India

Budget 2011-12 Impact: Sector that Lost/Gained the Most

New Delhi: The Union Budget 2011-12 presented on February 28 by Finance Minister Pranab Mukherjiseems balanced and growth oriented. Agriculture, Infrastructure and Social sector have been the focus areas. The budget has sought to promote growth with an inclusive agenda. Consequently, substantial plan outlay has been devoted to social and rural development. The Finance Minister expressed his concern over the problem of generation and circulation of black money in the Budget Session and announced the implementation of a Five Fold Strategy to deal with the problem. Besides this the Budget 2011-12 laid the foundation for the roll out of DTC and GST. Proposed increased exemption limit was in-line with market expectations. Investment reforms for FIIs and FDIs came in as a surprise which has been a major cause of concern in recent months.

GST & DTC: Long pending reform: FM has restated governments’ priority to implement GST and DTC by FY12, the most important reform in taxation policy. DTC Code is proposed to be effective from April 1, 2012 to allow taxpayers, practitioners and administrators to fully understand the legislation and adjust to the revised procedures. Unlike DTC, decisions on the GST have to be taken in concert with the States. As a step towards the roll-out of GST, FM proposed to introduce the Constitution Amendment Bill in this session of Parliament. Establishment of a strong IT infrastructure is essential to rollout GST successfully. On the direct tax front, reduction in surcharge on Corporate tax from 7.5% to 5% and an increase in tax limits on personal income tax from Rs. 1.6 lakh to Rs. 1.8 lakh is in line with principals of draft DTC.

Agriculture: Soaring food prices that are denting the disposable income have been a major cause of concern for the government lately. Consequently the Agriculture sector acquired utmost importance in the Union Budget 2011-12. The Finance Minister said that production and distribution bottlenecks for items such as fruits and vegetables, milk, meat, poultry and fish would be the focus area in FY12. Various Agro Schemes such as Rashtriya Krishi Vikas Yojana, Accelerated Fodder Development Programme have witnessed considerable hike in allocations. Besides this, access to agriculture credit has also been made easier for the farmers.

Social Sector: Social sector has been one of the focus areas in this budget too. The Finance Minister hiked the allocation for social sector in the Union Budget 2011-12 to Rs. 160887 cr. an increase of 17% over the allocation in previous budget. Allocation for Bharat Nirman is proposed to be increased by Rs.10,000 crore over the current fiscal at Rs. 58000 cr. Bharat Nirman includes the government’s flagship programmes such as Pradhan mantra Gram Sadak Yojna, Accelerated Irrigation benefit programme, Indira Awas Yojna, Rajiv Gandhi Grameen Vidyutikaran Yojna. Besides Planned allocations for Health and Education have also been stepped up by 20% and 24% respectively.

Infrastructure: A strong emphasis on infrastructure is clearly visible in the budget. Allocation for infrastructure stands at 48.5% of Gross Budgetary Support to plan expenditure. The focus has been two pronged especially increasing refinancing through Indian Infrastructure Financial Corporation (IIFCL) while focussing on current national level infrastructure projects. IIFCL is expected to achieve a cumulative disbursement target of Rs 20000cr by March 31, 2011 and Rs 25000cr by March 31, 2012. In addition, FM proposed to allow tax free bonds of Rs. 30000cr to boost infrastructure development in railways, ports, housing and highways.

Fiscal Consolidation: The biggest surprise in the budget has been the fiscal defciit target for FY12 set by the Government which is encouraging for global investors. Fiscal deficit is expected to come down to an impressive 4.6% of GDP in FY12 as compared to 5.1% in FY11. The rolling targets for fiscal deficit are placed at 4.1% for 2012-13, and 3.5% for 2013-14. The targets do look ambitious, but a roadmap to achieve these targets is still to be watch out.

Foreign Investment environment: Apart from exciting fiscal deficit guidence, another big positive came in from of FM’s efforts towards inviting more funds for investment, especially into infrastructure. In this direction, FIIs limit to invest in corporate bonds have been increased by a significant US$ 20 bn taking the limit to US$ 25 billion. Besides, the withholding tax will now attract a lower tax rate of 5% against 20%. This will raise the total limit available to the FIIs for investment in corporate bonds to US$ 40bn. Such moves are likely to spur FIIs into infrastructure sector which has been seen volatile and net seller in last 2-3 months.

HIGHLIGHTS OF UNION BUDGET 2011-12:

Fiscal:

* The Gross Tax Receipts estimated at Rs. 9,32,440 crore in FY12.
* The Non Tax Revenue Receipts estimated at Rs. 1,25,435 cr.
* Total expenditure at Rs. 12,57,729cr in the BE 2010-11, an increase of 13.4% over last year.
* Plan and Non Plan expenditures in BE 2010-11 estimated at Rs. 4,41,547cr and Rs.8,16,182cr respectively.
* Targets for fiscal deficit pegged at 4.1% for 2012-13 and 3.5% for 2013-14 respectively.
* Effective Revenue Deficit estimated at 2.3% of GDP in the Revised Estimates for 2010-11 and 1.8% for 2011-12.
* Fiscal Deficit brought down from 5.5% in BE 2010-11 to 5.1% of GDP in RE 2010-11.
* Fiscal Deficit kept at 4.6% of GDP for 2011-12.
* Fiscal Deficit to be progressively reduced to 3.5% by 2013-14.
* All subsidy related liabilities brought into fiscal accounting.
* Net market borrowing of the Government through dated securities in 2011-12 would be Rs. 3.43 lakh crore.
* Central Government debt estimated at 44.2% of GDP for 2011- 12 as against 52.5% recommended by the 13th Finance Commission.
* XI Plan expenditure more than 100% in nominal terms than envisaged for the Plan period.

Disinvestment:

* Rs. 40000 crore to be raised through disinvestment in 2011-12.

Agriculture:

* Allocation of Rs. 300cr per scheme: (1) to promote 60,000 pulses villages in rainfed areas, (2) to promote animal based protein production through livestock development, dairy farming, piggery, goat rearing and fisheries (3) for Accelerated Fodder Development Programme to benefit farmers in 25,000 villages (4) to bring 60,000 hectares under oil palm plantations (5)to promote higher production of Bajra, Jowar, Ragi and other millets, which are highly nutritious and have several medicinal properties (6) for implementation of vegetable initiative to provide quality vegetable at competitive prices and (7) to promote organic farming methods, combining modern technology with traditional farming practices
* To improve rice based cropping system in this region, allocation of Rs 400 crore has been made.
* Allocation under Rashtriya Krishi Vikas Yojana (RKVY) increased from Rs 6,755 crore to Rs. 7,860 crore.
* Allocation of Rs. 300 crore to promote Allocation of Rs.300 crore for Government Augmentation of storage capacity through private entrepreneurs and warehousing corporations has been fast tracked.
* Credit flow for farmers raised from Rs.3,75,000 crore to Rs. 4,75,000 crore in 2011-12.
* Interest subvention proposed to be enhanced from 2% to 3% for providing short-term crop loans to farmers who repay their crop loan on time.
* In view of enhanced target for flow of agriculture credit, capital base of NABARD to be strengthened by Rs. 3,000 crore in phased manner and Rs. 10,000 crore to be contributed to NABARD’s Short-term Rural Credit fund for 2011
* Approval for 15 more Mega Food Parks during 2011-12.

Subsidy:

* Nutrient Based Subsidy (NBS) has improved the availability of fertilizer; Government actively considering extension of the NBS regime to cover urea.
* Government to move towards direct transfer of cash subsidy to people living below poverty line in a phased manner for better delivery of kerosene, LPG and fertilizers. Task force set up to work out the modalities for the proposed system.

Infrastructure Development:

* Rs 2,14,000 crore provided for infrastructure development which accounts for over 48.5% of the total plan allocation.
* IFCL’s disbursements are expected to touch Rs 20,000cr by end March 2011 and reach around Rs 25,000cr by March 2012.
* Under take out financing scheme, seven projects sanctioned with debt of Rs. 1,500 crore. Another Rs. 5,000 crore will be sanctioned during 2011-12.
* To boost infrastructure development, tax free bonds of Rs.30,000 crore proposed to be issued by Government undertakings during 2011-12.
* Government to come up with a comprehensive policy for further developing PPP projects.
* Capital investment in fertilizer production proposed to be included as an Infrastructure sub-sector.

TAX PROPOSALS-

Direct Taxes:

* Exemption limit for the general category of individual taxpayers enhanced from Rs. 1,60,000 to Rs 1,80,000 giving uniform tax relief of Rs. 2,000.
* Exemption limit enhanced and qualifying age reduced for senior citizens.
* Higher exemption limit for Very Senior Citizens, who are 80 years or above.
* Current surcharge of 7.5% on domestic companies proposed to be reduced to 5%.
* Rate of Minimum Alternative Tax proposed to be increased from 18% to 18.5% of book profits.
* Tax incentives extended to attract foreign funds for financing of infrastructure.
* Additional deduction of Rs. 20,000 for investment in long-term Infrastructure bonds proposed to be extended for one more year.
* Lower rate of 15% tax on dividends received by an Indian company from its foreign subsidiary.
* Benefit of investment linked deduction extended to businesses engaged in the production of fertilizers.
* Investment linked deduction to businesses developing affordable housing.
* Weighted deduction on payments made to National Laboratories, Universities and Institutes of Technology to be enhanced to 200%.
* System of collection of information from foreign tax jurisdictions to be strengthened.
* A net revenue loss of Rs. 11,500 crore estimated as a result of proposals.

Indirect Taxes-

Excise Duty:

* Central Excise Duty retained at 10%.
* Reduction in number of exemptions in Central Excise rate structure.
* Nominal Central Excise Duty of 1% imposed on 130 additional items in the purview of excise duty.
* Lower rate of Central Excise Duty enhanced from 4% to 5%.
* Optional levy on branded garments or made up proposed to be converted into a mandatory levy at unified rate of 10 %.
* Scope of exemptions from Excise Duty enlarged to include equipments needed for storage and warehouse facilities on agricultural produce.
* A concessional rate of Central Excise Duty extended to batteries imported by manufacturers of electrical vehicles.
* Concessional Excise Duty of 10% to vehicles based on Fuel cell technology.
* Reduction in Excise Duty on kits used for conversion of fossil fuel vehicles into Hybrid vehicles.
* Excise Duty on LEDs reduced to 5% Full exemption from basic Excise Duty granted to enzyme based preparation for pre-tanning.
* Parallel Excise Duty exemption for domestic suppliers producing capital goods needed for expansion of existing mega or ultra mega power projects.

Customs Duty:

* Peak rate of Custom Duty held at its current level
* Basic Custom Duty reduced for specified agricultural machinery from 5% to 2.5%.
* Basic Custom Duty reduced on micro-irrigation equipment from 7.5% to 5%.
* De-oiled rice bran cake to be fully exempted from basic Custom Duty. Export Duty of 10% to be levied on its export.
* Rate of Export Duty for all types of iron ore enhanced and unified at 20% ad valorem. Full exemption from Export Duty to iron ore pellets.
* Basic Custom Duty on two critical raw materials of cement industry viz. petcoke and gypsum is proposed to be reduced to 2.5%.
* Cash dispensers fully exempt from basic Customs Duty.
* Full exemption from basic Customs Duty extended to batteries imported by manufacturers of electrical vehicles.
* Exemption granted from basic custom duty parts/assemblies needed for Hybrid vehicles.
* Basic Customs Duty on solar lantern reduced from 10% to 5%.
* Full exemption from basic Customs Duty to Crude Palm Stearin used in manufacture of laundry soap.
* Full exemption from basic Customs Duty to bio-asphalt and specified machinery for application in the construction of national highways
* Scope of exemptions from basic Customs Duty for work of art and antiquities extended to apply for exhibition or display in private art galleries open to the general public.
* Exemption from Import Duty for spares and capital goods required for ship repair units extended to import by ship owners.
* Concessional basic Custom Duty of 5% and CVD of 5% available to newspaper establishments for high speed printing presses extended to mailroom equipment.

Proposals relating to Customs and Central Excise estimated to result in a net revenue gain of Rs. 7,300 crore.

Service Tax:

* Standard rate of Service Tax retained at 10%
* Hotel accommodation in excess of Rs. 1,000 per day and service provided by air conditioned restaurants that have license to serve liquor to come into the tax net
* All services provided by hospitals with 25 or more beds with facility of central air conditioning will be taxed
* Service Tax on air travel both domestic and international raised.
* Services provided by life insurance companies in the area of investment and some more legal services proposed to be brought into tax net.
* All individual and sole proprietor tax payers with a turn over upto Rs. 60 lakh freed from the formalities of audit.

Proposals relating to Service Tax estimated to result in net revenue gain of Rs 4,000crore. Proposals relating to Direct Taxes estimated to result in a revenue loss of Rs 11,500crore and those related to Indirect Taxes estimated to result in net revenue gain of Rs. 11,300crore resulting in a net loss of Rs 200crore from the taxes.

Sectoral Impact:

INFRASTRUCTURE- POSITIVE:  The development of world level Infrastructure remains the key focal area in the Union Budget 2011-12, with budgeted spending in infrastructure estimated at Rs 2,14,000cr an hike of over 23% from Rs 1,73,000cr during 2010-11, providing 48.5% of the plan allocation. The budget has proposed to provide the much needed foreign investment in Indian infrastructure by mountaineering their venturing limit to $40bn from $20bn earlier. The total disbursement target for India Infrastructure Finance Company Limited (IIFCL) has been hiked to Rs 25000cr from Rs 20000cr. However, there is a marginal increase in allocation to rural infra fund to Rs 18000cr from Rs 16000cr.

The budget widens the classification of Infrastructure by including ‘Cold Storage facilities’ and ‘capital investment in Fertilizers’ as sub section of Infrastructure. With the higher allocation in to Infrastructure coupled with GoI’s intentions to provide much needed long term money into infrastructure, via, creating infrastructure debt fund, through tax free bonds worth Rs 30000cr and by extending deduction of Rs 20000 in Tax liability by investing in long term infrastructure bond, this will clear the much longer debate to speed up Infrastructure development and will act as highly positive for the Industry. However, no allocation has been made to ramp up the Transmission and Distribution capacity of power in the country, which stands at 13.7% of the country’s power generation capacity at 21000 MW.

Steel Industry- Positive: Overall the union budget has been POSITIVE for the Steel sector considering our expectations. The budget provided for enhancing infrastructure spending to Rs 2, 14,000cr which will boost the demand for steel products. However, hike in Iron Ore export duty to 20% came in as a surprise, which will provide the much needed respite to domestic producers, as their margins were under pressure on grounds of high raw material prices. Hike in Iron ore export duty will dent the margins of Sesa Goa and NMDC.

With increased focus of Government of India to build sound infrastructure, the domestic steel industry is expected to grow at a CAGR of 10% in next five years against the average annual growth of 8% achieved between 1991-2010. Going forward we expect steel prices to remain firm on account of strong demand lead by domestic markets coupled recovering global economies. We believe this scenario would be positive for steel companies. No clear regulatory framework from Government of India with regards to environmental policies and land acquisition policies still leaves ambiguity to foreign investment.

IT Industry-Negative: The Finance Minister announced some unexpected moves which will hurt the IT companies in the form of higher taxes after the proposed higher Minimum Alternate Tax (MAT) rate of 18.5% for units operating in Special Economic Zones (SEZ) and on developers of the SEZs. IT companies have been migrating to special economic zones as tax breaks under the Software Technology Parks of Indian (STPI) scheme will come to end this year under which companies operating in these units had been given a 10-year tax break that was to end in 2010. In the FY 10 Budget, however, this was extended to March 31, 2011. The IT industry had been asking for an extension of one more year until the Direct Tax Code is implemented in 2012

Oil & Gas Industry –Negative: The union budget provided no respite to the mounting under recovery for the Oil Marketing Companies (OMC’s). We expected a decline in the import duty on grounds of rising crude oil prices and losses pertaining to the industry mainly due to the subsidy sharing aspect. But with only consideration to the LPG and Kerosene, which would be provided as a direct cash subsidy to people under poverty line and no concern for the rising Crude Oil prices, the budget is NEGATIVE for the entire sector including companies HPCL, BPCL and IOC. As we expected the issue of Diesel Deregulation was not taken in the budget and no proposal was provided to deregulate it on the backing of rising inflation.

Textiles-Neutral: Union Budget 2011-12 has been positive for the Textile Sector. The Finance Minister has proposed to provide Rs. 3,000 crore to NABARD, which will benefit 15,000 cooperative societies and about 3 lakh handloom weavers. The optional levy of duty on garment and made-ups industry has been converted into mandatory duty of 10%.

Banking Industry-Positive: Union budget 2011-12 is positive for public sector bank in term of recapitalization. The Finance Minister proposed to provide capital infusion of Rs. 6000cr in public sector banks (PSBs) to maintain Tier-I capital to CRAR at 8%. The finance minister proposed to raise the target of credit flow to farmers to Rs. 475000cr in FY2011-12 as against of Rs. 375000cr in FY2010-11. This move will be increase the NPAs of the PSBs. The FM proposed to bring suitable legislative amendments in the regards of more banking license to private player and NBFCs for the FY 2011-12. RBI is planning to issue the guidelines for banking licences for the financial year 2011-12. The FM proposed to enhance the additional subvention to 3% in 2011-12. It would be negative for PSB in term of net interest margin.

Pharma Industry-Neutral:  In Budget 2011-12, Government didn’t focus to reduce healthcare cost as they made no proposals on reducing excise duty, tax holiday on healthcare infrastructure and weighted deduction for expenses incurred outside R&D facility like overseas trials, preparations of dossiers, consulting & legal fees on healthcare and pharmaceutical sector. It also not extended the list of life saving drugs. However, FM proposed to step up the plan allocations for Healthcare in 2011-12 by 20% to Rs. 26,760 crore as against Rs 22,300 crore in 2010-11. Further, by considering the need of the industry for Innovation, it enhanced the weighted deduction on payments made to National Laboratories, universities and Institutes of technology, for scientific research, from 175% to 200%. Increase in the rate of MAT to 18.5% from the current 18% and inclusion of units operating in SEZs under MAT would negatively impact companies which presently have or are planning to set up manufacturing units in SEZs. There were also no indications on the extension of the EOU benefit which is available only till FY2011, which could be a negative for the sector.

Fertilizers Industry-Positive: Fertilizer remains a prominent sector in Budget 2011-12. Government proposed to include capital investment in fertilizer production as an infrastructure sub-sector as the sector requires higher capital. Also, to ensure greater efficiency, cost effectiveness and better delivery for fertilizers, the Government proposes that it will take move towards direct transfer of cash subsidy to people living below poverty line in a phased manner. Urea is the key focus in the industry, which represents around 50% of all fertilizer products consumed in the country with an annual consumption of 27mt of a total fertilizer consumption of 55mt. During the year 2010-11, the Nutrient Based Subsidy (NBS) policy was successfully implemented for all fertilizers except urea. Thus, government proposes active consideration of the Urea under the extension of the NBS regime. This is a positive move by the government and will benefit both farmers and companies in the industry.

Aviation Industry-Negative: Overall the Union budget has been NEGATIVE for the aviation industry as the domestic air travel will cost more from the next financial year with the government raising service tax on it by Rs 50 and Rs 250 for domestic and international journeys respectively. We expected a decline in the prices of ATF (Aviation Turbine Fuel) by bringing it under the regime of GST and making it uniform across the country. Proposal of fog prone equipment was also not considered in the proposed budget. However, there was relief to the Air India as the Finance Minister made a budgetary support of Rs 1,200 crore to the ailing national carrier as additional equity infusion. This would be the third tranche of equity for Air India, which received Rs 800 crore and Rs 1,200 crore respectively in the 2009-10 and 2010-11 budgets.

Hospitality Industry-Negative: The Hospitality industry contributes more than 8.6% to our country’s GDP, despite that our Finance Minister did not came out with any positives for the sector, instead there was an added service tax which was levied on hotel accommodation , liquor and healthcare and making it costlier. We expected that the hotel industry would be given higher depreciation allowances as the industry has to make heavy investments in renovation and up-gradation and demands for massive capital investment but there was no such grants were given to the concerned sector.

Automobile Industry-Positive:  India’s automotive sector has some positive to take from the budget because Finance Minister proposed many encouraging moves for the promotion of green technology, as per our expectation. FM announced to set up a National Mission, apart from several incentives in the form of deduction in excise and custom duty, for Hybrid and Electric Vehicles to encourage manufacturing and selling of alternative fuel-based vehicles. At present EV sales are just accounted at less than 1% of the petrol two wheelers sold in the country, so this all proposed steps will help the industry to clock more numbers in this segment. Another welcome move to benefit carmakers and auto component suppliers is the reduction of custom duty on raw steel which in turn will help to strengthening margins besides the excise duty remain intact on vehicles. Moreover, broader measures like increased focus on rural and infrastructure spending would support long term growth of the sector.

(The views and investment tips expressed by investment experts on moneycontrol.com are their own, and not that of the website or its management. )

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