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The government on March 16, 2012 will table its Union Budget 2012-13 on the
backdrop of global uncertainties and a weak domestic macroeconomic environment.
Investors are hoping that the government would recognise the immediate need to
convey its commitment to revive growth outlook and fiscal consolidation. In India,
Budget is perceived to be determined more by political economy considerations than
purely economic ones. Therefore, the outcome of State elections may have a
significant bearing on this Union Budget. We expect the Union Budget 2012-13 to
focus on:
Striking a balance between fiscal consolidation and public spending while
maintaining sustainable inclusive growth
Increase investment in infrastructure sector
Higher allocation on education and health
Road map on implementation of GST and DTC
Road map to reduce non-merit subsidy and leakage in social welfare schemes
spending using Aadhaar (unique identification number)
To increase revenue collection – extending net for service tax, duty hike on
selected items such as cigarettes and increase in the rate of MAT.
EXPECTATIONS ON ECONOMY
Economic growth: The last fiscal year saw an enhanced focus on infrastructure spending with the government allocating more than 48% of the total planned expenditure in the 2011-12
budget. However, many of the new projects could not take off, due to delays in approval and decision making. New project launches have dropped by 32% in 2011-12 compared to the
previous year. Even the growth rate of core infrastructure industries has slowed down to 4.4% for the first 9 months of 2011-12 against 5.7% growth achieved in the first 9 months of
2010-11. Moreover, with gross fixed capital formation coming down to 29% (advance estimates for 2011-12), investment slowdown remains imminent.
While farm growth has remained robust, a slowdown in manufacturing has resulted in most of the growth estimates being toned down. As per the PMEAC review of economy, a growth
rate of 7.5-8% has been projected for 2012-13. For the current fiscal, the Council pegged the growth rate at 7.1%, marginally more than 6.9% projected by the Central Statistical
Organization (CSO). The quick estimates (QE) released at the end of January 2012 has revised the growth estimate upward for 2009-10 from 8.0 to 8.4%, while reducing for 2010-11,
marginally down from 8.5% to 8.4%.
The Union Budget 2012-13 is expected to provide a road map to make up for the lost ground by the next fiscal year. The key highlight would remain fiscal consolidation, where the
government is expected to cap fiscal deficit gap to 5% for the next fiscal year.
Fiscal deficit: The slippage in fiscal deficit on account of falling revenue collection and high subsidy burden is considerable compared to last year's budget estimate of 4.6% of GDP. The
government in the fiscal 2011-12 budget had estimated borrowings at Rs4.17trn. However the government may likely miss some targeted mobilization, especially through disinvestment
route. The disinvestment target was pegged at Rs400bn, whereas the actual mobilisation till date has been just Rs11.44bn through divestment in Power Finance Corporation in May 2011
and ~Rs.90bn from ONGC divestment. The government has already announced that it will borrow additional Rs400bn (over the already announced increase of Rs528.72bn from the
market), due to sluggish tax revenues and mounting spending commitments. This may take the actual fiscal deficit in fiscal 2011-12 above 6% of GDP (the nominal GDP as per advance
estimates is slightly higher than the GDP assumption in budget). Reducing the fiscal deficit therefore shall be a formidable challenge for fiscal 2012-13 budget.
Other key expectations:
The expenditure side of the Budget will remain sticky, owing to welfare programs such as NREGA. Additional burden of subsidies is likely to bloat the expenditure side,
especially on account of food, fertiliser and oil. Expect ~4% rise in the government expenditure from the last fiscal year.
A slower growth in the next few quarters is expected to result in weaker revenues. The government may go ahead with increasing excise duty by upto 2%. Other items that may
be modified are:
Increase in taxes on cigarettes
Allowing STT under capital gains tax
Disinvestment target may remain similar to the last year target of Rs400bn
Further road map for the application of GST and Direct Tax Code.
Increase in the exemption of income tax slab
Tinkering of MAT, which may impact investment sentiment negatively.
AUTO
In the current scenario of pricing pressure, rising petrol prices and high interest rates, any increase in excise duty will have a negative impact on the sector. F12 has seen moderate
volume growth across the segment. We expect excise duty to remain at the current level of 10%. However, any increase in excise duty will hurt the sentiments. We continue to prefer
Hero MotoCorp and M&M.
AVIATION
The current year is one of the most difficult years for airline industry. The industry not only witnessed sector specific challenges, but also saw issues related to specific players forcing
airlines to shrink their operations. We believe this Union Budget would provide the much needed breather for Air India by way of budgetary support and is also likely to address some of
the structural issues of the ailing aviation sector.
BANKING
The Budget announcements are likely to provide further road map to the much awaited financial reforms. Important announcements awaited are concessional deposits' tenure,
infrastructure funding, capital infusion to banks and fiscal consolidation. Likely to be positive for the banks, if reforms are addressed and the government is able to boost investments -
specifically in infrastructure
CAPITAL GOODS & ENGINEERING
Paucity of orders would be the major concern for the capital goods sector. However, the finalisation of bulk tender orders, after almost a year, is the only saving grace. Also, tardy pace of
project execution and rise in interest costs continues to be the cause of concern. Consistency in revival of projects and execution of orders for power equipments are expected only after
the strategic issues related to fuel linkages and land acquisition are finalised. The capital goods index (-15% YoY) fared badly over the last 4 quarters, largely due to the above mentioned
reasons. The capital goods players are expecting positive provisions from the Budget to improve infrastructure spending and revive the order inflows from customers. We expect the
Budget provision for the industry to be neutral to positive.
CEMENT
The Budget 2012-13 is expected to be largely negative/neutral to the cement sector as indirect taxes are likely to be revised upwards putting higher burden on the sector. However, the
sector may benefit indirectly, if incentives are given to housing and infrastructure sector and reducing duties on key inputs used in cement manufacturing. Certain measures including
capital receipt status to CERs, drawback on limestone mining royalty and renewable energy status to waste heat recovery units of cement plants can extend sentimental boost to the
sector, but marginal financial relief.
CONSUMER DURABLE
We expect the government to support the domestic manufacturers by reducing custom duty for LCD panels and increasing abatement rate for various products (Air Conditioners, LCD
TVs, Plasma TVs, Refrigerators, Mobile Phones and Monitors). This will create a level playing field for the domestic manufacturers against imported products. We also expect the
abolishment of Special Additional Duty (SAD), which will result in cost saving and also improve cash flows for players. CST was supposed to be reduced every year to give way to GST;
however, since past 3 years, it has been kept at 2%, which we expect to reduce to 1%. Overall, we expect the budget to bring positive news for the industry, especially domestic
manufactures.
FMCG
FMCG companies have been reeling under the pressure of commodity inflation due to various global and local factors for most part of last year. We believe the recent moderation in
inflation and rising expenditures will require the government to increase direct and indirect sources of revenues. Excise duty rates are expected to increase by 10-15% for cigarettes and
other FMCG products.
We expect some news on the progressive measures like introduction of GST, which will positively impact the sector. Allocation to funds for MGREGA will also increase and will positively
impact the sector, since it stimulates rural demand.
INFRASTRUCTURE/CONSTRUCTION
Being the first year of the 12th Plan, the focus on developing country’s infrastructure is likely to be of utmost priority for the government in this Budget. We expect various measures would
be taken to drive infrastructure investment to sustain the growth rates. Furthermore, this Budget is likely to act as a road map for clearances, award, financing and the monitoring of
infrastructure projects in the country.
INFORMATION TECHNOLOGY
Imposition of MAT regime on SEZ units and the discontinuation of STPI benefits impacted the IT-BPO sector negatively last year. Any relief from taxation, although unexpected, can
provide a boost to sentiments this time around. We hope the Budget can address some other pending issues, namely, removal of dual levy of Service tax & VAT on "right to use" software
and simplification of service tax duty refund process. Higher allocation towards e-governance and UIDAI would be a positive for IT companies.
MEDIA & ENTERTAINMENT
The Budget is expected address the issues of digitisation, as we shift from analog cable TV to digital. Steps for smooth transition along with reduction of duty on set-top boxes are
expected.
METALS
The measures to improve infrastructure investment and implementation of the same will be the prime focus in this Budget. We believe higher allocation of fund for infrastructure spending
will result into higher steel demand, which bodes well for the sector.
OIL AND GAS
Overall, the Budget is expected to be positive for the sector. We do not see any clarity on subsidy sharing mechanism. However, in order to bring down subsidies, the government is likely
to indicate a road map to bring subsidy bill under control.
PHARMA
Overall, the Budget is expected to be positive for the sector. We also believe any favorable announcement on term extension of the weighted tax deduction on R&D spends (to expire in
March 2012) would ensure renewed interest by the major pharma players like Sun, DRL, Ranbaxy, Lupin, Glenmark and Cadila.
POWER
On the backdrop of the shortage of fuel and lower schedule of power from the SEB and their mounting losses, we are expecting extension of 80IA benefits, the exemption of service tax
and excise duty on cement/steel used in Mega/Ultra Mega Power Projects, exemption of SPVs from Dividend Distribution Tax, in the upcoming budget. The setting up of coal regulator
will also improve the dismal fuel situation plaguing the industry. A financial assistance package for the ailing SEBs is desirable. But, we feel it would be highly unlikely in the current
situation. We expect a higher allocation to reform oriented plans like R-ADARP and RGGVY programmes to continue. This will also contribute positively to the sector's long term growth.
We believe the budget to remain neutral to positive bias for the sector.
REAL ESTATE
We expect the government to support property buyers by increasing tax benefits for home loan borrowers and revising (upwards) the cap for loans qualifying for affordable housing, to
adjust to variation in property prices across various cities. We also expect the government to help the sector by appointing a regulatory body for the sector, which will improve
transparency level and create a level playing field for developers. This will also reduce time taken for approval, and hence quicker supply, which will in turn reduce property prices and
help buyers. However, we do not expect the sector to be given industry status, which the developers are demanding. This will continue liquidity issues for the sector. Overall, though we
do not expect the budget to affect developers positively in a direct way, it will definitely affect them indirectly i.e. by providing support to the buyers. Overall, we expect a positive Budget
for the real estate sector.
RETAIL
Over the last few years, retail has strongly emerged as a high-volume sector, contributing to over 39% to the country’s GDP and owning ~9% of country’s total employment. We expect
GST announcement and clarity on FDI in multiple-brand retail.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
The government on March 16, 2012 will table its Union Budget 2012-13 on the
backdrop of global uncertainties and a weak domestic macroeconomic environment.
Investors are hoping that the government would recognise the immediate need to
convey its commitment to revive growth outlook and fiscal consolidation. In India,
Budget is perceived to be determined more by political economy considerations than
purely economic ones. Therefore, the outcome of State elections may have a
significant bearing on this Union Budget. We expect the Union Budget 2012-13 to
focus on:
Striking a balance between fiscal consolidation and public spending while
maintaining sustainable inclusive growth
Increase investment in infrastructure sector
Higher allocation on education and health
Road map on implementation of GST and DTC
Road map to reduce non-merit subsidy and leakage in social welfare schemes
spending using Aadhaar (unique identification number)
To increase revenue collection – extending net for service tax, duty hike on
selected items such as cigarettes and increase in the rate of MAT.
EXPECTATIONS ON ECONOMY
Economic growth: The last fiscal year saw an enhanced focus on infrastructure spending with the government allocating more than 48% of the total planned expenditure in the 2011-12
budget. However, many of the new projects could not take off, due to delays in approval and decision making. New project launches have dropped by 32% in 2011-12 compared to the
previous year. Even the growth rate of core infrastructure industries has slowed down to 4.4% for the first 9 months of 2011-12 against 5.7% growth achieved in the first 9 months of
2010-11. Moreover, with gross fixed capital formation coming down to 29% (advance estimates for 2011-12), investment slowdown remains imminent.
While farm growth has remained robust, a slowdown in manufacturing has resulted in most of the growth estimates being toned down. As per the PMEAC review of economy, a growth
rate of 7.5-8% has been projected for 2012-13. For the current fiscal, the Council pegged the growth rate at 7.1%, marginally more than 6.9% projected by the Central Statistical
Organization (CSO). The quick estimates (QE) released at the end of January 2012 has revised the growth estimate upward for 2009-10 from 8.0 to 8.4%, while reducing for 2010-11,
marginally down from 8.5% to 8.4%.
The Union Budget 2012-13 is expected to provide a road map to make up for the lost ground by the next fiscal year. The key highlight would remain fiscal consolidation, where the
government is expected to cap fiscal deficit gap to 5% for the next fiscal year.
Fiscal deficit: The slippage in fiscal deficit on account of falling revenue collection and high subsidy burden is considerable compared to last year's budget estimate of 4.6% of GDP. The
government in the fiscal 2011-12 budget had estimated borrowings at Rs4.17trn. However the government may likely miss some targeted mobilization, especially through disinvestment
route. The disinvestment target was pegged at Rs400bn, whereas the actual mobilisation till date has been just Rs11.44bn through divestment in Power Finance Corporation in May 2011
and ~Rs.90bn from ONGC divestment. The government has already announced that it will borrow additional Rs400bn (over the already announced increase of Rs528.72bn from the
market), due to sluggish tax revenues and mounting spending commitments. This may take the actual fiscal deficit in fiscal 2011-12 above 6% of GDP (the nominal GDP as per advance
estimates is slightly higher than the GDP assumption in budget). Reducing the fiscal deficit therefore shall be a formidable challenge for fiscal 2012-13 budget.
Other key expectations:
The expenditure side of the Budget will remain sticky, owing to welfare programs such as NREGA. Additional burden of subsidies is likely to bloat the expenditure side,
especially on account of food, fertiliser and oil. Expect ~4% rise in the government expenditure from the last fiscal year.
A slower growth in the next few quarters is expected to result in weaker revenues. The government may go ahead with increasing excise duty by upto 2%. Other items that may
be modified are:
Increase in taxes on cigarettes
Allowing STT under capital gains tax
Disinvestment target may remain similar to the last year target of Rs400bn
Further road map for the application of GST and Direct Tax Code.
Increase in the exemption of income tax slab
Tinkering of MAT, which may impact investment sentiment negatively.
AUTO
In the current scenario of pricing pressure, rising petrol prices and high interest rates, any increase in excise duty will have a negative impact on the sector. F12 has seen moderate
volume growth across the segment. We expect excise duty to remain at the current level of 10%. However, any increase in excise duty will hurt the sentiments. We continue to prefer
Hero MotoCorp and M&M.
AVIATION
The current year is one of the most difficult years for airline industry. The industry not only witnessed sector specific challenges, but also saw issues related to specific players forcing
airlines to shrink their operations. We believe this Union Budget would provide the much needed breather for Air India by way of budgetary support and is also likely to address some of
the structural issues of the ailing aviation sector.
BANKING
The Budget announcements are likely to provide further road map to the much awaited financial reforms. Important announcements awaited are concessional deposits' tenure,
infrastructure funding, capital infusion to banks and fiscal consolidation. Likely to be positive for the banks, if reforms are addressed and the government is able to boost investments -
specifically in infrastructure
CAPITAL GOODS & ENGINEERING
Paucity of orders would be the major concern for the capital goods sector. However, the finalisation of bulk tender orders, after almost a year, is the only saving grace. Also, tardy pace of
project execution and rise in interest costs continues to be the cause of concern. Consistency in revival of projects and execution of orders for power equipments are expected only after
the strategic issues related to fuel linkages and land acquisition are finalised. The capital goods index (-15% YoY) fared badly over the last 4 quarters, largely due to the above mentioned
reasons. The capital goods players are expecting positive provisions from the Budget to improve infrastructure spending and revive the order inflows from customers. We expect the
Budget provision for the industry to be neutral to positive.
CEMENT
The Budget 2012-13 is expected to be largely negative/neutral to the cement sector as indirect taxes are likely to be revised upwards putting higher burden on the sector. However, the
sector may benefit indirectly, if incentives are given to housing and infrastructure sector and reducing duties on key inputs used in cement manufacturing. Certain measures including
capital receipt status to CERs, drawback on limestone mining royalty and renewable energy status to waste heat recovery units of cement plants can extend sentimental boost to the
sector, but marginal financial relief.
CONSUMER DURABLE
We expect the government to support the domestic manufacturers by reducing custom duty for LCD panels and increasing abatement rate for various products (Air Conditioners, LCD
TVs, Plasma TVs, Refrigerators, Mobile Phones and Monitors). This will create a level playing field for the domestic manufacturers against imported products. We also expect the
abolishment of Special Additional Duty (SAD), which will result in cost saving and also improve cash flows for players. CST was supposed to be reduced every year to give way to GST;
however, since past 3 years, it has been kept at 2%, which we expect to reduce to 1%. Overall, we expect the budget to bring positive news for the industry, especially domestic
manufactures.
FMCG
FMCG companies have been reeling under the pressure of commodity inflation due to various global and local factors for most part of last year. We believe the recent moderation in
inflation and rising expenditures will require the government to increase direct and indirect sources of revenues. Excise duty rates are expected to increase by 10-15% for cigarettes and
other FMCG products.
We expect some news on the progressive measures like introduction of GST, which will positively impact the sector. Allocation to funds for MGREGA will also increase and will positively
impact the sector, since it stimulates rural demand.
INFRASTRUCTURE/CONSTRUCTION
Being the first year of the 12th Plan, the focus on developing country’s infrastructure is likely to be of utmost priority for the government in this Budget. We expect various measures would
be taken to drive infrastructure investment to sustain the growth rates. Furthermore, this Budget is likely to act as a road map for clearances, award, financing and the monitoring of
infrastructure projects in the country.
INFORMATION TECHNOLOGY
Imposition of MAT regime on SEZ units and the discontinuation of STPI benefits impacted the IT-BPO sector negatively last year. Any relief from taxation, although unexpected, can
provide a boost to sentiments this time around. We hope the Budget can address some other pending issues, namely, removal of dual levy of Service tax & VAT on "right to use" software
and simplification of service tax duty refund process. Higher allocation towards e-governance and UIDAI would be a positive for IT companies.
MEDIA & ENTERTAINMENT
The Budget is expected address the issues of digitisation, as we shift from analog cable TV to digital. Steps for smooth transition along with reduction of duty on set-top boxes are
expected.
METALS
The measures to improve infrastructure investment and implementation of the same will be the prime focus in this Budget. We believe higher allocation of fund for infrastructure spending
will result into higher steel demand, which bodes well for the sector.
OIL AND GAS
Overall, the Budget is expected to be positive for the sector. We do not see any clarity on subsidy sharing mechanism. However, in order to bring down subsidies, the government is likely
to indicate a road map to bring subsidy bill under control.
PHARMA
Overall, the Budget is expected to be positive for the sector. We also believe any favorable announcement on term extension of the weighted tax deduction on R&D spends (to expire in
March 2012) would ensure renewed interest by the major pharma players like Sun, DRL, Ranbaxy, Lupin, Glenmark and Cadila.
POWER
On the backdrop of the shortage of fuel and lower schedule of power from the SEB and their mounting losses, we are expecting extension of 80IA benefits, the exemption of service tax
and excise duty on cement/steel used in Mega/Ultra Mega Power Projects, exemption of SPVs from Dividend Distribution Tax, in the upcoming budget. The setting up of coal regulator
will also improve the dismal fuel situation plaguing the industry. A financial assistance package for the ailing SEBs is desirable. But, we feel it would be highly unlikely in the current
situation. We expect a higher allocation to reform oriented plans like R-ADARP and RGGVY programmes to continue. This will also contribute positively to the sector's long term growth.
We believe the budget to remain neutral to positive bias for the sector.
REAL ESTATE
We expect the government to support property buyers by increasing tax benefits for home loan borrowers and revising (upwards) the cap for loans qualifying for affordable housing, to
adjust to variation in property prices across various cities. We also expect the government to help the sector by appointing a regulatory body for the sector, which will improve
transparency level and create a level playing field for developers. This will also reduce time taken for approval, and hence quicker supply, which will in turn reduce property prices and
help buyers. However, we do not expect the sector to be given industry status, which the developers are demanding. This will continue liquidity issues for the sector. Overall, though we
do not expect the budget to affect developers positively in a direct way, it will definitely affect them indirectly i.e. by providing support to the buyers. Overall, we expect a positive Budget
for the real estate sector.
RETAIL
Over the last few years, retail has strongly emerged as a high-volume sector, contributing to over 39% to the country’s GDP and owning ~9% of country’s total employment. We expect
GST announcement and clarity on FDI in multiple-brand retail.
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