trn, better than market
expectations
Revenues: Riding on tax buoyancy
Gross tax revenue forecast to increase
18.5% led by buoyancy in corporate tax
The increase of 21.5% in corporate tax
collections appears optimistic
Excise duty and service tax both unchanged
at 10%
However, more services brought under the
service tax net, and exemptions under
excise cut. Both are valid moves in
preparation for the GST
Divestment in FY12 pegged at Rs400bn, up
76% from a downwardly revised Rs227bn in
FY11
Expenditure: More disciplined but underfunded
Total expenditure poised to rise 3.4%,
hinting of a bit more discipline to avoid
greater populism
However, direct subsidies remain
underfunded, as was the case in last
year’s budget
Additional subsidy bill could be up to
0.5ppt of GDP higher
Some local fuel price adjustment likely
during the year
Rs401bn budgeted for NREGA in FY12,
flat versus Budget FY11
Allocation of Rs2.14trn for
infrastructure in FY12, 48.5% of total
plan allocation
Health and family welfare: Rs269bn
(+15.4%)
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Incremental, but staying on track
In contrast to most years, the mood going into the FY12 Budget was sombre – reflecting investors concerns
on the macro challenges for equity markets and the lack of loss of policy traction over the past few months.
In this backdrop, the FY12 Budget, even if lacking vision, came as a relief; the FM has been careful to avoid
tax proposals/expenditure plans that could rock the boat and yet raised hopes that some reform signals –
focussed on improving governance - could be pursued as the year goes by.
The intent to continue to move ahead with fiscal consolidation is clearly there, but there is a bit of gamble
with high oil prices and growth expectations; we think the slippage could be to the extent of 40-50bps of
GDP, but with the net borrowing programme for FY12 in line with that in FY11, this is not a major worry. With
consumption growth well supported, the task before the government is to put in place conditions to help
revive the capex cycle; the moderate borrowing target, the 23% higher outlay for infrastructure sectors and
measures to enhance external inflows into these projects is a positive.
The government has admitted that better governance on the ground and pushing ahead with committed
structural initiatives like GST, DTC, further simplification of processes and revamping subsidy delivery
systems will be the key to driving the reform process forward. With the market now at average historical
valuations and some macro challenges set to abate as we get past 1Q, positive signals on governance can be
the trigger for a revival.
Among sectors, autos, banks and consumer sector are positively impacted. The applicability of MAT on SEZ
developers and units should be a negative for Reliance industries. Airlines and retail sector also negatively
impacted. Expected reduction in duties not happening should be a negative for oil, gas sector.
Key tax proposals
Direct tax
Surcharge on corporate tax reduced from 7.5% to 5%; effective tax rate falls from 33.2% to 32.4%
Increase in MAT rate from 18% to 18.5%. Levy of MAT on developers of SEZ and units operating them
Provide concessional rate of tax (15% against 30% earlier) on dividends received by Indian companies from their foreign
subsidiaries in FY12
Increase in basic exemption limit for individual tax payers from Rs160,000 to Rs180,000.
The Govt. estimates that changes in direct tax would result in a revenue loss of Rs115bn
Customs duty
Peak customs duty is retained at existing 10%. Some rationalization is being done to unify three rates namely, 2%,
2.5% and 3% at the middle level of 2.5%
Customs duty for micro-irrigation equipment reduced from 7.5% to 5%.
Increase in export duty for all types of iron ore at 20% ad valorem. Duty on pet coke and gypsum (used in cement
industry) reduced to 2.5%
Excise duty
Excise duty retained at existing 10%.
However, additional 130/370 items were included under the tax net by withdrawing exemptions granted earlier – taxed
at 1%. Most of these items relates to consumer goods. Remaining 240 items would be eventually bought under tax net
once GST is implemented
The Govt. estimates that changes in indirect tax would result in a revenue loss of Rs113bn
Service tax
Service tax was also retained at existing level of 10%
Service tax on air travel (domestic & international) raised. Service tax on hospitality and hospitals as well.
Services provided by life insurance companies in the area of investment are also proposed to be bought in to tax net
Key outlays and reform initiatives
Spending in major areas in FY12
Infrastructure – Rs2,140bn;
23.3%YoY increase and 49% of total
plan outlay
Rs580bn for rural infrastructure
programs under Bharat Nirman.
+21% YoY
Rs242bn for roads (3% YoY
increase)
Social sector – Rs1,609bn (17% YoY
increase)
Health and family welfare – Rs269bn
(15% over FY11)
Education – Rs520bn (24% over
FY11)
NREGA – Rs400bn (Rs410bn in
FY11)
Steps towards structural reforms
Direct transfer of cash subsidy to
BPL families. System will be in place
by Mar’12
Five-fold strategy to tackle issues
relating to generation and circulation
of black money
Consideration of additional banking
licenses to private sector players
Implementation of GST and Direct
Tax Code from April 2012
Allow foreign individual investment
in domestic MF schemes.
Budget FY12: Fiscal responsibility favoured
Budget FY12 resisted the pressure to
go into an overdrive on spending and
populism, but lacked vision.
Nominal GDP growth assumption of
14.0% appears conservative
Real GDP growth in FY12 is likely to be
lower than the 9.0% assumed, while
inflation will be higher than the
assumption of 5.0%
Total revenue forecast to be up 3.6%,
with higher tax revenue expected to
offset the decline in nontax revenue
Total spending higher by 3.4%,
indicating some restraint and some
underfunding of direct subsidies
Fiscal deficit in FY11 came in at a
better-than-expected 5.1% of GDP (BE:
5.5% of GDP)
Fiscal deficit for FY12 pegged at 4.6%
of GDP but could be up to 0.5ppt higher
Net government borrowing in FY12 at
Rs3.43trn, better than market
expectations
Revenues: Riding on tax buoyancy
Gross tax revenue forecast to increase
18.5% led by buoyancy in corporate tax
The increase of 21.5% in corporate tax
collections appears optimistic
Excise duty and service tax both unchanged
at 10%
However, more services brought under the
service tax net, and exemptions under
excise cut. Both are valid moves in
preparation for the GST
Divestment in FY12 pegged at Rs400bn, up
76% from a downwardly revised Rs227bn in
FY11
Expenditure: More disciplined but underfunded
Total expenditure poised to rise 3.4%,
hinting of a bit more discipline to avoid
greater populism
However, direct subsidies remain
underfunded, as was the case in last
year’s budget
Additional subsidy bill could be up to
0.5ppt of GDP higher
Some local fuel price adjustment likely
during the year
Rs401bn budgeted for NREGA in FY12,
flat versus Budget FY11
Allocation of Rs2.14trn for
infrastructure in FY12, 48.5% of total
plan allocation
Health and family welfare: Rs269bn
(+15.4%)
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