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India Economics
What Do We Expect from
Budget F2013?
Two important issues we are watching for in
Budget F2013: The government is scheduled to
present the annual budget F2013 on March 16.
Considering the current weak macro trend, investors are
building hope that the government will recognize the
need to relay its commitment to reviving the growth
outlook with budget measures. We would watch the
budget announcement in the context of two most
important issues:
• A credible plan to cut government expenditure
growth
• Policy measures to encourage private investment
Market implications: According to our India Strategist,
Ridham Desai, “history does not favor the market in the
following 3-4 weeks. The markets are usually flat in the
month ahead of the budget and, in two out of three years,
fall in the month following it. In the past 15 years, the
market has been positive in the following years: 1997,
1999, 2004, 2006, 2009, 2010 and 2011 – there does
not seem to be a great correlation between market
performance and a market-friendly budget. We continue
to be buyers of Indian equities from a 12- to 18-month
perspective, though seek protection from a correction in
the near term.”
Industry-specific expectations: Our analyst team
expects the budget to be a clear positive for
infrastructure and utilities. We do not see any policy
measures that hurt consumption, but we believe any
credible plan to reduce government revenue
expenditure growth or oil subsidies will hamper the top
lines of some consumer industries in the near term.
What Do We Expect From Budget F2013?
Summary
The government is scheduled to present the annual budget
F2013 on March 16. Considering the current weak macro
trend, investors are building hope that the government will
recognizing the need to relay its commitment to reviving the
growth outlook with budget measures. We would watch the
budget announcement in the context of two most important
issues:
• A credible plan to cut government expenditure growth
• Policy measures to encourage private investment
Particularly on expenditure growth target, we believe the
implementation of the promise in the budget is more
important than the promise itself. For instance, for F2012,
the government budget announcement for projected fiscal
deficit was 4.6% of GDP – but the actual trend for April-Dec
indicates that the deficit will likely be at 6-6.2% of GDP.
Including off-budget subsidies, the deficit will be 6.9-7.1% of
GDP.
Macro Backdrop Calls for Clear Commitment in the
Budget
The macro environment in India has been challenging over
the last few months. Though the global funding environment
has improved recently, we have been arguing that domestic
factors are still holding back a V-shaped recovery. At the heart
of the poor macro environment in India has been the bad mix
of growth since the credit crisis unfolded in 2008. The ratio of
private investment to GDP has been declining, yet the
government deficit has prevailed in the range of 9-10% of
GDP (excluding one-off revenues from telecom license fees).
This divergent trend in private investment and fiscal deficit has
been steadily taking down India’s potential growth over the
last four years. Policymakers’ attempt to push for higher
growth with this bad mix has brought the feedback of higher
inflation, current account deficit and tighter inter-bank liquidity.
Need to Get the Productivity Dynamic Back
In this context, we believe that the government will need to
focus on reviving the productivity dynamic and bring back the
private investment gradually to lift the sustainable growth. As
we have been highlighting, we believe that the revival in
investment cycle is the key to recovery in overall growth in this
cycle.
Exhibit 1
Fiscal Deficit Consolidation Is Critical Now
As % of GDP F2008 F2009 F2010 F2011E F2012E
Central Fiscal Deficit 2.5% 6.0% 6.5% 4.8% 6.0%
State Fiscal Deficit 1.5% 2.4% 3.3% 2.6% 2.5%
Sub-total 4.1% 8.4% 9.8% 7.4% 8.5%
Inter-government adjustments -0.1% -0.1% -0.1% 0.0% 0.0%
Combined Headline Deficit 4.0% 8.3% 9.7% 7.4% 8.5%
Major Off-budget expenditure
items 0.8% 1.6% 0.2% 0.6% 0.9%
Overall Fiscal Deficit 4.8% 9.9% 10.0% 8.1% 9.4%
Overall Fiscal Deficit (excluding
3G receipts) NA NA NA 9.4% 9.6%
Source: Budget Documents, Morgan Stanley Research, E=Morgan Stanley Research
Estimates
Any measure that aims to push consumption will cause
inflation to remain higher for longer and increase the risk of
hard landing in the economy. In India, the sharp decline in
private corporate investment after the credit crisis has meant
that the sustainable GDP growth rate at which inflation is
non-accelerating has also declined. As we have seen over the
past two years, boosting consumption and intervention in the
rural labor market through employment scheme in this
environment has brought high and persistent inflation.
Inflation has been now above the RBI’s comfort zone of
5-5.5% for over two years now. A further boost to domestic
consumption through monetary and fiscal easing in the face of
capacity constraints and already high inflation would only
intensify the inflation problem. Hence, the government needs
to push private investment to revive growth this time.
However, the current macro environment is discouraging for
entrepreneurs. Reviving capex in a counter-cyclical manner
will need aggressive policy effort. Assuming that the political
environment improves after the assembly elections in Uttar
Pradesh, the government could initiate some of the
long-pending policy reforms, such as allowing FDI in
multi-brand retail and reduction of fuel subsidies, along with
the budget announcement or around that time. Recently, the
government has started taking actions to address the
long-pending issues of supply of fuel for electricity projects.
This could be a good start – but a sustained effort will be
critical to revive private investment in a counter-cyclical
manner.
As we have been highlighting, there is a need to
accelerate implementation of major policy reforms:
• Enacting the Goods and Services Tax Act – GST (value
added tax).
• Strengthening institutional capacity to manage the
awarding of major infrastructure projects through
public-private route, which should increase transparency;
• Building a comprehensive plan for energy security along
with a systematic program for energy pricing reform;
• Meaningful steps towards divestment of the
government’s stakes in SOEs
• Acceleration in infrastructure spending, particularly for
power: The government needs to systematically address
institutional capacity to sustain a steady rise in
infrastructure spending.
The government could potentially announce its commitment
on to initiate the above mentioned policy reforms – but as
always, implementation is more important. We believe that
this process of implementing policy reforms that revives
investment will be time-consuming considering Indian political
and current institutional structure.
Simultaneously, it will be critical to reduce the fiscal
deficit with the support of a significant cut in government
expenditure growth to low single digit levels. Strong
expenditure growth and higher subsidies – at a time when tax
revenue growth has been slowing – has kept central
government deficit high (including off-budget subsidy in the
range of 6.9-7.1% of GDP). This boost to consumption via
public spending had helped to offset the shortfall in growth
from the decline in private investment to GDP to some extent.
However, without an accompanying rise in new productive
capacity, it also aggravated the inflation pressures from higher
global commodity prices.
In addition, we believe that there is a need to reconsider the
unproductive dynamics of the Mahatma Gandhi National
Rural Employment Guarantee Act (MNREGA), which has
boosted rural wages but without a significant improvement in
farm output. Although this program had the right policy
intentions, its implementation has caused major distortions in
the economy, in our view.
What Kind of Fiscal Consolidation Is Needed?
We believe the government is likely to project reduction in the
fiscal deficit partly by cutting expenditure growth and partly by
increasing tax rates. We believe the government will be
targeting a fiscal deficit of 4.9% (5.7% of GDP including
off-budget subsidy of 0.8% of GDP) compared with 6%
estimated for F2012 (6.9% of GDP including off-budget
subsidy of 0.9%). We expect the government to announce
increase in excise duty and services taxes by expansion of a
number of items which are taxed and increase in duties on
certain products
We do see some risk that the government may resort to 1-2ppt
increases in excise and services tax rates across the board. In
our base case, however, we are assuming that the government
will likely avoid increasing excise duties and service taxes
across the board, considering the statement made by the
finance minister in last year’s budget on this subject:
“In view of the healthy growth in indirect taxes in 2010-11, I
had the option to roll back the Central excise duty to levels
prevailing in November 2008. I have chosen not to do so for
two reasons. I would like to see improved business margins
translated into higher investment rates. I would also like to
stay my course towards GST. I have therefore decided to
maintain the standard rate of Central excise duty at 10 per
cent.”
We believe the bigger contributor to reduction in projected
deficit will be a cut in the ratio of government expenditure to
GDP. We expect the government to target a lower
expenditure growth rate of 7.5-8% compared with estimated
growth of 11% in F2012 (note April-December growth has
been 13.9%). Moreover, we expect the government to make
an announcement on the medium-term plan on aim to reduce
non-merit subsidy spending and leakage in welfare scheme
spending as enrolling of unique identification numbers is
scaled up by the Unique Identification Authority of India
(UIDAI).
We believe the current macro backdrop warrants a reduction
in fiscal deficit with the support of reduction in expenditure and
subsidies – and not by increase in taxes. Hiking taxes may
help bring credibility to the government’s intention to reduce
market borrowings, but we think it would be a less appropriate
move – especially at a time when private investment
sentiment is weak. Reduction in expenditure will also be
critical to ensure that any revival in private investment is
accommodated without increasing the aggregate demand
pressures and inflation risks.
Moreover, we believe that reduction in fiscal deficit should
largely be targeted through reducing revenue expenditure,
which would to help improve gross national saving. Along with
increase in investment, the government needs to aim to
increase savings to ensure the current account deficit does
not widen from the current level of ~3.3% of GDP (our
estimate for F2012). As we have highlighted earlier, (see:
India Economics: Asia Insight: It's Time to Address the Fiscal
Deficit Problem), government expenditure tends to be biased
on revenue spending. Within the revenue account, subsidy
and interest payments account for nearly 38-40% of
expenditure.
The key will be follow-through on the budget
announcement with implementation. The implementation
of the promise to reduce expenditure will be reflected in the
monthly government expenditure data, which we watch
closely. Currently, we believe that while the government will
target the deficit for F2013 at 4.9%, the actual outcome will
depend on its ability to meet the expenditure growth target. So
far in the last eight years of United Progressive Alliance
(Congress Party-led coalition) rule, this happened only once,
in F2008. The government targeted slightly high 17% growth
in total expenditure and the actual outcome was 16.3%.
Stock Market Implications
According to our India Strategist, Ridham Desai, “history does
not favor the market in the following 3-4 weeks. The markets
are usually flat in the month ahead of the budget and, in two
out of three years, fall in the month following it. In the past 15
years, the market has been positive in the following years:
1997, 1999, 2004, 2006, 2009, 2010 and 2011 – there does
not seem to be a great correlation between market
performance and a market-friendly budget. We continue to be
buyers of Indian equities from a 12- to 18-month perspective,
though seek protection from a correction in the near term.”
Industry-Specific Expectations
Our analyst team expects the budget to be a clear positive for
infrastructure and utilities. We do not see any direct policy
measures that hurt consumption, but we believe any credible
plan to reduce government expenditure growth or oil
subsidies will hamper the top lines of some consumer
industries in the near term.
Bottom-Up Industry-Specific Expectations from our Analyst Team
Industry Budget Expectations
Autos and Autos Parts
Binay Singh
• We expect no hike in excise duty. Historically, excise duty hikes have happened during times of robust auto growth but given
moderate sales across segments, we don’t expect any excise hike this time.
• We expect additional Rs25,000 duty on diesel cars and UVs. While the petroleum ministry is pushing for additional duty of Rs80k
on diesel cars and UVs, we expect a hike of only Rs25k and it could trend up in the coming years in case diesel decontrol does not
happen.
Banks
Anil Agarwal & Mihir Sheth
We would watch for
• Any details on potential capital infusion in to state-owned banks
• Potential reduction in the lock-in period of term deposits to be eligible for tax deduction from 5 years to 3 years
• Any indication on the quantum of funds to be mobilized under RIDF
• Any policy initiatives affecting infrastructure projects
Cement
Ashish Jain
• We do not expect any industry-specific changes. The outlook on infrastructure spending and any import duty changes, if any, on
coal, pet coke, gypsum is important.
Construction and Infrastructure Devt.
Akshay Soni
• We expect a pickup in spending across various segments of Indian infrastructure – Ports, Roads, Airports, Rail and Urban Infra.
• We expect that the budget will levy import duties on Power Equipment at 10-12% following demands from domestic power
equipment companies like L&T, BHEL etc for a level-playing field.
• We expect that the budget will increase the tax exemption limit under Sec 80 CCF for infrastructure bonds from current Rs 20,000
to Rs.1,00,000 to address funding constraints.
• Given the coal shortage in the country, we expect that the current 5% import duty on coal may be abolished to reduce the cost
of imported coal.
FMCG
Nillai Shah
• No major changes expected. For cigarettes, we expect a ~10% hike in excise duty. This would be moderate and in line
with market estimates as well. If the government harmonises rates of tax on tobacco products & products made with
tobacco substitutes, this would be a positive.
Healthcare
Sameer Baisiwala
• The Budget usually does not have much impact on the healthcare sector. We expect the 200% weighted deduction for R&D
spending to continue. Other measures including changes in indirect taxes, budgetary allocation to public healthcare etc. may
have a marginal impact.
IT Services
Vipin Khare
• We expect clarity on implementation schedule for Direct Tax Code which would be applicable to companies.
• As per media reports, industry body NASSCOM's wish list is removal of MAT on SEZ units. During last budget MAT was imposed
on SEZ units. We do not expect any material change to the current tax structures we believe lowering of MAT rates could be
beneficial for companies in our industry.
• In the past, there has been news around tax claims by the Income tax department from IT companies on their onsite portion of
revenues. A clarification around definitions and applicability of taxes could be helpful for the companies
Media
Vipul Prasad • We expect that there could be a possible reduction in import duty for set top boxes to 0%
Metals and mining
Vipul Prasad • We expect that there could be a possible reduction in import duty of thermal coal to 0%
Oil and Gas
Vinay Jaising
• The subsidy bill for the country is expected to remain high at ~US$27bn for FY-12. Given the high subsidy bill, we think the
government may look to manage the subsidy bill on the demand side by increasing duties on diesel vehicles
• Despite the cut in custom duties and excise duties, which were announced in June 2011, the taxation component remains high in
consumer prices (over 45% in petrol and ~24% in diesel). We think there is always a possibility for the government to rationalize
these duties. However, given the tight fiscal situation we do not think this to be a high probability event during the budget.
• We think government can announce modest price increases in diesel, LPG and kerosene after the election results in March.
Property
Sameer Baisiwala
• Otherwise a non event for the property group, the government may (i) impose new measures (taxes) to discipline property prices
(such as service tax for residential units introduced 2 years back) (ii) thrust on infrastructure would be a longer term demand
driver and positive for the market (iii) incentives for mortgages (such as raising the Rs1.5 million deductions for interest payment
on home loans) would support ongoing recovery (iv) relaxation of liquidity – lower FDI restrictions and facilitation of foreign
borrowings will help companies overcome balance sheet issues
Retailing
Nillai Shah • We do not expect any major changes.
Telecom
Vinay Jaising
• We think the budget could be a non-event this year since the National Telecom Policy (NTP 2012) is likely to be announced within
C2012. This would, among other issues cover excess spectrum charges and spectrum renewal charges for incumbent
operators.
Utilities
Parag Gupta
We expect
• Withdrawal of MAT on SEZ developer/co-developer
• Waiver of import duty on coal
• Introduction of customs duty on imported power equipment
• Extension of income tax deduction under Section 80 IA
• Exemption of withholding tax on ECBs
• Some announcement on proposed infrastructure fund
Source: Morgan Stanley Research
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Economics
What Do We Expect from
Budget F2013?
Two important issues we are watching for in
Budget F2013: The government is scheduled to
present the annual budget F2013 on March 16.
Considering the current weak macro trend, investors are
building hope that the government will recognize the
need to relay its commitment to reviving the growth
outlook with budget measures. We would watch the
budget announcement in the context of two most
important issues:
• A credible plan to cut government expenditure
growth
• Policy measures to encourage private investment
Market implications: According to our India Strategist,
Ridham Desai, “history does not favor the market in the
following 3-4 weeks. The markets are usually flat in the
month ahead of the budget and, in two out of three years,
fall in the month following it. In the past 15 years, the
market has been positive in the following years: 1997,
1999, 2004, 2006, 2009, 2010 and 2011 – there does
not seem to be a great correlation between market
performance and a market-friendly budget. We continue
to be buyers of Indian equities from a 12- to 18-month
perspective, though seek protection from a correction in
the near term.”
Industry-specific expectations: Our analyst team
expects the budget to be a clear positive for
infrastructure and utilities. We do not see any policy
measures that hurt consumption, but we believe any
credible plan to reduce government revenue
expenditure growth or oil subsidies will hamper the top
lines of some consumer industries in the near term.
What Do We Expect From Budget F2013?
Summary
The government is scheduled to present the annual budget
F2013 on March 16. Considering the current weak macro
trend, investors are building hope that the government will
recognizing the need to relay its commitment to reviving the
growth outlook with budget measures. We would watch the
budget announcement in the context of two most important
issues:
• A credible plan to cut government expenditure growth
• Policy measures to encourage private investment
Particularly on expenditure growth target, we believe the
implementation of the promise in the budget is more
important than the promise itself. For instance, for F2012,
the government budget announcement for projected fiscal
deficit was 4.6% of GDP – but the actual trend for April-Dec
indicates that the deficit will likely be at 6-6.2% of GDP.
Including off-budget subsidies, the deficit will be 6.9-7.1% of
GDP.
Macro Backdrop Calls for Clear Commitment in the
Budget
The macro environment in India has been challenging over
the last few months. Though the global funding environment
has improved recently, we have been arguing that domestic
factors are still holding back a V-shaped recovery. At the heart
of the poor macro environment in India has been the bad mix
of growth since the credit crisis unfolded in 2008. The ratio of
private investment to GDP has been declining, yet the
government deficit has prevailed in the range of 9-10% of
GDP (excluding one-off revenues from telecom license fees).
This divergent trend in private investment and fiscal deficit has
been steadily taking down India’s potential growth over the
last four years. Policymakers’ attempt to push for higher
growth with this bad mix has brought the feedback of higher
inflation, current account deficit and tighter inter-bank liquidity.
Need to Get the Productivity Dynamic Back
In this context, we believe that the government will need to
focus on reviving the productivity dynamic and bring back the
private investment gradually to lift the sustainable growth. As
we have been highlighting, we believe that the revival in
investment cycle is the key to recovery in overall growth in this
cycle.
Exhibit 1
Fiscal Deficit Consolidation Is Critical Now
As % of GDP F2008 F2009 F2010 F2011E F2012E
Central Fiscal Deficit 2.5% 6.0% 6.5% 4.8% 6.0%
State Fiscal Deficit 1.5% 2.4% 3.3% 2.6% 2.5%
Sub-total 4.1% 8.4% 9.8% 7.4% 8.5%
Inter-government adjustments -0.1% -0.1% -0.1% 0.0% 0.0%
Combined Headline Deficit 4.0% 8.3% 9.7% 7.4% 8.5%
Major Off-budget expenditure
items 0.8% 1.6% 0.2% 0.6% 0.9%
Overall Fiscal Deficit 4.8% 9.9% 10.0% 8.1% 9.4%
Overall Fiscal Deficit (excluding
3G receipts) NA NA NA 9.4% 9.6%
Source: Budget Documents, Morgan Stanley Research, E=Morgan Stanley Research
Estimates
Any measure that aims to push consumption will cause
inflation to remain higher for longer and increase the risk of
hard landing in the economy. In India, the sharp decline in
private corporate investment after the credit crisis has meant
that the sustainable GDP growth rate at which inflation is
non-accelerating has also declined. As we have seen over the
past two years, boosting consumption and intervention in the
rural labor market through employment scheme in this
environment has brought high and persistent inflation.
Inflation has been now above the RBI’s comfort zone of
5-5.5% for over two years now. A further boost to domestic
consumption through monetary and fiscal easing in the face of
capacity constraints and already high inflation would only
intensify the inflation problem. Hence, the government needs
to push private investment to revive growth this time.
However, the current macro environment is discouraging for
entrepreneurs. Reviving capex in a counter-cyclical manner
will need aggressive policy effort. Assuming that the political
environment improves after the assembly elections in Uttar
Pradesh, the government could initiate some of the
long-pending policy reforms, such as allowing FDI in
multi-brand retail and reduction of fuel subsidies, along with
the budget announcement or around that time. Recently, the
government has started taking actions to address the
long-pending issues of supply of fuel for electricity projects.
This could be a good start – but a sustained effort will be
critical to revive private investment in a counter-cyclical
manner.
As we have been highlighting, there is a need to
accelerate implementation of major policy reforms:
• Enacting the Goods and Services Tax Act – GST (value
added tax).
• Strengthening institutional capacity to manage the
awarding of major infrastructure projects through
public-private route, which should increase transparency;
• Building a comprehensive plan for energy security along
with a systematic program for energy pricing reform;
• Meaningful steps towards divestment of the
government’s stakes in SOEs
• Acceleration in infrastructure spending, particularly for
power: The government needs to systematically address
institutional capacity to sustain a steady rise in
infrastructure spending.
The government could potentially announce its commitment
on to initiate the above mentioned policy reforms – but as
always, implementation is more important. We believe that
this process of implementing policy reforms that revives
investment will be time-consuming considering Indian political
and current institutional structure.
Simultaneously, it will be critical to reduce the fiscal
deficit with the support of a significant cut in government
expenditure growth to low single digit levels. Strong
expenditure growth and higher subsidies – at a time when tax
revenue growth has been slowing – has kept central
government deficit high (including off-budget subsidy in the
range of 6.9-7.1% of GDP). This boost to consumption via
public spending had helped to offset the shortfall in growth
from the decline in private investment to GDP to some extent.
However, without an accompanying rise in new productive
capacity, it also aggravated the inflation pressures from higher
global commodity prices.
In addition, we believe that there is a need to reconsider the
unproductive dynamics of the Mahatma Gandhi National
Rural Employment Guarantee Act (MNREGA), which has
boosted rural wages but without a significant improvement in
farm output. Although this program had the right policy
intentions, its implementation has caused major distortions in
the economy, in our view.
What Kind of Fiscal Consolidation Is Needed?
We believe the government is likely to project reduction in the
fiscal deficit partly by cutting expenditure growth and partly by
increasing tax rates. We believe the government will be
targeting a fiscal deficit of 4.9% (5.7% of GDP including
off-budget subsidy of 0.8% of GDP) compared with 6%
estimated for F2012 (6.9% of GDP including off-budget
subsidy of 0.9%). We expect the government to announce
increase in excise duty and services taxes by expansion of a
number of items which are taxed and increase in duties on
certain products
We do see some risk that the government may resort to 1-2ppt
increases in excise and services tax rates across the board. In
our base case, however, we are assuming that the government
will likely avoid increasing excise duties and service taxes
across the board, considering the statement made by the
finance minister in last year’s budget on this subject:
“In view of the healthy growth in indirect taxes in 2010-11, I
had the option to roll back the Central excise duty to levels
prevailing in November 2008. I have chosen not to do so for
two reasons. I would like to see improved business margins
translated into higher investment rates. I would also like to
stay my course towards GST. I have therefore decided to
maintain the standard rate of Central excise duty at 10 per
cent.”
We believe the bigger contributor to reduction in projected
deficit will be a cut in the ratio of government expenditure to
GDP. We expect the government to target a lower
expenditure growth rate of 7.5-8% compared with estimated
growth of 11% in F2012 (note April-December growth has
been 13.9%). Moreover, we expect the government to make
an announcement on the medium-term plan on aim to reduce
non-merit subsidy spending and leakage in welfare scheme
spending as enrolling of unique identification numbers is
scaled up by the Unique Identification Authority of India
(UIDAI).
We believe the current macro backdrop warrants a reduction
in fiscal deficit with the support of reduction in expenditure and
subsidies – and not by increase in taxes. Hiking taxes may
help bring credibility to the government’s intention to reduce
market borrowings, but we think it would be a less appropriate
move – especially at a time when private investment
sentiment is weak. Reduction in expenditure will also be
critical to ensure that any revival in private investment is
accommodated without increasing the aggregate demand
pressures and inflation risks.
Moreover, we believe that reduction in fiscal deficit should
largely be targeted through reducing revenue expenditure,
which would to help improve gross national saving. Along with
increase in investment, the government needs to aim to
increase savings to ensure the current account deficit does
not widen from the current level of ~3.3% of GDP (our
estimate for F2012). As we have highlighted earlier, (see:
India Economics: Asia Insight: It's Time to Address the Fiscal
Deficit Problem), government expenditure tends to be biased
on revenue spending. Within the revenue account, subsidy
and interest payments account for nearly 38-40% of
expenditure.
The key will be follow-through on the budget
announcement with implementation. The implementation
of the promise to reduce expenditure will be reflected in the
monthly government expenditure data, which we watch
closely. Currently, we believe that while the government will
target the deficit for F2013 at 4.9%, the actual outcome will
depend on its ability to meet the expenditure growth target. So
far in the last eight years of United Progressive Alliance
(Congress Party-led coalition) rule, this happened only once,
in F2008. The government targeted slightly high 17% growth
in total expenditure and the actual outcome was 16.3%.
Stock Market Implications
According to our India Strategist, Ridham Desai, “history does
not favor the market in the following 3-4 weeks. The markets
are usually flat in the month ahead of the budget and, in two
out of three years, fall in the month following it. In the past 15
years, the market has been positive in the following years:
1997, 1999, 2004, 2006, 2009, 2010 and 2011 – there does
not seem to be a great correlation between market
performance and a market-friendly budget. We continue to be
buyers of Indian equities from a 12- to 18-month perspective,
though seek protection from a correction in the near term.”
Industry-Specific Expectations
Our analyst team expects the budget to be a clear positive for
infrastructure and utilities. We do not see any direct policy
measures that hurt consumption, but we believe any credible
plan to reduce government expenditure growth or oil
subsidies will hamper the top lines of some consumer
industries in the near term.
Bottom-Up Industry-Specific Expectations from our Analyst Team
Industry Budget Expectations
Autos and Autos Parts
Binay Singh
• We expect no hike in excise duty. Historically, excise duty hikes have happened during times of robust auto growth but given
moderate sales across segments, we don’t expect any excise hike this time.
• We expect additional Rs25,000 duty on diesel cars and UVs. While the petroleum ministry is pushing for additional duty of Rs80k
on diesel cars and UVs, we expect a hike of only Rs25k and it could trend up in the coming years in case diesel decontrol does not
happen.
Banks
Anil Agarwal & Mihir Sheth
We would watch for
• Any details on potential capital infusion in to state-owned banks
• Potential reduction in the lock-in period of term deposits to be eligible for tax deduction from 5 years to 3 years
• Any indication on the quantum of funds to be mobilized under RIDF
• Any policy initiatives affecting infrastructure projects
Cement
Ashish Jain
• We do not expect any industry-specific changes. The outlook on infrastructure spending and any import duty changes, if any, on
coal, pet coke, gypsum is important.
Construction and Infrastructure Devt.
Akshay Soni
• We expect a pickup in spending across various segments of Indian infrastructure – Ports, Roads, Airports, Rail and Urban Infra.
• We expect that the budget will levy import duties on Power Equipment at 10-12% following demands from domestic power
equipment companies like L&T, BHEL etc for a level-playing field.
• We expect that the budget will increase the tax exemption limit under Sec 80 CCF for infrastructure bonds from current Rs 20,000
to Rs.1,00,000 to address funding constraints.
• Given the coal shortage in the country, we expect that the current 5% import duty on coal may be abolished to reduce the cost
of imported coal.
FMCG
Nillai Shah
• No major changes expected. For cigarettes, we expect a ~10% hike in excise duty. This would be moderate and in line
with market estimates as well. If the government harmonises rates of tax on tobacco products & products made with
tobacco substitutes, this would be a positive.
Healthcare
Sameer Baisiwala
• The Budget usually does not have much impact on the healthcare sector. We expect the 200% weighted deduction for R&D
spending to continue. Other measures including changes in indirect taxes, budgetary allocation to public healthcare etc. may
have a marginal impact.
IT Services
Vipin Khare
• We expect clarity on implementation schedule for Direct Tax Code which would be applicable to companies.
• As per media reports, industry body NASSCOM's wish list is removal of MAT on SEZ units. During last budget MAT was imposed
on SEZ units. We do not expect any material change to the current tax structures we believe lowering of MAT rates could be
beneficial for companies in our industry.
• In the past, there has been news around tax claims by the Income tax department from IT companies on their onsite portion of
revenues. A clarification around definitions and applicability of taxes could be helpful for the companies
Media
Vipul Prasad • We expect that there could be a possible reduction in import duty for set top boxes to 0%
Metals and mining
Vipul Prasad • We expect that there could be a possible reduction in import duty of thermal coal to 0%
Oil and Gas
Vinay Jaising
• The subsidy bill for the country is expected to remain high at ~US$27bn for FY-12. Given the high subsidy bill, we think the
government may look to manage the subsidy bill on the demand side by increasing duties on diesel vehicles
• Despite the cut in custom duties and excise duties, which were announced in June 2011, the taxation component remains high in
consumer prices (over 45% in petrol and ~24% in diesel). We think there is always a possibility for the government to rationalize
these duties. However, given the tight fiscal situation we do not think this to be a high probability event during the budget.
• We think government can announce modest price increases in diesel, LPG and kerosene after the election results in March.
Property
Sameer Baisiwala
• Otherwise a non event for the property group, the government may (i) impose new measures (taxes) to discipline property prices
(such as service tax for residential units introduced 2 years back) (ii) thrust on infrastructure would be a longer term demand
driver and positive for the market (iii) incentives for mortgages (such as raising the Rs1.5 million deductions for interest payment
on home loans) would support ongoing recovery (iv) relaxation of liquidity – lower FDI restrictions and facilitation of foreign
borrowings will help companies overcome balance sheet issues
Retailing
Nillai Shah • We do not expect any major changes.
Telecom
Vinay Jaising
• We think the budget could be a non-event this year since the National Telecom Policy (NTP 2012) is likely to be announced within
C2012. This would, among other issues cover excess spectrum charges and spectrum renewal charges for incumbent
operators.
Utilities
Parag Gupta
We expect
• Withdrawal of MAT on SEZ developer/co-developer
• Waiver of import duty on coal
• Introduction of customs duty on imported power equipment
• Extension of income tax deduction under Section 80 IA
• Exemption of withholding tax on ECBs
• Some announcement on proposed infrastructure fund
Source: Morgan Stanley Research
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